Budget Primer JULY 2018 Hawaiʻi - An Overview of How Hawaiʻi Invests in Our Future and Our People - Hawai'i Budget & Policy Center
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JULY 2018 Hawaiʻi Budget Primer An Overview of How Hawaiʻi Invests in Our Future and Our People
Hawai‘i Budget & Policy Center Better information. Better policy. Better Hawai‘i. Advisory Board Randy Moore, Chair Norm Baker Joy Barua Betsy Cole David D. Derauf, MD James Koshiba Jerry Rauckhorst David J. Reber, Esq. Jennifer Sabas, Esq. Jeanne Unemori Skog Leslie Wilcox Kalbert Young Sylvia Yuen Staff Beth Giesting, Director www.HIBudget.org
JULY 2018 1
CONTENTS
Contents
Introduction and Overview 3
Basics of Hawaiʻi’s State Budget 4
Budget Lifecycle and Process 8
Hawaiʻi’s Fund Categories 10
Revenue: Hawaiʻi’s Taxes and Fees 14
How Hawaiʻi Spends Its Money 19
County Budgets at a Glance 26
In Conclusion: Get Involved 30
Appendix: Snapshot of Executive
Departments and Agencies 32
Appendix: Appropriations Bills
Passed for FY2019 36
Endnotes38HAWAIʻI STATE BUDGET PRIMER
“Don’t tell me what
you value. Show
me your budget,
and I’ll tell you
what you value.”
—Joe BidenJULY 2018 3
INTRODUCTION AND OVERVIEW
Introduction and Overview
Hawai‘i’s budget is a powerful foundation of daily life and a demonstration
of our state’s priorities. It sets out where we get our money and what and
who we spend it on. It dictates the investments we make in our schools, our
environment, our health, and our economy. It is the blueprint for Hawai‘i’s
current and future prosperity and is an economic engine in itself, making up
20 percent of the state’s gross domestic product.
Every budget cycle, our elected leaders need to make tough decisions.
Will the state raise additional revenue by increasing taxes or fees?
Will the state add or cut services for people, and if so, what will be
affected—public health, public education, economic development?
Who will bear the brunt of or benefit from the changes—keiki, kupuna,
the poor, the wealthy?
How will we invest in Hawai‘i’s future? How much money will we spend
on affordable housing, the environment, and transportation? How much
will we save for a rainy day?
Despite the importance of the budget, for all but a few people, its process
and substance are incomprehensible. The Hawai‘i Budget and Policy
Center’s Budget Primer seeks to address that hurdle for policy makers, other
individuals and groups wanting to understand and have a say in the decisions
about our budget. This primer serves as an entry-level course covering the
components of the state budget, how it is created, and the priorities and
choices it reflects.
In this primer, we focus largely on the state’s executive branch budget.
It allocates funding to all state programs and services and is the largest
budget that the Legislature passes. The executive budget, as passed by
the Legislature in 2018 to be spent in fiscal year 2019, was $17.5 billion for
operating and capital expenditures plus other appropriations measures.1
Reflecting the different branches of government, the Legislature also passes
separate budgets for the Judiciary, Legislature, and Office of Hawaiian
Affairs.
In addition, this primer provides a high-level summary of county budgets,
important in their own right in collecting and spending public money to meet
local needs.4 HAWAIʻI STATE BUDGET PRIMER
Basics of Hawaiʻi’s What is the State Budget? Fiscal Year/Biennium Budget
Our budget is a plan for spending For the Hawai‘i state government,
State Budget based on available revenues. It each fiscal year (FY) begins on
reflects the priorities and values July 1 and ends on June 30 of the
of the state as it addresses the following year and is referred to
operational and capital needs of by the calendar year of its end
the executive branch, the Judiciary, date. For example, FY2019 starts
the Legislature, and the Office of on July 1, 2018 and ends on June
Hawaiian Affairs. The Legislature 30, 2019. Hawai’i operates on a
also appropriates funds to meet fiscal biennium budget, meaning
other priority needs through grants- each budget covers two fiscal years.
in-aid and appropriations bills. Fiscal biennium 2017-2019 (FB17-
19) covers fiscal years 2018 and
2019, spanning July 1, 2017 to June
Who Decides?
30, 2019. The budget details the
Each branch of government expenditures and revenues for a
provides a proposed budget for given biennium.
its operating and capital needs to
The executive branch accounts
the Legislature, which considers,
for 99 percent of the state budget
amends, and appropriates funds
by paying for the programs and
for these budgets during the
services managed by the 17
annual legislative session. In
administrative departments, the
addition, other appropriations
University of Hawai‘i system, and
bills are introduced and grant-in-
the governor’s and lieutenant
aid proposals are submitted for
governor’s offices. Smaller
legislative decision-making. The
appropriations are made to support
legislative session provides the
the other independent branches
public the most information and
of government in Hawai‘i: the
the best opportunity to express
Legislature, the Judiciary, and the
opinions about state-supported
Office of Hawaiian Affairs. The
programs, operating budgets and
Legislature approves operating and
bills that affect other appropriations
capital budgets for each branch.
and revenues such as taxes.
The Legislature also funds grants-
in-aid, which support operating
or capital requests from non-
governmental applicants, approves
state bond issues, and makes other
appropriations.JULY 2018 5
BASICS OF HAWAIʻI’S STATE BUDGET
Hawai‘i FY2019 Budget
Vital Statistics
Operating and Capital Projects:
Executive: $16.8 billion
Judiciary: $185 million
Legislative: $42 million
OHA: $9 million
Grants in Aid: $30 million
Appropriations bills: $481 million
TOTAL: $17.5 billion
Permanent Positions: 48,222
Temporary Positions: 4,067
Source: HBPC analysis of FY2019 budget worksheets and
appropriations bills, 2018 session6 HAWAIʻI STATE BUDGET PRIMER
Legal Requirements for Hawaiʻi’s Budget
Balanced Budget: The Hawai‘i Constitution provides that no public money shall be
expended except as appropriated by law. In addition, it requires that controlling the
rate of expenditures or reducing expenditures of appropriated state moneys shall be
made by law. It states that general fund expenditures for any fiscal year shall not exceed
the state’s current general fund revenues and unencumbered cash balances, except
when the governor declares that the public’s health, safety or welfare is threatened, as
provided by law.
