Hesitant about the political and economic consequences of raising the state's general excise tax, state House lawmakers are walking through several potential alternatives, including another increase in income taxes and eliminating tax breaks for investors and nonprofits.

The state House Finance Committee considered a full menu of tax options yesterday to help with a $1.2 billion budget deficit through June 2011.

Lawmakers have said they want to avoid a GET hike if possible because the tax is far-reaching and regressive. But the GET also has the potential to bring in the most new revenue — about $400 million to $500 million from a 1 percentage point increase — far more than many of the other options combined.

"They are scrounging around for money. No doubt about it. They are going to overturn every stone," said Lowell Kalapa, president and executive director of the Tax Foundation of Hawai'i. "But they're scared out of their wits about raising taxes. It's an election year."

Last year, lawmakers raised income taxes on the wealthy, the hotel-room tax, the conveyance tax on the sale of luxury homes, and tobacco taxes.

State Rep. Marcus Oshiro, D-39th (Wahiawā), the chairman of the committee, said if lawmakers were to pursue another income tax hike, it would likely be directed at upper-income tax brackets.

The committee heard testimony on two income tax bills last night — one directed broadly across tax brackets, which would bring in about $33 million a year; and another aimed at the wealthy, which would also capture about $33 million annually.

"We want to make sure that all of us know the options available, and that we bring them out for public debate and consideration," Oshiro said.

On a posterboard in the third-floor committee room at the state Capitol, staffers have written four questions to try to tether those who testify to the economic reality of the deficit:

• How far can we cut government programs and services?

• What programs and services are we willing to live without?

• Are we willing to pay more for the programs and services we want?

• What do we want Hawai'i to look like when the recession ends?

Yet for several hours yesterday, lawmakers heard people defend the value of their specific programs and tax credits and why they should be protected from cuts.

TAX CREDIT SUNSETS

One bill would eliminate a range of tax credits — saving about $99 million a year — including breaks for low-income housing, alternative energy, high-technology projects and motion picture and other creative media.

Chris Lee, director of the Academy of Creative Media at the University of Hawai'i-Mānoa, and others connected to the entertainment industry said they were baffled that lawmakers would consider eliminating the film tax break just as it was producing economic results.

"I'm surprised to see it up for question," Lee said.

But state Rep. Isaac Choy, D-24th (Mānoa), an accountant, and other lawmakers asked why even successful tax credits should not have a sunset date so they can be reviewed for effectiveness. Choy also questioned whether tax breaks, if they succeed at developing new industry, should remain since the industry should be able to sustain itself at some point.

State Rep. Pono Chong, D-49th (Maunawili, Olomana, Enchanted Lake), said advocates for public education and the poor have to come before lawmakers annually to fight for state money, while many investors do not have to justify their tax credits unless they are up for repeal.

"Isn't it fair that we should put a sunset on each credit?" Chong asked.

Kalapa, of the Tax Foundation, said tax credits favor certain industries yet are subsidized by all taxpayers. He suggested that if lawmakers were to give up a fraction of the tax credits, the state may have enough money to reduce furloughs for public school teachers.

Kalapa also asked lawmakers to consider whether preserving the tax credits is preferable to raising taxes. "We have to cope with that cost," he said.

GOVERNOR'S STANCE

Gov. Linda Lingle has opposed a GET increase or an income tax hike to help close the deficit, so lawmakers will likely have to get two-thirds' majority support in the House and Senate to enact significant tax increases.

Public-sector labor unions, which have struggled with pay cuts and furloughs, are among the few interest groups publicly calling for tax increases.

Jim Williams, interim executive director of the Hawai'i State Teachers Association, urged lawmakers to advance the bill that increases income taxes on the wealthy. He said such a targeted tax increase is more equitable than the broad-based and regressive GET, because it would fall on those who have succeeded financially.

"The question is not whether that additional revenue is needed, but how it should be raised in the most equitable way," he said.

Randy Perreira, the executive director of the Hawaii Government Employees Association, said in an interview yesterday that he does not see how lawmakers will be able to avoid a tax increase given the size of the deficit, the financial challenges facing the state worker health care and retirement systems, and the desire to protect education and social service programs from further cuts.

Perreira said it was "hard to believe" lawmakers could find a solution without a GET increase, unless they adopt many of the other tax options on the table instead.