The state will collect about $125 million less this fiscal year than lawmakers expected when they approved the state budget last spring, mostly because of a massive state income tax cut legislators approved in the final days of the last session.

The state Council on Revenues, a panel of experts tasked with projecting state tax collections each year, concluded Thursday that Hawaii is gradually recovering from the tourism slump triggered by the Aug. 8, 2023, Maui wildfires, while the construction industry is booming.

But the council maintained that state general fund tax collections will grow by a modest 3.5% this fiscal year and 2.2% next year because of the unprecedented tax cuts lawmakers approved in May.

New projections made public by the state Tax Department Thursday show the income tax cut in Act 46 will reduce state tax collections by more than $240 million in the fiscal year that began July 1, and will reduce collections by nearly $597 million the following year.

Another tax measure approved in the spring, Act 47, will reduce excise tax collections by an additional $33 million next year. That new law eliminates the state excise tax on medical and dental care services provided under Medicare, Medicaid and the military’s TRICARE.

The bottom line is that while the council projected in March the state general fund would collect $10.027 billion in taxes this fiscal year, the experts now expect actual collections to be slightly more than $9.902 billion.

The tax cut won praise from council Chairman Kurt Kawafuchi, who said it is a “really good policy of the administration and the Legislature to pass the tax relief.” He cited the increasing cost of essentials such as food and gasoline.

But the impact on tax collections may make it more difficult for Gov. Josh Green and state lawmakers to balance the state budget when the Legislature reconvenes in January. The amounts the state will forgo because of those tax cuts are scheduled to increase each year.

That may be creating a new normal for state government, experts said.

“Essentially, to make all of this pencil out, the state government spending — actual spending — needs to remain relatively flat for the next decade,” said economist Carl Bonham, also a member of the council.

He suggested that can be done in part by eliminating funding for vacant jobs in state government, an idea that Green has said he plans to pursue. But the council also briefly noted some hefty expenses that state government will have to pay in the near future.

Data provided by the Tax Department suggested the state must pay $537 million in hazard pay to unionized public employees who were required to work during the Covid pandemic, and the state faces major costs in the future to resolve lawsuits and help Maui recover from the wildfire.

Almost all of the public worker union contracts expire next year, and the unions certainly will be pressing for wage increases to offset the impact of inflation, Bonham said.

Green has said state budgets in the years ahead may be tight, but he expects the state will be able to pay its bills without raising taxes.

However, he has said he plans to once again ask lawmakers to impose a so-called “Green Fee” on visitors to help finance state efforts to cope with climate change.