Under pressure: Why Hawaiʻi’s budget can’t afford another year of inaction
The 2026 legislative session is now in the rearview mirror. Some progress was made toward a fair tax system that collects more revenue from those at the top to fund our collective needs, but it won’t be enough to fill the gaps in our state budget.
Hawaiʻi’s budget is confronting a perfect storm of pressures—diminishing state revenue, looming federal cuts, and the mounting costs of climate disaster recovery—that threaten to unravel the programs working families depend on. To protect our local communities, the legislature must take bolder action on revenue generation in 2027.
Three Major Sources of Budget Strain
There are three main forces that will continue to squeeze Hawaiʻi’s finances. Each of them alone would be cause for concern; together, they pose an existential threat to the state’s ability to fund core services and invest in our future.
The Ongoing Cost of Act 46 (2024): Hawaiʻi’s revenue picture is already compromised by the income tax cuts enacted through Act 46 of 2024. While Senate Bill 3125 (signed into law as Act 24) softened the blow by freezing certain elements, the overall damage remains. Even with the changes made in Act 24, Act 46 will reduce state revenue by more than $1 billion annually by 2031—around a tenth of Hawaiʻi’s total tax revenue.
The Federal Cliff, H.R. 1: At the federal level, Hawaiʻi faces hundreds of millions in funding losses due to H.R. 1, the “One Big Beautiful Bill.” This legislation extends the 2017 Tax Cuts and Jobs Act—which already costs the federal government over $4.6 trillion—while mandating deep cuts to domestic programs. Medicaid and SNAP will bear the brunt, forcing Hawaiʻi to cover up to $700 million in annual costs. An estimated 19,000 to 38,000 Hawaiʻi residents could lose Medicaid coverage, and thousands could lose their SNAP benefits. These are not abstract numbers. They represent working parents, elderly kūpuna, and children who rely on these programs to survive. Without new state revenue to fill the gaps, the state will be forced to cut benefits or absorb costs it cannot afford.
Climate Disasters Are No Longer Hypothetical: The Kona Low storms of early 2026 caused at least $1 billion in damage across the islands, demonstrating that climate change-fueled extreme weather is already here. Flooding, landslides, and infrastructure failures disrupted communities and strained emergency services. These events are not anomalies; they are a preview. As sea levels rise and storm patterns intensify, Hawaiʻi will face increasingly frequent and costly disasters, requiring substantially more revenue for response, hardening, and recovery.
Less Revenue Leads to Inevitable Cuts
The math is unforgiving. When revenue falls, programs suffer—and this is already visible in the budget approved by the legislature.
Consider the Department of Hawaiian Home Lands (DHHL). The department received $185 million for fiscal year 2026, but that figure drops to $131 million in 2027. This reduction comes at a time when DHHL is already failing to meet its constitutional mandate. With over 29,000 Native Hawaiian beneficiaries on the homestead waiting list, the department faces an estimated $800 million shortfall.
The legislature’s failure to pass a conveyance tax increase this year—which could have generated up to $60 million annually for DHHL alone—represents a profound missed opportunity.
Compounding the injustice, Hawaiʻi spends roughly $300 million on incarceration while DHHL receives just $185 million. We are investing more in jailing people—disproportionately Native Hawaiians, often for non-violent offenses—than in housing them. Redirecting even a fraction of prison spending to DHHL would help honor our obligations and reduce homelessness simultaneously.
Yet the Office on Homelessness and Housing Solutions faces a similar trajectory, with funding dropping from $25 million to $18.6 million in 2027. Individually, these cuts may appear marginal. Together, they represent a retreat from commitments at the very moment the need is greatest.
These programs are not luxuries; they are the infrastructure of a compassionate society. When we cut housing, we see more families on the streets. When we cut healthcare, we see more untreated conditions. The human cost is real and compounds over time.
A Path Forward: Revenue Options for 2027
The 2027 legislative session will be decisive. Next year, the legislature will have another opportunity to course-correct our tax system—but only if lawmakers muster the courage to continue raising taxes on the wealthy.
Figure 1: Average Projected Tax Increase From Taxing Capital Gains at the Same Rate as Ordinary Income, by Income Group.
Figure 1. For Hawaiʻi households making up to $345,000 per year, the average expected increase in tax liability that would result from the state taxing capital gains at the same rate as ordinary income would be negligible. Households making up to $783,300 would still only see an average tax increase of $293. Only households making above that amount, $783,301 or more, would see a significant increase in tax liability—an average of close to $10,000.
Raising the Capital Gains Tax: Currently, Hawaiʻi taxes long-term capital gains—profits from stocks, bonds, and other investments—at a maximum rate of 7.25 percent, significantly lower than the top income tax rate of 11 percent. This creates a glaring loophole: those who earn income through work pay more than those who earn income from wealth. More than 70 percent of capital gains accrue to taxpayers earning over $400,000. Aligning capital gains with ordinary income would generate an estimated $85 million annually, with 88 percent of the new revenue coming from the top 1 percent of earners. This is not a broad-based tax increase; it is a targeted correction of an inequitable policy.
Modernizing the Conveyance Tax: The conveyance tax, paid when residential properties change hands, is one of Hawaiʻi’s most effective tools for capturing revenue from the real estate market. But rates haven’t been updated since 2009, even as property values have skyrocketed. House Bill 2049, which failed to advance this session, would have created a progressive, marginal rate structure that lowers or maintains taxes for most owner-occupants while raising rates on high-value investment properties. It also would have provided a reliable funding stream for the Dwelling Unit Revolving Fund, the Rental Housing Revolving Fund, and—critically—DHHL, with a dedicated annual allocation of up to $60 million. The bill’s failure is a major missed opportunity that must be revisited in 2027.
Closing Corporate Loopholes: Multinational corporations continue to exploit tax loopholes that shift profits out of state. Implementing Worldwide Combined Reporting—a policy already adopted by several other states—would close these gaps and generate significant revenue, ensuring corporations pay their fair share alongside small businesses and working families.
Figure 2: The Process By Which U.S.-Based Multinational Corporations Use Subsidiaries to Evade U.S. Taxes.
Hawaiʻi is built on a foundation of shared responsibility—the understanding that our collective well-being depends on our care for one another. That social contract sustains our public schools, keeps our communities healthy, and provides a safety net for neighbors in times of need. But that foundation is cracking.
Act 46, H.R. 1, and the growing costs of climate change are not abstract fiscal challenges—they are threats to the very fabric of our society. If we fail to act, we will see more families priced out of their homes, more children going hungry, more Native Hawaiians waiting decades for land, and more communities devastated by preventable disasters.
The revenue options are available. The moral imperative is clear. Now we need the political will. The 2027 session must be defined not by nibbling around the edges, but by bold, equitable choices that protect Hawaiʻi’s working families, honor our obligations, and build a resilient future for generations to come. The time for half-measures is over.
With the end of the 2026 legislative session, there are lingering concerns around the long-term direction of Hawaiʻi’s budget from advocates and legislators alike. The state is confronting a growing list of challenges that could throw our budget—and the programs and services within it—into disarray. Now more than ever, we need to preserve funding for Hawaiʻi’s working families.