Excess Revenues: The state constitution requires that “whenever the state general
fund balance at the close of each of two successive fiscal years exceeds five percent of
general fund revenues for each of the two fiscal years,” during the next regular session
the Legislature shall do one of the following: 1) provide a refund or tax credit; 2) deposit
funds into the state emergency reserve; or 3) prepay debt service obligations, pension,
or other post-employment benefit liabilities.
Council on Revenues: The Hawai‘i Constitution requires that there be a Council on
Revenues. This Council is established by law and administratively attached to the
state Department of Taxation. The Council on Revenues is made up of seven unpaid,
volunteer members, three of whom are appointed by the governor for four-year terms
and two each who are appointed by the President of the Senate and the Speaker of the
House of Representatives for two-year terms. Members of the Council are not subject
to term limits. The Council is required to provide its latest forecast of revenues to the
governor and the Legislature by June 1, September 1, January 10 and March 15 of each
year. The revenue estimates cover the fiscal year in progress and each of the ensuing
fiscal years.
The Council also provides its estimates of state total personal income in order to
establish the state expenditure ceiling mandated by the Hawai‘i Constitution. Forecasts
of total personal income are reported to the Director of Finance, the governor, the Chief
Justice and the Legislature each August 5 and November 5.
Estimates prepared by the Council are considered by the governor in preparing the
state budget, recommending appropriations and controlling expenditures, and are
considered by the Legislature in appropriating funds and enacting revenue measures.
South Carolina may be the only other state that has a group performing functions similar
to Hawai‘i’s Council on Revenues.
The Hawai‘i Legislative Expenditure Ceiling: The Hawai‘i Constitution provides that “the Legislature shall
Reference Bureau establish a general fund expenditure ceiling, which shall limit the rate of growth of
(lrbhawaii.org) has a quick
general fund appropriations…to the estimated rate of growth of the State’s general
link to the state constitution
on its homepage.
economy as provided by law.” By statute, the expenditure ceiling is set by the rate of
“state growth” as determined by averaging the annual state personal income growth
during the three preceding calendar years. This average rate of state growth is used
to adjust the immediate prior fiscal year expenditure ceiling. The Legislature may not
authorize appropriations that exceed the ceiling unless two-thirds of each house votes
to do so and they explicitly state the agreed-upon dollar amount, rate by which they are
exceeding the ceiling, and the rationale for this action.
As noted by the Department of Budget and Finance (budget.hawaii.gov/budget/about-
budget/), “The governor is required to submit to the Legislature a plan of proposed
aggregate appropriations for the State which includes the executive budget, proposed
grants-in-aid to private entities, any specific appropriation measures to be proposed
by the executive branch and estimates of the aggregate proposed appropriations of
the judicial and legislative branches of government. In any year in which this plan of
proposed General Fund appropriations exceeds the estimated expenditure ceiling, the
Governor must declare the dollar amount and the rate by which the expenditure ceiling
would be exceeded and the reasons for proposing appropriations in excess of the
ceiling amount.”JULY 2018 7
BASICS OF HAWAIʻI’S STATE BUDGET
Revenue and Spending Trends
The Legislature is responsible for
approving the budget—the state’s
spending plan—but the Department
of Taxation oversees the collection
of tax revenue and other fees, the
Council on Revenues analyzes past
and future revenue trends, and
the governor and Department of
Budget and Finance are responsible
for controlling the purse strings,
complying with the approved
budget within the constraints of
available resources. Revenues
and expenditures are affected by
inflation, population growth, the
economy, tax law changes, and
other factors. Figure 1.3 and 1.4
show projected increases in both
revenue and spending.2
Historic Revenue and Spending
Patterns
With the exception of recent budget
surpluses, Hawai‘i typically fully
expends all general fund revenues
on an annual basis. The recession
created a gap between revenues
and expenditures in 2009 (Fig 1.5),
but in most years revenues modestly
exceed expenses.3 The total amount
available to spend is based on the
Council on Revenues’ quarterly
projections. In addition, individual
budgetary items have spending
ceilings that are linked to the overall
growth of the economy.4
Comparative Spending
Hawai‘i comes in fourth among states
in per capita spending of state-
generated revenues. Alaska spends
the most ($13,522), Florida spends
the least ($3,509), and Hawai‘i spends
$9,685. The national average is
$5,858.58 HAWAIʻI STATE BUDGET PRIMER
Budget Lifecycle The budget process involves many individuals and entities, including the
governor, the state Legislature, the Council on Revenues, the Department of
and Process Budget and Finance, and all the executive departments and agencies. The
budget process shown here summarizes information from the Department of
Budget and Finance.6
Due to the biennial timeframe, the Legislature passes a new budget every
odd-numbered year and a supplemental budget every even-numbered year.JULY 2018 9
BUDGET LIFECYCLE AND PROCESS
April to September balance of the current fiscal year two-thirds vote of each house.12
The budget process begins in and expectations for the next six
the spring and summer with fiscal years. In the state Legislature,
July through September
program structure updates by the the Senate Ways and Means
and Beyond
Department of Budget and Finance Committee (WAM) and House
Finance Committee (FIN) conduct The budget is adopted and funds
(B&F) and the many departments.
public hearings with executive are allocated based on legislative
In August/September, B&F issues
departments and agencies and appropriations and action by the
budget preparation instructions to
prepare revised versions of the bill governor (e.g., vetoes or restrictions)
the departments.7
and budget worksheets. FIN reviews for the biennium starting July 1
the bill and worksheets, and after of the odd-numbered calendar
October to December year. The governor has the power
three readings (votes), the whole
Agencies submit their budget House of Representatives passes a to release or restrict funding that
requests to B&F. After submitting version of the budget. WAM then was appropriated. Restrictions are
budget recommendations to the reviews and makes modifications, most frequently imposed when
departments and going through and the Senate passes its own the Council on Revenues lowers its
an appeals period, the governor version after three readings. Finally, revenue projections.
