Taxes and other revenues collected by the state are put into individually separate and distinct funding categories. Funds in these categories are then withdrawn to support the state budget in different ways. The largest revenue depositories are the general fund, special funds for various purposes, federal funds and bond proceeds. Figure 3.1 shows how Hawaiʻi tax revenues are distributed into these funds.

This post will cover the general fund and federal funds. A second part will cover special funds, reserve funds, bond funds and state debt, and other funding sources.

General Fund

The general fund is the state’s largest fund. It is also the fund most subject to constitutional restrictions and most open to legislative discretion. However, it supports only 52 percent of ongoing executive operations and makes up only 45 percent of all executive funds when adding in capital improvements and other appropriations bills, according to HBPC analysis of FY2019 budget worksheets and appropriations bills passed during the 2018 session. All revenue not specifically accounted for elsewhere goes into the general fund.

The general fund is mainly comprised of tax revenue, with the largest sources being general excise and use taxes, personal income tax, and the transient accommodation tax. Most of the general fund comes from state taxes, but general fund revenue also comes from investment earnings and money from fines, licenses and permits. Of all tax collections, 86 percent was distributed to the general fund in FY2017 (Fig. 3.1).

Article VII, sec. 5 of the Hawai‘i State Constitution mandates that general fund expenditures may not exceed general fund revenues and unencumbered cash balances, except in certain circumstances. However, revenue projections that miss the mark or leftover deficits from prior years sometimes result in expenditures that exceed revenues.

Trends in General Fund Revenue

As seen in Figure 3.2, general fund revenue dipped during the recent recession—even without accounting for inflation or population growth—but has climbed steadily since. As a response to recession-flattened revenues, the Legislature increased cigarette and tobacco taxes, temporarily increased the hotel room tax, increased taxes on the transfer of large properties, created temporary new brackets and rates on high-income filers, and imposed a temporary tax credit cap. These decisions bolstered revenue in the years following the recession. Other post-recession general fund revenue-enhancing measures include a change in income tax brackets in conjunction with enacting an Earned Income Tax Credit for lower-income wage earners in 2017.

Hawaiʻi reached an unprecedented $1 billion general fund surplus at the close of FY2016, and continuing surpluses allow the Legislature the ability to appropriate funds public investments and other needs while also contributing to the rainy day fund in 2018.

Federal Funds

Federal funds are an important source of support for state programs. HBPC analysis of FY2019 budget worksheets and appropriations bills passed in 2018 shows that federal funds will support 17 percent of Hawai‘i’s $17.5 billion total state budget, either as matching percentages or as grants.

The vast majority—82 percent—of federal funds awarded go to health and human services programs, with 9 percent going toward education, and 9 percent to all other programs (Fig 3.3). This amounts to $3 billion out of a $15 billion executive budget ($14.4 billion for ongoing operations plus $480 million for one-time appropriations), 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;
  • 33 percent of the Department of Defense budget to mitigate physical disasters;
  • 10 percent of the Department of Labor and Industrial Relations budget for workforce development; and
  • 10 percent of the Department of Land and Natural Resources budget for fisheries, forests and general ecosystem protection.

A study by the Center on Budget and Policy Priorities for FY2017 showed that 17.5 percent of the funding in Hawai‘i’s state budget came from federal grants, which put Hawai‘i last among all states (Fig 3.4). By this measure, Michigan received the largest share of federal funding at 41.9 percent, while the national average was 31.3 percent.

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).

A distinction should be made in accounting for Hawai‘i’s share of federal funds: a large amount of federal dollars come to Hawai‘i because of a strong military presence and defense spending here. These expenditures contribute to the gross state product and related tax revenues, but not directly to crucial programs supported by the state budget. Only the latter are reflected in Figure 3.5.

In 2016, the Legislature passed SB2550 (Act 225), amended in 2017 by SB102 (Act 178). These bills direct the administration to study and report on federal funds supporting state programs in order to understand the impact of possible major reductions in federal funds. The first act calls for policy recommendations that address “conditions for using federal funds as the means of financing the salaries of state employees” and “circumstances under which the state government should continue programs or projects with state funds after federal funds are no longer available for those programs and projects.”

The subsequent directive in Act 178 reads, in part, “the Legislature intends for the study to result in a policy from the governor that reduces the dependence of state government on federal funds.” In response, the Department of Budget and Finance issued its interim report to the Legislature in January 2018 outlining initial steps and listing federal grants by state department.

Where your taxes go: a breakdown of Hawaii’s fund categories, part 2” – special funds, reserve funds, bond funds and state debt, and other funding sources.