Because the House passed the pension tax, it will be debated during conference committee negotiations in the remaining few weeks of this year's legislative session. But it will face a difficult path following the Senate's stand against it.

The legislation to tax pensions of individuals with federal adjusted gross income exceeding $100,000 or couples earning $200,000 would raise about $17 million a year as the state faces a projected $1.3 billion deficit over the next two years. The Senate made up for the revenue that would have been collected from taxing pensions by preventing higher-income taxpayers from claiming state income tax deductions.

Supporters of the pension tax have said that few people in the private sector still receive pensions, and it wasn't fair to tax Social Security and 401(k) funds while exempting pension income.

But many senators decided to oppose the pension tax after learning that the attorney general's office said it could be vulnerable to a legal attack based on the claim that the Hawaii Constitution prevents diminishing accrued retirement benefits, said Senate President Shan Tsutsui.

"We had a lot of members with heartburn on the pension tax to begin with," said Tsutsui, D-Wailuku-Kahului. "The fact that even if we did pass it, it would be subject to constitutional challenge, then it was almost as if it probably wasn't worth it at that point."

A lawsuit could prevent the state from collecting any tax money from pensions while it's argued in court, said Sen. Clayton Hee, who introduced the Senate floor amendment to remove the pension tax.

"The prudent legislative action is to not tax retirees," said Hee, D-Kahuku-Kaneohe. "It makes no sense."

The Senate also killed the idea of raising the general excise tax last week, leaving few options for raising money to balance the state's budget before the Legislature adjourns May 5. Lawmakers appear to be about $200 million short, even if all pending revenue measures pass.

Instead, lawmakers will have to consider additional spending cuts, Tsutsui said.

"Because of the fact that you have some revenue items that are falling off the table … we're going to have to be looking deeper into the budget in terms of cuts to different departments," he said.

The pension tax debate started when Democratic Gov. Neil Abercrombie in January proposed taxing pensions of individuals with more than $35,000 in annual income and couples making more than $70,000, which would have raised about $112 million a year.

But as legislators tried to protect the middle class from having to pay the pension tax, the amount of money it would bring in shrank, and its importance to the state's finances diminished.

The largest tax measure still alive this year would eliminate business tax exemptions for airlines, subcontractors and subleasers, raising about $200 million a year.