Hawai'i's $574 million budget surplus likely will grow even larger, giving state lawmakers more money to work with this session as they consider tax relief and new spending on public school repairs and other neglected infrastructure.

The state Council on Revenues yesterday increased its forecast for the fiscal year that ends in June, projecting 9.5 percent revenue growth, up from 8 percent from the last forecast in December. The additional revenue — about $50 million — would expand the budget surplus and give lawmakers more confidence and flexibility on spending decisions.

But the council lowered its forecast for the next fiscal year to account for one-time windfalls and higher tax collections that have pushed revenues higher over the past year. The council predicts 6.5 percent revenue growth in fiscal year 2007, down from 7.5 percent.

The council's lower forecast for 2007, along with predictions that Hawai'i's sizzling economy will start to slow, may lead some lawmakers to be more conservative.

House Democrats have been cold to tax relief for the past two sessions and said as recently as Thursday that school repairs, affordable housing, energy and irrigation systems should be the priorities for the surplus. Some Democrats had been waiting for the council's latest forecast and anticipated pressure for tax relief if the surplus grew.

House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise), said yesterday he would be receptive to tax relief. "It's very much a possibility," the speaker said.

Gov. Linda Lingle and Senate President Robert Bunda, D-22nd (North Shore, Wahiawa), have cited the council's forecasts over the past year as proof the state can afford tax relief.

"We believe they are even more merited now," Linda Smith, the governor's senior policy adviser, said of the administration's tax relief proposals.

The Republican governor has recommended a tax rebate, a tax credit for food and medicine, expanding income tax brackets and an increase in the standard income tax deduction. Among lawmakers, the increase in the standard deduction and a separate proposal for an earned income tax credit for the working poor have had the most interest.

"This is the perfect time for us to do it," Bunda said.

The council's forecasts have been consistently lower than actual revenue growth over the past year, mostly because of underestimating the rise in personal income, tax collections and inflation. The council decreased the forecast for 2007 to adjust for one-time windfalls due to court settlements and for higher delinquent tax collections that may level off or decline.

Paul Brewbaker, a Bank of Hawaii economist and chairman of the council, said lawmakers should recognize that the recent forecast errors have been in the state's favor since revenues were underestimated instead of overestimated. "Lucky for everybody because it says something about our underlying economy," he said.

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.