prepares the proposed executive House and Senate members meet
branch budget. B&F is largely in a conference committee to The Following Year
responsible for crafting the reconcile their versions of the bill
The Legislature is not legally
proposed budget, in discussion and worksheets. Both the House
required to amend the biennium
with the executive departments and Senate must then vote to pass
budget during the following
and state agencies. The governor the final conference version of the
legislative session (even-numbered
submits this proposed budget to budget bill.9
year), but it almost invariably does
the Legislature in December, at
update the executive budget. The
least 30 days before the Legislature
May governor proposes an executive
convenes. The Council on Revenues
The budget bill goes to the supplemental budget, and the
provides quarterly forecasts of
governor, who can sign or veto it. Legislature passes another budget
future revenues to inform the
The governor also has “line item” bill that amends the budget passed
budget process.8
veto power, which means that he or in the first (odd-numbered) year.
she may veto particular items in the The supplemental budget bill may
January to April/May change a department’s authorized
budget by striking out or reducing
No later than January 10, the those items.10 11 If the governor funding and staffing for the second
Council on Revenues must share vetoes anything, the Legislature can year in the budget biennium.13 14
with the Legislature its quarterly reconvene to amend and pass the
general funds forecast for the budget or override the veto with a10 HAWAIʻI STATE BUDGET PRIMER
Hawaiʻi’s Fund
Categories
Taxes and other revenues collected
by the state are credited to discrete
funding categories which are drawn
upon to support the state budget.
The largest revenue depositories
are the general fund, special funds
for various purposes, federal funds,
and bond proceeds. Figure 3.1
shows how Hawai’i tax revenues are
distributed into these funds.15
General Fund
The general fund is the state’s
largest fund, most subject to
constitutional restrictions, and
most open to legislative discretion,
yet it supports only 52 percent
of ongoing executive operations
and makes up 45 percent of all
executive funds when adding in
capital improvements and other
appropriations bills.16 All revenue not
specifically accounted for elsewhere
goes into the general fund.17 except in certain circumstances.21 on high-income filers, and imposed
The general fund is mainly However, revenue projections that a temporary tax credit cap. These
comprised of tax revenue, with miss the mark or leftover deficits decisions bolstered revenue in the
the largest sources being general from prior years sometimes result in years following the recession.23 Post-
excise and use, personal income, expenditures that exceed revenues. recession general fund revenue-
and transient accommodation taxes. Trends in General Fund Revenue: enhancing measures include a
Most of the general fund comes As seen in Figure 3.2, general fund change in income tax brackets in
from state taxes,18 but general revenue dipped during the recent conjunction with enacting an Earned
fund revenue also comes from recession, even without accounting Income Tax Credit for lower-income
investment earnings and money for inflation or population growth, wage earners in 2017.24
from fines, licenses, and permits.19 but has climbed steadily since.22 As Hawai’i reached an unprecedented
Of all tax collections, 86 percent a response to recession-flattened $1 billion general fund surplus at the
was distributed to the general fund revenues, the Legislature increased close of FY2016,25 and continuing
in FY2017 (Fig. 3.1).20 cigarette and tobacco taxes, surpluses allowed the Legislature
The state constitution mandates temporarily increased the hotel to appropriate significant funds to
that general fund expenditures may room tax, increased taxes on the affordable housing and other needs
not exceed general fund revenues transfer of large properties, created while also contributing to the rainy
and unencumbered cash balances, temporary new brackets and rates day fund in 2018.26JULY 2018 11
HAWAIʻI’S FUND CATEGORIES
Federal Funds
Federal funds are an important
source of support for state
programs, contributing $3 billion
to a $15 billion executive budget
($14.4 billion for ongoing operations
plus $480 million for one-time
appropriations). Federal funds are
largely devoted to health, human
services, and education (Fig 3.3),
making up:
• 63 percent of the Department of Human
Services budget, contributing more than
half the cost of Medicaid and CHIP (the
Children’s Health Insurance Program)
and substantial portions of program
costs for adoption and foster care, TANF
(Temporary Assistance for Needy Families),
SNAP (the Supplemental Nutrition
Assistance Program), and housing
assistance.
• 8 percent of the Department of Health
budget, paying for such services as
behavioral health care and WIC (Women
Infants and Children) program.
• 11 percent of the Department of Education
budget, supporting special education
programs and other initiatives.
• 32 percent of the funding for the Office
of the Attorney General budget to pay for
child support enforcement and criminal
justice information and identification.
• 26 percent of the Department of Hawaiian
Home Lands’ budget to manage and
develop trust lands.
In FY2019, federal funds will support 17 percent of
• 33 percent of the Department of Defense
Hawai‘i’s $17.5 billion state budget, either as matching
budget to mitigate physical disasters.
percentages or as grants. The vast majority—82 percent—
• 10 percent of the Department of Labor of federal funds awarded go to health and human services
and Industrial Relations budget for programs, nine percent towards education, and nine
workforce development. percent to all other programs.28
• 10 percent of the Department of Land A study by the Center on Budget and Policy Priorities
and Natural Resources budget for for FY2017 showed that 17.5 percent of the funding in
fisheries, forests, and general ecosystem Hawai‘i’s state budget came from federal grants, which
protection.27 put Hawai‘i last among all states (Fig 3.4). By this measure,12 HAWAIʻI STATE BUDGET PRIMER
Michigan received the largest share
of federal funding at 41.9 percent,
while the national average was
31.3 percent.29 Looking at federal
funding as part of the state budget
in another way, Hawai‘i ranks 28th
on a per capita basis, drawing in
$1,800 per resident. This is well
behind first-place Alaska at $5,177
per head but better than last-place
Ohio with $1,075 (Fig 3.5).30
A distinction should be made in
accounting for Hawai‘i’s share of
federal funds: a large amount of dependence of state government Fund, which receives surcharges
federal dollars come to Hawai‘i on federal funds.”32 In response, the from wireless phone users to fund
because of a strong military Department of Budget and Finance the 911 emergency system.38 While
presence and defense spending issued its interim report to the special funds may not be diverted to
here.31 These expenditures contribute Legislature in January 2018 outlining any other purpose, they must still be
to the gross state product and related initial steps and listing federal appropriated through the budget
tax revenues, but not directly to grants by state department.33 process in order to be spent.
