TLDR; police lose a lot of funding if they don’t send data on extremely grave crimes. Hate crime data submissions really don’t influence police funding.

Long Answer:

Underreporting of crimes is a huge issue. I don’t want to downplay this at all. We really have terrible crime data, and it’s something most laypeople don’t understand. You should know all crimes are self-reported by the police.

But, generally index crimes, eg. murder, forcible rape, robbery, larceny, assault, car theft, are decently accurate. Murder, robbery, and theft are considered to be essentially right all the time for a variety of reasons. (You can’t hide a body forever).

But what’s the big reason we should trust these types of crime? Well, the federal government provides major grants to police conditional on them sending those types of crime records to the FBI to tabulate and analyze. If you don’t send the data, you don’t get the money. Police really care about funding. These grants account for major portions of funding.

That doesn’t mean those records are perfect. Prior to 1960, crime data are essentially useless because the federal government did little to encourage submission. Even after, forcible rape tends to be understated because women weren’t inclined to report crimes.

But what about other types of crimes? Non-index crimes including hate crimes aren’t tied to major sources of FBI funding. That’s not to say the FBI doesn’t care. It’s just that police departments really aren’t trained or equipped for the paperwork necessary. What ends up happening is that only a few departments send hate crime data. Those tend to be really skewed. You may have San Francisco PD sending in data that suggest hate crimes are rampant, San Diego PD saying it’s non-existent, and then really prejudiced counties in Alabama and Mississippi saying there were 0 hate crime incidents (clearly not true). Everything in between is missing. Those data are neither representative nor accurate. Garbage in leads to garbage out. Making any assessments on hate crime data is so cavalier that you’d be a fool to do so.