For the second consecutive year, all eyes at the Hawaiʻi Legislature this session will be on Washington, D.C.
Last year lawmakers worried President Donald Trump’s administration would dramatically cut federal spending on social programs such as food aid and medical services for the poor, forcing the state to step in to make up the difference.
Anxiety this year seems to be focusing on the impact the administration’s policies will have on the national economy and tourism.
Hawaiʻi now has a “huge reliance” on spending by tourists from the mainland because visitor arrivals from Japan and Canada have been lagging, according to Joseph Roos, chief of the Economic Research Branch of the state Department of Business, Economic Development and Tourism.
Mainland tourists now account for about 80% of the state’s all-important tourism industry, but the situation on the mainland looks shaky, lawmakers were told in budget briefings last week.
Uncertainty over Trump’s tariffs has reduced hiring across the nation to a near-standstill, and consumer confidence has tanked in a sign that “people are really struggling,” said Carl Bonham, executive director of the University of Hawaiʻi Economic Research Organization.
Wealthy people are still spending freely, but a sharp decline in the stock market could cause even the well-to-do to pause their spending and travel, which would be punishing for Hawaiʻi’s visitor industry.
“That’s the kind of stuff that keeps us up at night,” Bonham told the House Finance Committee at a briefing on Thursday.
All of that is happening at a time when lawmakers are already bracing for the impact of federal budget cuts to social services imposed under the One Big Beautiful Bill Act passed by Congress and signed into law by Trump last summer.
When they officially convene the 2026 session of the Legislature later this month, lawmakers will confront a “pretty substantial budget problem,” House Finance Committee Chair Chris Todd said Friday.
Damage Done
Roos provided data to House and Senate lawmakers last week showing the federal cuts imposed by OBBBA will reduce funding for the Supplemental Nutrition Assistance Program, also known as food stamps, by an estimated $634 million over the next three years.
During the same period, the new federal law would also cut federal support for medical services for the poor and disabled under Medicaid by more than $1.2 billion.
If the Hawaiʻi state government makes up the difference, the total hit to the state budget from OBBBA in the next several years will be $1.8 billion.
Gov. Josh Green has already said he is determined to shield needy Hawaiʻi residents from the impact of federal budget cuts to social services.
Given that additional cost, Seth Colby, acting director of the state Department of Budget and Finance, told the Senate Ways and Means Committee last week, “we wouldn’t be able to balance the financial plan without other revenues.”
In order to do that, Green says the state needs to indefinitely pause state income tax cuts that were promised to Hawaiʻi taxpayers in 2024.
Colby told senators the administration will submit bills to lawmakers later this month to pause the state income tax cuts that began to take effect in 2025 and are currently scheduled to roll out in a series of steps over the next six years.
If those state tax cuts actually took effect as scheduled, they would cost the state about $7 billion in lost revenue over the next six years, according to data from the state Tax Department.
Colby said the Green administration proposal is to leave the tax breaks untouched for 2025 and 2026, but to indefinitely pause all of the tax cuts scheduled to take effect starting in 2027. He said extra tax credits will be offered to provide at least some tax relief to Hawaiʻi’s low-income and working-class families.
“In order to modify things, we’re providing tax credits to ensure that working-class families still get benefits and still have lower tax liabilities, while higher-income households will not get the full benefit,” Colby said.
That plan drew a sharp response from some senators, who wanted to know if the administration made a systematic effort to reduce state spending instead of deferring the scheduled tax cuts.
They raised possible alternatives such as eliminating waste, siphoning off unused money from state special funds, or stripping funding from vacant positions as other ways to balance the budget.
Senate Ways and Means Chair Donovan Dela Cruz asked if the administration scrutinized the base budget to try to make cuts.
Colby, who was appointed to his job six weeks ago, replied: “To my knowledge, there was no large cost-cutting exercise made.” He said he is ready to work with lawmakers on that effort.
“You’re putting this out to the public, the public is not going to be happy about this, without us even looking at where are the areas we can save in,” said Sen. Donna Kim.
“I understand your frustration,” Colby told lawmakers. “I don’t think any of us wanted to be here.”
More Risks Ahead
Against that gloomy backdrop, key lawmakers who gathered Friday for a discussion hosted by the Pacific Law Institute agreed the next actions by the federal government will again drive events when the Legislature meets on Jan. 21.
“Uncertainty is probably one of the biggest problems,” said Senate Judiciary Chair Karl Rhoads. “We just don’t know what’s going to come out of Washington.”
Rhoads said he worries the Trump administration will follow through on the president’s plan to eliminate the Federal Emergency Management Agency and shift responsibility for responding to major disasters to the states.
FEMA has been a huge player in the Lahaina wildfire recovery effort, and Rhoads wondered if the state will now be forced to build up the Hawaiʻi Emergency Management Agency to try to take the place of FEMA.
He also worried the push by the federal administration to impose tariffs and crack down on immigration will be inflationary, with the government effectively spurring price increases and chasing away low-cost labor.
Todd noted the national economic slowdown is arriving at a time when the state Council on Revenues is predicting state tax collections will decline this year and increase slowly in the next fiscal year that begins July 1.
“All of those things have kind of combined to cause some substantial heartburn,” he said, which has been compounded by the timing of the state tax cut plan.
“My main priority is in any attempt to deal with that budget, we make sure that that burden is not placed on folks who cannot afford to pay more already,” Todd said. “There’s no sense in putting additional financial burden on folks who are already either receiving government assistance or really struggling to make ends meet.”