crucial programs supported by the Figure 3.6 shows projected changes
state budget. Only the latter are Special Funds in special fund balances between
reflected in Figure 3.5. Special funds are established by FY2017 and FY2023.39
In 2016, the Legislature passed the Legislature with revenues from
SB2550 (Act 225), amended in specified sources that are dedicated Reserve Funds
2017 by SB102 (Act 178). These to supporting an identified purpose The Emergency and Budget Reserve
bills direct the administration to related to the revenue source. They Fund (EBR), which was created in
study and report on federal funds are restricted funds that may not 1999, is devoted to emergency and
supporting state programs in be allocated by the Legislature or “rainy day” purposes.40 The EBR is
order to understand the impact of governor for any other purpose.34 funded by legislative appropriations
possible major reductions in federal A variety of sources contribute and surpluses from tobacco
funds. The first act calls for policy to special funds, including eight settlement moneys. Interest earned
recommendations that address percent of state tax revenues.35 on the EBR is deposited to the
“conditions for using federal funds Special fund revenues include general fund.41
as the means of financing the fuel taxes, motor vehicle taxes,
salaries of state employees” and unemployment insurance taxes, According to the Pew Charitable
“circumstances under which the revenue from public undertakings, Trusts,42 Hawai‘i’s rainy day fund had
state government should continue fees collected for medical services, 15.2 days’ worth of general funds
programs or projects with state and other sources.36 Special funds at the end of FY2017. The national
funds after federal funds are no will pay for 18 percent of the average for that year was 19.8 days,
longer available for those programs total FY2019 budget, including with Alaska having the highest
and projects.” The subsequent transportation, hospitals, housing, reserve level at 383 days and four
directive in Act 178 reads, in education, environmental states having none. Hawai‘i’s 2017
part, “the Legislature intends for management, tourism, and other rainy day balance ($311 million as
the study to result in a policy from areas.37 An example of a special of FY2017) represented 4.2 percent
the governor that reduces the fund is the Wireless Enhanced 911 of general fund expendituresJULY 2018 13
HAWAIʻI’S FUND CATEGORIES
compared to 5.4 percent for the national average.43
Figure 3.7 shows increasing rainy day balances for
Hawai‘i. The Legislature appropriated an additional
$125 million to the EBR in 2018.44
The Hawai‘i Hurricane Relief Fund (HHRF) was
established in 1993 in response to private insurers
withdrawing from the Hawai‘i market after Hurricane
Iniki. It ceased operations in 2002 when private
insurance again became available. At its termination
the fund amounted to $187 million, which is kept in
HHRF in the event its services are required in future.
However, HHRF has served as a de facto budget
reserve, helping tide the state over through the
recession. Legislation was passed to restore funds
via tax revenues in fiscal years 2013 through 201545
Bond Funds and State Debt
The state constitution defines the kinds of bonds
and debt obligations the state can undertake and
requires that the Legislature approve all bonds. The
constitution limits the debt that the state may incur,
providing that general obligation bonds may be
approved only if the principal and interest payable
in any fiscal year is no more than 18.5 percent of
the average of general fund revenues over the principal on the bonds. Debt service payments amounting
preceding three years.46 This provision is intended to $795 million were included in the FY2019 Department of
to ensure that the state’s bond obligations do not Budget and Finance budget.49
jeopardize operating funds. The state issues an
annual statement of outstanding indebtedness and Other Funds
projects annual bond issues and debt obligations These include:
(Fig 3.8).47 On July 1, 2017 this statement noted the
following: $6.9 billion for general obligation bonds, • Private Contributions, usually related to launching
$2.9 billion for revenue bonds, and $1.4 billion for or piloting a special project or purpose.
special purpose revenue bonds.48 • County Funds such as the surcharge imposed by
The Department of Budget and Finance manages the City and County of Honolulu to fund the rail
most state bonds and debt. These include general project or fuel taxes imposed by the counties.50
obligation bonds, revenue bonds and special facility • Trust Funds, which invoke the state’s fiduciary
revenue bonds issued by state agencies, special responsibility for assets held to benefit those
assessment bonds, mortgage credit certificates, with a vested interest in the assets, such as the
short-term loans, and municipal lease financing. Employer-Union Health Care Trust Fund.51
The department also issues and manages special
• Interdepartmental Transfers, which deploy funds
purpose revenue bonds, which are instruments that
to support a program in a different department.52
fund airports, harbors, highways, and public housing
as well as some private projects operated for the • Revolving Funds, which are “funds from which
public good, such as hospitals and electric utility the costs of goods and services is [sic] paid for by
plants where private parties pay the interest and charges/fees that are levied on the public.”5314 HAWAIʻI STATE BUDGET PRIMER
Revenue: Hawaiʻi’s
Taxes and Fees
Revenues, particularly taxes, drive
the budget. Compared to other
states, Hawai‘i’s tax structure relies
heavily on income and consumption
taxes and less on other fees and
taxes.54 Hawai‘i has the fifth lowest
local taxes (which are county taxes
in Hawai‘i) as a share of total state
funding; however, most services
that are funded at the local level Changes in tax revenue collection to 25 percent of the general excise
in other states are state functions as shown in Figure 4.1, resulted from tax.58
here. One example is that Hawai‘i the combined effects of recession While Hawai‘i ranks high in tax
is the only state in which the public and recovery, inflation, population collections per capita, it falls closer
school system functions as a school increases, and tax policy changes. to the average on overall tax as a
district system funded and operated In fiscal year 2017, Hawai‘i collected percentage of income, a measure
by the state.55 In other states, $7.3 billion in taxes, including: of the impact of tax policy upon
public education is supported • Net general excise and residents. According to the Tax
at the county or municipal level, use tax collections of $3.2 Foundation, Hawai‘i residents paid
often relying on property taxes billion (44 percent of total) the 14th highest share of their
for funding. In Hawai‘i, only the income to state and local taxes. In
counties have constitutional • Net individual income tax
collections of $2.2 billion Hawai‘i, 10.2 percent of income
authority to levy property taxes, went to state and local taxes, which
which are used for county services (30 percent of total)
is only slightly higher than the U.S.
