State House and Senate Democrats have chosen to aim tax relief at people they believe need it most while keeping a cautious watch on Hawai'i's slowing economy.

A $50 million package agreed to late Friday would provide middle- and lower-income residents with immediate tax relief through a one-time rebate and a permanent tax break in the form of a credit on food purchases. The package is weighted toward lower-income residents, who would get a bigger rebate and a larger credit. It leaves out upper-income and wealthy taxpayers.

Lawmakers also have agreed to restore a tax break on ethanol-blended gasoline that expired at the end of last year, which, if passed on to consumers by the petroleum industry, could lead to an 11-cents-per-gallon reduction in gas prices.

"We wanted to provide the relief in a meaningful way to people who really need it, the working poor and the folks who are struggling to make ends meet," said state Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui), the chairwoman of the Senate Ways and Means Committee. "We end up squeezing the middle class for everything so we're trying to target it for people who really need some assistance."

Lawmakers, particularly in the House, wanted to contain spending this session because of fears that the state's economy will soon dip. Economic forecasts have projected revenue growth to remain steady at 6 percent, but some lawmakers believe it will fall, making it prudent to keep more money in reserve.

"I was afraid that the general public might have unrealistic expectations," state Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said of the strength of the economy. "We wanted to really focus in and assist those who really need it the most. We thought that for those over a certain income level, a tax rebate would be less meaningful."

LINGLE DISAPPOINTED

Gov. Linda Lingle said yesterday she was disappointed Democrats did not raise the standard income tax deduction or, alternatively, index the standard deduction, the personal exemption and tax brackets each year for inflation. The Republican governor, who had wanted $346 million in tax relief this session, welcomed the ethanol tax break and the food credit, which she had endorsed.

But Lingle was curious why lawmakers again left tax relief to the last hours — a rushed and often chaotic sprint toward the midnight Friday deadline to have bills ready for final votes this week as session adjourns. Lawmakers also waited to the end of last session to agree to a $50 million tax package.

"I just believe that the cost of living is impacting families so severely that they needed to make this a higher priority," Lingle said. "I'm glad we got some tax relief, but I feel it should have been more and I'll continue to push for more in the years ahead."

Over the past two sessions, with the state enjoying sizable budget surpluses, majority Democrats have framed the debate on spending as a tradeoff that should favor public education, social services and long-neglected infrastructure improvements over tax relief. Lingle and Republicans have said that the state has the money to do both and that more significant tax relief would help residents overcome the state's high cost of living.

Many people outside the state Capitol also are divided.

"I feel it's essential," David H.A. Soares, a retired oil company worker who lives Downtown, said of tax relief. "People are working hard, day in and day out, just to keep up."

Venus Jacob, a supervisor for a property management company, said tax relief is appreciated but other issues, such as the lack of affordable housing, are more urgent. "There are more people who need housing right now," she said.

Lawmakers are required by the state constitution to award tax relief this session because of two consecutive years where the general-fund balance exceeds revenues by 5 percent. In the 17 times since 1978 that the Legislature has had to provide tax relief under the constitution, it has given an across-the-board rebate to every taxpayer, most often through a token $1.

PLAN EXCLUDES SOME

This would be the first time that lawmakers attempt to meet the constitutional requirement with targeted tax relief, but Baker and Oshiro believe it is both legally permissible and practical. But Linda Smith, the governor's senior policy adviser, said the administration would likely ask the attorney general for an opinion.

"Certainly, it is a concern to us," said Smith, who believes every taxpayer is entitled to a rebate under the constitution.

Lawmakers also had considered, but discarded, an earned-income tax credit for the working poor.

The ethanol tax break, which looked doubtful earlier this month, was revived at the insistence of Senate negotiators. House leaders had worried about the $32 million cost of restoring the tax break, but agreed with senators that it might help consumers who pay among the highest gas prices in the nation.

"For anyone who needs to drive, and a lot of us do, this would make it a little easier on their pocketbook," Baker said.

The ethanol tax break would start again in July and would expire at the end of June 2009, a precaution in case the economy slows and lawmakers need the money back. Lawmakers also agreed to increase the gasoline license tax by 1 cent to raise more money for the state's highway fund.

When the 11-cents-per-gallon ethanol tax break expired, gas prices rose by about 11 cents per gallon, so now lawmakers expect oil and gas companies to extend the break to consumers. At least one company, Aloha Petroleum, has publicly guaranteed that it would pass the tax break on to its customers.

But, as insurance, lawmakers added a fine of $100,000 for gas producers, wholesalers and retailers that increase profit margin as a result of the tax break. It also would be considered an unfair or deceptive trade practice.

In a separate bill, lawmakers agreed to spend $1.2 million so the state Public Utilities Commission can monitor the petroleum industry and report unlawful profiteering or false and deceptive statements to the state Attorney General's office.

Lingle, referring to the often frenzied negotiations that culminated with House and Senate leaders crowded into a single hearing room late Friday night, said perhaps they should consider improving the process. "This just simply doesn't work," the governor said. "I attended a couple of the conference committee meetings over this past week and it's unbelievable how business is conducted on serious issues."

Oshiro said the rush on Friday was symbolic of the collaborative nature of the legislative process. It actually ran better than in some years, when House and Senate leaders would have to extend deadlines — or even the session itself — to finish. "It's an open process that accepts input from the public right up until the very end," he said.

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.