Ignoring Gov. Linda Lingle's veto threat, the state House and Senate voted yesterday to raise taxes to help balance the state's budget.

The bills would increase state income taxes on the affluent, hotel-room taxes that fall mainly on tourists, cigarette and other tobacco taxes, and the conveyance tax on the sale of luxury homes.

Lawmakers sent a bill that would restrict high-technology tax credits back to conference committee for further discussion, driving a wedge between House and Senate negotiators that halted budget talks last night.

Majority Democrats said that while they would prefer not to raise taxes during a recession, they need the additional revenue to help close a budget gap that sits at around $170 million over the two-year budget cycle. Lawmakers continue to explore new revenue-generating ideas and spending cuts for state departments and programs to balance the budget.

"None of us here take any pleasure or get any political points for proposing tax increases," said state Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau).

Linda Smith, Lingle's senior policy adviser, said the governor will likely veto most of the tax increases. "We believe they are destructive to our economic well-being," Smith said.

Lawmakers missed the Tuesday deadline to have bills at the governor's desk within 10 session days of adjournment, which would have required Lingle to sign or veto the bills before the session closes May 7. House leaders are prepared to extend the session by a few days for potential veto overrides of the tax measures, but Senate leaders have not made a similar commitment.

If the session is not extended, Lingle would have 45 working days — or until July 14 — to sign, veto or allow the tax bills to become law without her signature. Lawmakers also have the option of returning in July for a veto override session.

GOVERNOR'S OPTIONS

Smith said Lingle has presented lawmakers with a budget proposal that avoids tax increases and state worker layoffs. The Lingle administration has estimated $278 million in savings through collective bargaining negotiations with public-sector labor unions, but lawmakers have not accepted that figure because the labor talks are still in progress.

Smith indicated that the governor, who has discretion in implementing the budget after it is passed by the Legislature, may disregard some of the lawmakers' work.

"This administration has laid out a way to deal with the budget shortfall that does not require raising taxes," she said.

Tax increases approved yesterday are an attempt to spread the burden of the state's deficit and are aimed more at higher-income residents and tourists than at the lower and middle classes. Tax hikes on cigarettes and other tobacco products could disproportionately be felt among the poor, but have the dual purpose of discouraging tobacco use while bringing in new revenue to the state.

"The taxes we're looking at, I believe, are reasonable when you look at the bigger picture," said state Sen. Will Espero, D-20th ('Ewa Beach, Waipahu). "We're not looking at one big tax or one big cut somewhere. We are attempting to sacrifice throughout and transfer what we must do through all segments of our government.

"It is a difficult time."

House and Senate leaders wanted the tax measures in place to give budget negotiators a better understanding of the size of the remaining budget gap during conference committee. Other bills that involve state spending are in a holding pattern until the budget takes firmer shape, with lawmakers expected to finish most of their work by next week's internal deadline (May 1) to have all bills ready for final votes.

NEGOTIATIONS TIFF

Last night, budget talks were tied in knots after state Rep. Marcus Oshiro, D-39th (Wahiawa), the lead House negotiator, accused the Senate of caving to special interests for backtracking on an agreement reached Saturday to tighten the high-technology tax credits known as Act 221. Both the House and Senate sent the bill back to conference committee yesterday after senators objected to the agreement.

Oshiro said limits on the investment credits would save the state $130 million over two years and that if the Senate would not go along, the House would insist on opening up other portions of the budget where there had been agreement.

"Unfortunately, it appears the pocketbooks of the few, the wealthy and the vested won out over the needs of the many," a seething Oshiro told Senate negotiators.

State Sen. Donna Mercado Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), the lead Senate negotiator, responded that she was optimistic that Senate concerns with the bill could be addressed. But budget talks were delayed until tomorrow night.

INCOME TAXES

Earlier yesterday, lawmakers voted to increase state income tax rates for single taxpayers who earn $150,000 or more a year; heads of households who make $225,000 or more a year; and couples filing jointly who earn $300,000 or more a year. The bill would also raise the personal exemption and the standard income tax deduction, providing a break for many taxpayers.

The higher income taxes would generate about $48 million a year and would expire at the end of 2015.

State Senate Minority Leader Fred Hemmings, R-25th (Kailua, Waimanalo, Hawai'i Kai), said Democrats were taking a "politically correct" path of raising taxes on those with high incomes. He said lawmakers could reduce the deficit through spending cuts and privatizing some government services but have instead tried to spare public workers from any sacrifice.

"This is being done for one special-interest group to walk away from this state crisis without contributing a thing," he said.

Lawmakers also raised the hotel room tax, by 1 percentage point as of this July — from 7.25 percent to 8.25 percent — and another 1 percentage point in July 2010 — to 9.25 percent. The increase in the transient accommodations tax is expected to bring in $30 million the first year and $60 million the second and following years. The higher rate would apply to hotel and other vacation-rental operators through June 2015.

State House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Halawa), likened raising the hotel room tax to the increase in ticket prices for University of Hawai'i sports, which she believes dampened the enthusiasm among fans. She predicted tourists would be discouraged from visiting the Islands.

"It's going to kill the buzz of people coming to Hawai'i," she said.

Oshiro, chairman of the House Finance Committee, countered that tourists did not stop coming to the Islands after previous increases in the hotel room tax in 1994 and 1999 during bad economic times. The tax has not been increased in the past decade.

"People are not going to stop coming to Hawai'i," he said. "We have the best bargains. We have the best industry. We have the best workers. We have the best attractions."

ROOM TAX DIVERSION

Lawmakers are still discussing whether to temporarily divert hotel room taxes from the counties to help with the budget. In conference committee talks yesterday, lawmakers indicated they would likely not give counties the option of adding a local surcharge to the tax to offset the potential lost revenue. Kim said there is a lack of interest in the option among county leaders.

Lawmakers voted to raise the state's 10-cent-per-cigarette tax by 2 cents in July, in addition to the 1-cent increase already scheduled, bringing the tax to 13 cents. Previously scheduled 1-cent increases would bring the tax to 14 cents in July 2010 and 15 cents in July 2011.

The state's tax on the wholesale price of tobacco products, such as chewing tobacco or pipe tobacco, would rise from 40 percent to 70 percent starting at the end of September. The state's tax on cigars would increase from 40 percent to 50 percent, and smaller cigars that resemble cigarettes would be taxed like cigarettes.

Lingle has said she would consider the higher taxes on cigarettes and other tobacco products.

Lawmakers also voted to increase the conveyance tax on the sale of properties for $2 million or more and on the purchase of second homes. The bill would also reduce by 5 percent, through June 2012, the amount of conveyance tax revenue transferred to the rental housing trust fund and the natural area reserve fund. The money, like the tax increase, would instead be shifted to the general fund to help with the budget.