unrelated to education. (A ballot • Other state taxes, including average of 9.9 percent.59 Although
initiative has been proposed for the transient accommodation the percentage of income paid in
the 2018 election that would allow tax, fuel tax, and motor taxes is close to national averages,
property tax collection at the state vehicle tax of $1.9 billion (26 taxes on the poor in Hawai‘i are
level to support certain educational percent of total)56 much higher. The bottom 20
costs.) percent of Hawai‘i families pay
Taxes Per Capita approximately twice the state and
local tax rate as the top one percent,
In FY2015, Hawai‘i ranked third
the second heaviest tax burden in
highest in per capita state tax
the nation for those in poverty (Fig
collections, with a per capita
4.2).60
collection amount of $4,530.57
However, it should be noted that
states with large numbers of tourists, General Excise and Use Taxes
like Hawai‘i, have a portion of their The general execise/use tax is
state’s total revenue generated Hawai’i’s largest source of public
by taxes paid by visitors. Various revenue (Fig 4.3) and was singled
studies estimate that toursits pay up out to be the source of “catch-up”JULY 2018 15
REVENUE: HAWAIʻI’S TAXES AND FEES
contributions to fund post-employment public worker
benefits.61 In 2017, GET revenue amounted to $3.2
billion.62 General excise tax is imposed on business
activity that takes place in Hawai‘i while the use tax
is applied to services or goods acquired from an
unlicensed seller located outside of Hawai‘i. The use
tax is primarily imposed to reduce the price advantage
that out-of-state sellers would otherwise have over
Hawai‘i sellers.63
The GET assessment is four percent on most activities
but 0.15 percent on insurance commissions and
0.5 percent on wholesaling.64 Since 2007, O‘ahu
transactions at the four percent rate have also been
subject to a surcharge of one-half of one percent to
pay for the development of a commuter rail system.65
Hawai‘i relies on the GET for almost half of its tax
revenue, and Hawai‘i’s GET is uncommonly high. The
state GET of four percent appears modest when
compared to other state sales tax rates. However,
equating sales taxes and the general excise tax
misrepresents the true impact of the GET. It has been
estimated that the income generated by the GET is
equivalent to a sales tax of 10 - 11 percent. Currently,
Louisiana has the highest sales tax rate at 9.98 percent.66 67
While sales tax is usually imposed only on the end-
user of a good, Hawai‘i’s GET extends to services and
is applied even when the good or service purchased
will be later sold to someone else. This means the
same good can be subject to the GET several times.68
The GET is also unique in that it is based on the gross
revenue received by the person engaging in the
business activity, where most sales taxes are based on proportionally more in general excise taxes. Hawai‘i’s
the gross retail sales of tangible goods.69 In addition, excise tax structure is more regressive than the national
the tax inflates costs because sellers of goods and average where the lowest 20 percent of residents spend
services typically add on to their charges the amount seven percent of their income on excise or sale taxes.71
of the tax plus an additional amount to cover the tax Most states do not collect sales taxes on the purchase
on such additional charge. For example, on O‘ahu, the of food and other essentials. Hawai‘i’s GET has no such
taxes added by vendors for goods or services is 4.712 exemptions, but a refundable food general excise tax
percent (including the rail surcharge). credit is available to Hawai‘i residents with incomes
The top one percent of families in Hawai‘i spend one under $50,000. The credit, adjustable by income,
percent of their income on excise taxes, while the ranges from $110 at an income level under $5,000 to
lowest 20 percent of residents spend 11 percent of $35 for incomes between $40,000 and $49,999.72 This
their income on excise taxes.70 This phenomenon tax credit was the most commonly claimed in 2015,
occurs because poorer people must spend a higher appearing in 323,283 returns, or 45 percent of all
proportion of their money on goods, thus paying those filed.7316 HAWAIʻI STATE BUDGET PRIMER
Individual Income Tax
Hawai’i adopted an income tax
in 1901 before it even became
a state.74 In FY2017, Hawai’i’s
individual income tax produced
$2.2 billion, or 30 percent of all
tax revenue.75 According to the
Department of Taxation, “Hawai‘i’s
individual income tax generally
follows the federal definitions for
determining net taxable income
but has its own exemptions, tax
credits, and tax rates.” Individual tax
rates are arranged in 12 brackets.
The lowest tax rate is 1.40 percent
and, effective January 1, 2018, the
percentages paid by the top three
brackets were increased to nine
percent, 10 percent, and 11 percent,
respectively. Hawai‘i’s individual
income taxes are distinguished
by having the largest number of
brackets of any state, and the 11
percent paid at the top of the scale
is the second highest in the nation.76
77 78
The 2017 law that added the Transient Accommodations Tax • Fuel and environmental
three top tax brackets did so to The transient accommodations response taxes produced
offset a new non-refundable earned tax (TAT) is imposed on income $195 million.
income tax credit to start benefiting gathered from renting a hotel • Motor vehicle registration
lower income wage earners in 2018.79 room, rental house, or similar living and taxes amounted to $187
While Hawai‘i’s GET tax is accommodation to visitors.80 In 2017, million.
considered regressive, i.e., collects Hawai’i brought in $508 million from
• Cigarette and tobacco taxes
a larger share of the income of this source, or seven percent of all
totaled $124 million.
low- to moderate-income residents, Hawai‘i’s tax revenue.81 In 2017’s
Hawai‘i’s income tax is progressive, special legislative session, the TAT • Public service/utility
with higher income households was raised by one percent to 10.25 company fees, in lieu of
paying a greater share of income percent to fund Honolulu’s rail taxes, contributed $122
in taxes. Income taxes are imposed project.82 The distribution of TAT million.
on virtually all earners, but some funds is shown in Figure 4.5. • Liquor taxes yielded $51
low-income residents can erase their million.
tax debt with credits for food/excise Other Taxes and Fees83 • Conveyance taxes on
tax, low-income renters, child and
In FY2017: transferred properties
dependent care, and earned income.
produced $95 million.
All, except the earned income, tax • Hawai‘i’s corporate tax
credit are refundable. collected $77 million.JULY 2018 17
REVENUE: HAWAIʻI’S TAXES AND FEES
Tax Credits
Hawai‘i allows tax credits “to promote social
welfare,” “to encourage certain industries or
economic activities,” and “to avoid double
taxation or pyramiding of taxes.”84 In tax
year 2015, $304 million was distributed in
tax credits,85 as shown in Figure 4.6.
Tax Policy: Progressive, Proportional, or In Hawaiʻi, the individual income tax is progressive.
Regressive? Under a progressive tax, upper-income families pay
a larger share of their incomes in tax than those with
In evaluating Hawai‘i’s tax system, it is lower incomes. (After 2018, Hawai‘i’s tax is expected
important to consider what makes a good to be more progressive due to increased upper bracket
tax system. “Important Tax Policy Principles,” taxes coupled with an earned income tax credit for
outlined by the Institute on Taxation and lower income residents.)
