State Funding Sources
The State receives the majority of its revenues from taxes, fees and other sources, the most significant of which are the general excise tax, personal income tax, insurance premium tax, and corporation tax (which collectively constitute approximately 80 percent of total General Fund revenues). The Department of Taxation, headed by the Director of Taxation, is charged with the responsibility of administering and enforcing the tax revenue laws and the collection of all taxes and other payments payable thereunder. All tax revenues of the State are credited to one or the other of the two operating funds maintained by the State, designated respectively as the General Fund and Special Funds.
The State Constitution does not prohibit or limit the power of taxation, and reserves all taxing power to the State, except to the extent delegated by the Legislature to the political subdivisions of the State and except all the functions, powers and duties related to real property taxation, which is exercised exclusively by the counties.
The State Constitution requires the establishment of a tax review commission to be appointed as provided by law every five years. The purpose of such commission is to submit to the Legislature an evaluation of the State’s tax structure and to recommend revenue and tax policy, after which such commission is dissolved. The Constitution does not require action by the Legislature with respect to the recommendations as submitted. The Legislature has the option of accepting or rejecting all or portions of the commission’s findings.
Further information can be found on this link to the Tax Review Commission’s webpage – http://www6.hawaii.gov/tax/a9_2trc.htm.
The General Fund is used to account for resources not specifically set aside for special purposes. Any activity not financed through another fund is financed through the General Fund. The appropriations acts adopted by the Legislature provide the basic framework in which the resources and obligations of the General Fund are accounted. The operating appropriations and the related General Fund accounting process complement each other as basic control functions in the general administration of the government.
The Constitution provides that whenever the General Fund balance at the close of each of two successive fiscal years exceeds 5% of General Fund revenues for each year, the Legislature in the next regular session shall provide for a tax refund or tax credit to the taxpayers of the State, as provided by law. The Constitution does not specify the amount of, or a formula for calculating, any such tax refund or tax credit. In November 2010, Section 6 of Article VII, State Constitution, was amended to authorize the Legislature to provide for a tax refund or tax credit to taxpayers of the State or make a deposit into one or more funds that serve as temporary supplemental sources of funding in times of an emergency, economic downturn or unforeseen reduction in revenues, as provided by law. Act 138, SLH 2010, provided for the deposit of general funds into the Emergency and Budget Reserve Fund whenever State general fund revenues for each of two successive fiscal years exceeds revenues for each of the preceding fiscal years by 5%.
Taxes and Other Amounts Deposited in General Fund
The proceeds of the taxes described below are deposited in the General Fund.
General Excise and Use Tax. The general excise tax is a tax imposed on businesses for the privilege of doing business in Hawaii, and is assessed at various percentage rates on the gross income businesses derive from activity in the State. Businesses also may need to pay the use tax on the value of tangible personal property, services, and contracting that are brought into Hawaii from anywhere outside Hawaii. The tax is based upon the purchase price or value of the tangible personal property, contracting, or services purchased or imported, whichever is applicable. The general excise tax rate varies depending on the business activity; it is 0.15% on insurance commissions, 0.5% on certain activities such as wholesaling, and 4% on most activities at the consumer level. For FY2012 the general excise tax comprised approximately 50% of all general fund revenues. Effective January 1, 2007, the general excise and use tax was amended to provide the City and County of Honolulu a surcharge thereby increasing the general excise and use tax rate for transactions attributable to the county. The surcharge of ½ of 1% is imposed upon Oahu activities subject to the 4% General Excise and Use Taxes through 2022. The State retains, as General Fund realizations, 10% of the county surcharge collected to reimburse the costs of assessment, collections and disposition incurred by the State.
Income Taxes. Net taxable income (gross income less exclusions and deductions) for both individuals and corporations is subject to State income tax. Although there are differences, Hawaii income tax law generally follows the federal Internal Revenue Code in computing the net taxable income. The individual income tax rates for married individuals, including qualifying surviving spouses, and unmarried individuals, including qualifying heads of households, range from 1.4% to 11.0% of net taxable income. The income tax rates for estates and trusts range from 1.4% to 8.25%. Corporate income tax rates range from 4.4% to 6.4%.
Other Taxes. The General Fund receives revenues from several other taxes. The Public Service Company tax is a tax on the gross income from public utility business of public utilities in lieu of the general excise tax. The tax rate on gross income of Public Services Companies ranges from 1/2% (for sales for resale) to 8.2%. For a public utility, only the first 4% is a realization of the State, and any excess over 4% is distributed to counties that (1) provide by ordinance for a real property tax exemption for real property used by the public utility in its public utility business and owned by the public utility, or leased by the public utility under a lease requiring the public utility to pay the taxes on the property, and (2) that have not denied the exemption to the public utility. For a carrier of passengers by land between points on a scheduled route, the gross income is taxed at 5.35%, all of which is realized by the State. The estate tax is a tax on the transfer of a taxable estate and is based on the federal taxable estate, but has its own tax rate schedule, with tax rates varying from 10.0% to 15.7%. The generation skipping tax is also based on the federal taxable transfer, but has its own tax rate (currently 2.25%). The Banks and financial corporations tax is a franchise tax (in lieu of net income and general excise taxes) on banks, building and loan associations, development companies, financial corporations, financial services loan companies, trust companies, mortgage loan companies, financial holding companies, small business investment companies, or subsidiaries not subject to the taxes discussed above. The tax is assessed on net income for the preceding year from all sources at a rate 7.92%. Insurance premiums tax is a tax on insurance companies (underwriters) based on premiums written in the State In lieu of all taxes except property tax and taxes on the purchase, use or ownership of tangible personal property. Tax Rates range between .8775% and 4.68% depending on the nature of the policy. There is also an excise tax on those who sell or use tobacco products and a gallonage tax imposed on dealers who sell or use liquor.
