I am working in California and reside in Hawaii but they take a state withholding tax out for both states. Why do I have to pay taxes in both states?

The easiest way to think about it: states want money. California doesn't want people to work in California, but establish a residence somewhere with no/lower state taxes, so they charge you state taxes since the money is earned in California. Hawaii, on the other hand, says that you are benefitting from items like roads that are paid for out of the state treasury, so you should pay your fair share of the tax burden.

When you go and file your taxes, you may be able to claim some deductions because of both states wanting income tax from you. This is something you may want to discuss with a tax preparer before filing.