Economic Policy (ITEP),86 include:
• Equity: Does the tax system treat
people at different income levels,
and people at the same income
level, fairly?
• Adequacy: Does the tax system
raise enough money, in the short
and long run, to finance public
services?
• Simplicity: Does the tax system
allow confusing tax loopholes? Is it
easy to understand how your state’s In Hawaiʻi, property tax is approximately proportional.
taxes work? Under a proportional tax, everyone pays the same
percentage of their income in taxes regardless of how
• Exportability: Individuals and
much or little they earn.
companies based in other states
benefit from your state’s public
services. Do they pay their fair
share?
• Neutrality: Does the tax system
interfere with the investment and
spending decisions of businesses
and workers?
Tax equity is related to how “progressive,”
“proportional,” or “regressive” a tax is in
its effects on payers.87 Hawai‘i’s taxes have
been categorized by ITEP (Figs 4.7, 4.8, and
4.9). All figures are for Hawai‘i in 2015.88 In Hawaiʻi, the general excise tax is regressive. Under
a regressive tax, poor and middle income families pay
larger shares of their incomes than do the wealthy.18 HAWAIʻI STATE BUDGET PRIMER
Hawaiʻi’s Tax Review Commission
The constitution requires the establishment of a Tax Review Commission, whose
purpose is to evaluate the state’s tax structure and recommend revenue and tax
policy. Commission appointments were to be “on or before July 1, 1980, and every five
years thereafter.” The most recent commission (2015-17), whose seven members were
appointed by the governor with the consent of the Senate, submitted its report on
February 18, 2018.
The 2015-17 Tax Review Commission’s report summarized its main findings as follows:
• Additional payments needed to fund pension and other post-retirement
benefits will average over $400 million annually from 2018 to 2022 and
these additional payments will require more revenue than can reasonably be
expected to come from Hawai‘i’s current tax structure.
• The average share of income that Hawai‘i residents pay in state taxes rises
from about six percent to eight percent as household income rises from
$25,000 to $50,000, but the share is relatively flat above $50,000.
• The state should not eliminate statutory tax rates, but corporations should
be allowed to expense rather than depreciate new investments to encourage
investments within the state.
• The personal exemption and standard deduction in the state’s income tax
system have been eroded by inflation and are out of date.
• Although tax credits eliminate tax liability for most households with income
below the poverty threshold, there remain some instances where such
households are required to pay state income tax.
Based on the above findings and its deliberations, the Tax Review Commission
summarized its recommendations under three categories: net income tax
recommendations, revenue adequacy recommendations and recommendations for
further in-depth studies.
The net income tax recommendations included:
• Increasing the personal exemption and standard deduction to the 2017 federal
income tax levels and indexing them for inflation thereafter, and then altering
tax rates and tax brackets to make these changes revenue neutral.
• Taxing retirement income more evenly by making income from employer-
provided pensions subject to state income tax after a five year lag to help
The full report and people plan for the change.
recommendations of the Tax • All corporations to expense rather than depreciate new investments.
Review Commission can be
found at http://files.Hawaii. The revenue adequacy recommendations included:
gov/tax/stats/trc/docs2017/
• Expanding efforts to collect taxes on e-commerce and remote sales.
trc_rpt_2017.pdf.
The next Tax Review
• Taxing e-cigarettes at a rate comparable to the tax on regular tobacco
Commission is to be cigarette sales.
appointed by July 1, 2020.
• Establishing a commission to examine how to handle the unfunded and
It will complete its work
underfunded liabilities for pensions and health care for retired public workers,
and report its findings and
recommendations within a including measures to raise revenues and to reduce expenditures.
few years after its members The Tax Review Commission also recommended that in-depth studies be done on
are appointed.
whether Hawai’i should institute a carbon tax and whether the withholding rate on sales
More information is available of real property should be restored to its original rate of nine percent from its current
at http://tax.Hawaii.gov/
rate of five percent.
stats/a9_2trc/.JULY 2018 19
HOW HAWAIʻI SPENDS ITS MONEY
How Hawaiʻi
Spends Its Money
The Executive Budget
To see the budget in action, look to
the executive branch. This budget
supports an array of essential
health and social services, business
development, environmental
protection, and education from
kindergarten to university. It is
made up of the base budgets
for each department, capital
improvements, and one-time
appropriations. It authorizes funds
for salaries, pensions and other
benefits, facilities, contracts, and
debt service. A snapshot view of
each department that describes
primary functions, budget, and
staff is included in the appendix.
Detailed information about the
on-going base budget for the
executive branch is in the budget
bill (HB1900 in 2018). The resources
and staff rolled up in the budget by creating special funds that are • $481 million approved
bill can also be found in the HB1900 restricted to supporting related in separate one-time
budget worksheets available at the expenditures. Figure 5.1 compares appropriations bills.
“Legislative Information” page on Hawai‘i’s spending to the U.S. • $2.4 billion for the capital
the Legislature’s website. average.89 improvement project (CIP)
The allocation of revenues expresses The executive budget is the state’s budget.91
the priorities of state policy-makers largest budget, accounting for 99 The array of funds that supports
and underscores the ways Hawai‘i’s percent of state spending.90 the total executive budget varies
program financing differs from
The total FY2019 executive branch somewhat from those that support
other states. For example, Hawai‘i’s
budget amounts to $17.3 billion. the operating base budget (Fig 5.3
general fund covers functions
This sum is made up of: and Fig 5.4). The most significant
that are typically supported
• $14.4 billion for the difference is the addition of capital
by local governments in other
operating budget, the base improvement projects funds to the
states, including education, public
budget reflected in budget total budget. Because CIP funds
health and welfare, hospitals, and
worksheets and the budget pay for capital projects, they are not
penitentiary systems. Hawai’i’s
bill. part of the base budget.