Transient Accommodations Tax. A variety of other taxes are levied by the State including taxes on transient accommodations, conveyance and fuel and are allocated among various funds and to the counties. The transient accommodations tax (TAT) of 7.25% is levied on the furnishing of a room, apartment, suite or the like customarily occupied by the transient for less than 180 consecutive days for each letting by a hotel, apartment, motel, horizontal property regime or cooperative apartment, rooming house or other place in which lodgings are regularly furnished to transients for consideration, including the fair market rental value of time share vacation units. For the period beginning July 1, 2009, and ending June 30, 2010, 1.0% was assessed in addition to the existing 7.25% transient accommodations tax (total of 8.25%). For the period beginning July 1, 2010, and ending June 30, 2015, 2.0% is assessed in addition to the existing 7.25% transient accommodations tax (total of 9.25%). The additional amounts are to be deposited to the General Fund, except that 12.5% of the additional amount for FY 2011 was deposited to the Tourism Special Fund. Act 103, SLH 2011, established a $10 daily tax on each transient accommodation furnished at no charge. The Act also temporarily (from July 1, 2011 to June 30, 2015) limits the TAT revenue distribution to the counties to $93 million per year, and limits the distribution to the tourism special fund to $69 million per year. Act 171, SLH 2012, temporarily (from July 1, 2012 to June 30, 2015) increased the distribution to the tourism special fund from $69 million to $71 million. Any revenue in excess of these limits is retained by the General Fund.
Non-tax Revenues. Other amounts deposited to the General Fund are derived from non-tax sources, including investment earnings, rents, fines, licenses and permits, grants, charges for administrative services and other sources.
Further information can be found on this link to the Department of Taxation’s tax statistics webpage – http://www6.hawaii.gov/tax/a5_stats.htm.
Special Funds are used to account for revenues designated for particular purposes. Unlike the General Fund, Special Funds have legislative or other restrictions imposed upon their use. Special Funds are used primarily and extensively with regard to highway construction and maintenance, harbor and airport operations, hospital operations, housing and homestead programs, certain programs in the area of public education and the University of Hawaii, business regulation, consumer protection, environmental management and tourism and other economic development. The types of revenues credited to the various Special Funds are user tax receipts (fuel taxes), revenues from public undertakings, improvements or systems (airports, harbors and university revenue producing undertakings, among others), and various business, occupation and non-business licenses, fees and permits.
Fuel taxes, motor vehicle taxes, and unemployment insurance taxes are deposited to Special Funds. In addition, portions of the rental motor vehicle and tour vehicle surcharge taxes, tobacco taxes, transient accommodations taxes, environmental response taxes, and conveyance taxes are deposited into Special Funds (and portions of these taxes are deposited into the General Fund). Distributors are required to pay taxes on aviation fuel, diesel oil, alternative fuels for operation of an internal combustion engine and on liquid fuels other than the foregoing, e.g., on gasoline used to operate motor vehicles upon the public highways. The State has a vehicle weight tax that varies from $0.0175 per pound to $0.0225 per pound, depending on the net weight of the vehicle; vehicles over ten thousand pounds net weight are taxed at a flat rate of $300.00. The unemployment insurance tax is a tax on wages paid by employing units with one or more employees with certain exemptions. The unemployment tax rate is determined according to a multi contribution schedule system. There is an additional employment and training fund assessment on taxable wages paid to an employee. The percentage rate for this additional tax is .01%. There is a rental motor vehicle surcharge tax on a rented or leased motor vehicle. The tax is levied on the lessor. There is also a tour vehicle surcharge tax for each tour vehicle in the over 25 passenger seat category and for each tour vehicle in the 8 to 25 passenger seat category. The tax is levied on the tour vehicle operator. Act 104, SLH 2011, raised the rental motor vehicle surcharge to $7.50 per day and deposited $4.50 to the general fund, effective from July 1, 2011 to June 30, 2012. The tobacco tax currently assesses $0.16 for each cigarette or little cigar, 70% of the wholesale price of tobacco products, and 50% of the wholesale price of each large cigar. The environmental response taxes are currently set at $1.05 per barrel of petroleum product for the period from July 1, 2010 to June 30, 2015. The conveyance taxes are imposed on the amount paid in the sale, lease, sublease, assignment, transfer, or conveyance of realty or any interest therein. The tax rate ranges from $0.10 per $100 to $1.25 per $100, depending on the value of the property.
Further information can be found on this link to the Department of Budget and Finance’s latest non-general fund reports – http://budget.hawaii.gov/budget/reports-to-the-legislature/1983-2/.
State departments, agencies, and institutions annually receive federal grants. Approximately 52% of the federal grants are awarded to human resources programs in public health, vocational rehabilitation, income maintenance, services to the blind, and other social or health services. Approximately 23% of such federal funds are used to support programs in the public schools, community colleges, and the university system. Transportation and highway safety activities received about 9% of all federal funds, primarily for interstate highway construction. Employment programs, including unemployment compensation benefit payments, account for about 9% of such federal receipts. Other programs account for the balance of such receipts.
State Educational Facilities Improvement Special Fund
The State has established a State Educational Facilities Improvement Special Fund (“SEFISF”). The amounts in the SEFISF are to be used solely for capital improvements and facilities under the jurisdiction of the State Department of Education, except public libraries. The fund is capitalized by annual appropriations of at least $45 million in general obligation bonds or by annual transfers of at least $45 million from the General Excise Tax if no general obligation bond appropriations are authorized.