Legislature also indicates priorities20 HAWAIʻI STATE BUDGET PRIMER
Executive Operating Budget (on-
going departmental resources)
• General funds: $7.5 billion
• Special funds: $2.9 billion
• Federal funds: $3.0 billion
• Other funds, including trust
funds, interdepartmental
transfers, and revolving
funds: $989 million
The ongoing operating budget
for the executive departments is
of special note. This budget is the
base upon which the Legislature
adds or subtracts funds to form
future-year budgets. This base
accounts for 83 percent of the
FY2019 executive expenditures, with
the remaining 17 percent being
for capital improvements or other
one-time appropriations.92 Figure
5.5 shows the distribution of the
base operating budget among
programs, but it is notable that
these departmental operating
expenses do not include employee
benefits (such as health insurance,
social security, retirement, and other
post-retirement benefits) or debt
service. These excluded expenses,
which total more than $2.7 billion,
are instead included in the budget
of the Department of Budget and
Finance. In addition, capital and
facility costs for all departments,
except for public education and
the University of Hawai‘i system,
are shown in the Department of
Notes: Accounting and General Service
Other departments with operating budgets of under budget. This method of allocation
$300 million are Accounting and General Services, masks state operating expenses
Agriculture, Attorney General, Commerce and by department by under-reporting
Consumer Affairs, Defense, Governor’s and Lieutenant
costs for all except Budget and
Governor’s Offices, Hawaiian Homelands, Human
Resource Development, Land and Natural Resources,
Finance, whose budget is inflated.
and Taxation.JULY 2018 21
HOW HAWAIʻI SPENDS ITS MONEY
Executive Branch Staff
Staff are a major part of each
state department’s budget. The
executive branch is authorized
to employ 46,174 permanent
employees plus 3,955 temporary
full-time equivalents (FTEs) for a
total of 50,129 positions. Hawai‘i’s
statewide Department of Education
has, by far, the largest number of
staff, with 20,697 permanent and
2,168 temporary staff (Fig 5.6). The
Department of Human Resources
Development, which supports the
state’s personnel needs, has the
fewest at 98 FTEs.93
Executive Operating Budget:
Then and Now
In the ten years between fiscal
years 2009 and 2018, the overall
executive operating budget
increased by 31 percent from $10.8
billion to $14.1 billion. Much of the
increase is attributable to inflation
and population growth, as well
as changes in the economy (2009
was a recession year) and changes
dollar amounts: Hawaiian Home of Budget and Finance, where they
in tax policy. Between 2009 and
Lands by 109 percent ($27 million), are now. When the fringe and debt
2017, inflation-adjusted per capita
Commerce and Consumer Affairs by service payments for Education and
expenditures increased by nine
76 percent ($36 million), and Labor the University are subtracted from
percent. The changes in spending
by 58 percent ($173 million). the Department of Budget and
by department illustrate shifts
It appears that the operating budget Finance and added back to those
among competing priorities. In the
for the Department of Budget and departments in 2018, it shows that
2009 to 2018 span, the department
Finance grew by nearly $974 million Education grew by $189 million (7.5
experiencing the greatest growth
(58 percent) during this period, percent) and UH by $263 million (23
was Human Services with a gain of
but this increase is due largely percent), while Budget and Finance
$1.6 billion (up 84 percent). Health’s
to changes in budget allocation increased by a more modest $102
budget increased by 24 percent,
processes. In 2009, fringe and debt million (six percent). The governor’s
with the addition of $356 million
service payments for Education and lieutenant governor’s budgets
dollars and transportation added
and the University of Hawai‘i are the only ones smaller in 2018
$328 million, for a 48 percent gain.
system were reflected in those two than in 2009, with a decline in their
The operating budgets of several
departments’ budgets, rather than combined budgets of more than $1
smaller departments grew by large
being included in the Department million.94
percentages, but less dramatic22 HAWAIʻI STATE BUDGET PRIMER
Payment Obligations
Before any other spending decisions,
the Legislature has to address the
state’s non-negotiable obligations.
These costs are:
• Debt service
• Health benefits for
employees and retirees
• Mandated payments for
accumulated retiree health
costs
• Contributions to the
pension fund and social
security
• State share of Medicaid
match95
Except for Medicaid expenses,
which are included in the budget
for the Department of Human
Services, the costs named above are
allocated to and expended by the
Department of Budget and Finance.
96
Although described as “fixed” costs
by the Department of Budget and
Finance, the required sums depend
on factors related to each kind of
expense. For instance, the amount
of state Medicaid match varies by
the number and category of aid of
enrollees. As shown in Figure 5.8
and Figure 5.9, these items are part
of the executive base budget and
consume more than $3.6 billion, or
47 percent of all general funds.
Trends projected for these obligated
costs are shown in Figure 5.10
and Figure 5.11. These include an
increasing percentage of general
funds, from 43 percent in FY2010 to
47 percent in FY2019, expended for
obligated costs. 97JULY 2018 23
HOW HAWAIʻI SPENDS ITS MONEY
Health and Retirement Benefits
Among Hawai‘i’s obligated costs
noted above are pension and
retiree health benefits for state and
county public worker retirees. The
Employee Retirement System (ERS)
manages pension payouts and
investments while the Employer-
Union Health Benefits Trust Fund
(EUTF) manages active and retiree
health and other benefits. The
latter are often called “other post-
employment benefits,” or OPEB.
Hawai‘i’s pension and OPEB
obligations are frequently referred
to as “unfunded liabilities,” which
means that state obligations for
pensions and OPEB exceed the
amount of money in their respective
trust accounts. According to the
ERS actuarial valuation for the year
ending June 30, 2017, “the funding
period for paying off the UAAL”
(unfunded actuarial accrued liability)
is 26 years. The report states that
the unfunded actuarial accrued
liability totals $12.9 billion and the
funded ratio, that is, the value of
assets compared to accrued liability,
is 54.9 percent.98 A similar report for
EUTF for July 1, 2017 revealed an
unfunded actuarial accrued liability
for OPEB of $12.15 billion and a
funded position of 12.8 percent.99
Hawai‘i’s retiree systems short-
falls can be attributed to several
factors, one of which is increasing
retiree longevity. According to the
ERS report cited above, general
retirees at age 65 can expect to live
another 23.2 years if male and 26.4
if female.100 Another reason for the
shortfall is that legislators in the past
failed to fund retirement and OPEB
accounts adequately.10124 HAWAIʻI STATE BUDGET PRIMER
Steps have been taken to ameliorate
unfunded liabilities: HB546 (Act
268) was passed in 2013 requiring
accelerated state appropriations
to amortize the OPEB debt, and
in 2017 SB936 (Act 17) increased
the pension pay-in to catch up on
liabilities. This prudent, but painful,
strategy to reduce the unfunded
liabilities decreases future funding
requirements, provides an income-
generating base, and earns the
state a better bond rating and
lower interest rates on borrowing.102
Figure 5.12 and Figure 5.13 use
data from the Department of
Budget and Finance’s “Budget in
Brief” (FY2019) to show past and
expected appropriations from the
general fund for pension and OPEB
obligations.103
Capital Improvement Projects
The executive branch CIP budget,
totaling $2.4 billion for FY2019,
allocates funds to one-time
departmental infrastructure and
improvement projects. Departments
have very different capital project
needs (Fig 5.14). Two-thirds of all
capital funds are allocated to the
Department of Transportation
for airports, roads, harbors, and
similar purposes, while a number of
other departments have no capital
projects. The CIP budget, which is
much smaller than the operating
budget (Fig 5.15), is largely financed
by bonds.104JULY 2018 25
HOW HAWAIʻI SPENDS ITS MONEY
Grants-in-Aid and legislative branches, the Other Budgets
The Legislature appropriates grants- Legislature passes multiple Budget information is available on
in-aid (GIA) to non-governmental targeted appropriations bills that the Legislature’s website that details
entities. Applications and provide funding for projects and the budgets for the other branches
instructions are available on the government responsibilities. The of government, namely, the judiciary,
Legislature’s website’s “Legislative sums appropriated this way can be the Office of Hawaiian Affairs, and
Information” page. Eligibility for substantial, as these are the bills the Legislature. The bills passed that
and management of grants are that, among other things, fund appropriate funds to the judiciary
governed by Chapter 42F of the collective bargaining obligations and OHA are reflected in analogous
Hawai‘i Revised Statutes. There is and pay claims against the state. budget worksheets, which can be
no requirement that applicants be Appropriations cannot be made to found on the state Legislature’s
nonprofit organizations but nearly non-governmental entities; instead, website (www.capitol.hawaii.gov)
all are. According to Chapter 42F, with rare exceptions, the bills are under “Legislative Information.” For
the only restriction is that a grantee allocated to executive departments FY2019, a supplemental budget year,
must be incorporated in the state of for expenditure (for FY2019, the judiciary budget is SB2150, but
Hawai‘i.105 one appropriation bill funded a there is no supplemental budget
project in the legislative branch for OHA. Its budget for FB17-19
The grantee may receive funds for
and another went to the City and was passed in 2017 as HB335. The
operating or capital needs or both.
County of Honolulu, but to support Legislature’s appropriation bill is
Operating grants are appropriated
a Department of Education need). typically the first one approved
from general funds, while capital
Appropriations bills (see appendix) and signed by the governor every
grants are typically funded by
passed for FY2019 totaled $481 session. For FY2019, this is HB2600
general obligation bonds. The total
million and included $230 million (Act 1). The Legislature’s budget
appropriated to GIAs varies every
for affordable housing, more than supports legislative operations,
year, based on funds available after
$30 million for services for homeless the state auditor, the Legislative
other spending agreements have
people, $125 million for flood relief, Reference Bureau and Public
been reached. Grants appropriated
and $8 million for claims against Access Room, the ombudsman,
for FY2019 amounted to nearly $30
the state. Appropriations bills are and the state Ethics Commission.
million, with 65 percent going to
funded largely by general and Unlike the budgets for all other
capital and the balance to operating
special funds.108 branches of government, the
grants.106 Both the legislative
GIA worksheet summary and the Legislature’s budget bill is not
budget bill note the department Bond Issues accompanied by worksheets that
and program to which each grant detail appropriations and authorized
The legislative budget process
is assigned. Notwithstanding the staffing.
also involves the authority to issue
Legislature’s award of grants, the bonds. For FY2019, $70 million
governor has full discretion to was authorized for special purpose
withhold, reduce, or delay release of revenue bonds and $2 billion for
funds.107 general obligation bonds, both to
be managed by the Department of
Other Appropriations Bills Budget and Finance. The University
of Hawai‘i will manage the $100
In addition to the budget
million that was appropriated for
appropriations bills approved
university revenue bonds.109
by the Legislature to fund OHA
and the executive, judiciary26 HAWAIʻI STATE BUDGET PRIMER
County Budgets The state of Hawai‘i is not the only • Civil defense, fire,
governmental entity collecting and ambulance services, and
at a Glance spending money for the public ocean safety
good. Each of the four counties has • Police, prosecuting
taxing authority and responsibilities attorneys, and county jails
that complement state budgets and
services. During FY2018, Hawai‘i’s • Sanitation services, such
counties – the City and County as water, sewer, and waste
of Honolulu, Kaua‘i County, Maui management
County, and Hawai‘i County – • Building and maintaining
expected to raise and spend more mass transit systems, county
than $6 billion, with the bulk (62 and city roads, and streets
percent) going to operations and
• Driver licensing and vehicle
the balance to capital improvements
registration
(37 percent). There is a fifth county,
Kalawao, that is comprised of • City and county parks and
Moloka‘i’s Kalaupapa Peninsula, but recreational facilities
it is not included in this account. Its • Human services, including
few remaining permanent residents Aging and Disability
live in a Hansen’s disease facility, Resource Centers
and it is administered by the state
• Grants to nonprofit
Department of Health.
organizations
State and county revenue sources
Each county’s mayor proposes a
overlap very little. Counties collect
budget to the county council, which
property taxes, which, according
approves the budget for execution
to the state constitution, may not
by the county administration. Using
be assessed by the state. Other
the parlance of county councils,
county revenues include: service
actions are called “ordinances,”
and use fees for water, sewer and
not “bills.” Each county has the
waste disposal, licenses, and
same fiscal year as the state, that is,
permits, including building permits.
one that starts on July 1 and ends
Another sizeable category of
on June 30. Each budget covers
revenue, amounting to more than
a one-year period and is typically
$340 million for all counties, was
proposed in May and approved in
inter-governmental funding, most
June for the upcoming year.
of which is a share of the Transient
Accommodations Taxes (TAT) that Budget information is not presented
the state collects and shares with uniformly across all counties. HBPC
counties. analyzed and categorized data to
make it as comparable as possible.
Counties in Hawai‘i do not pay for
Links to county budget information
public education, but they carry
are included at the end of this
out many other essential services,
section.
including:You can also read
