A years-long effort to begin taxing dividends paid out to investors by some of the largest commercial property owners in Hawaii was blocked this year by state Sen. Rosalyn Baker, a lawmaker who has received substantial campaign donations from lobbyists and executives who represent some of those same investors.
Bills have been introduced at the state Capitol each year since 2014 proposing to eliminate the state tax deduction on dividend payments that benefits real estate investment trusts, or REITs. Those trusts own an array of high-profile Hawaii properties ranging from Ala Moana Center and Hilton Hawaiian Village Waikiki Beach Resort to the Wet ’n’ Wild Hawaii water park in Kapolei.
Critics of the tax deduction for REIT dividend payments describe it as a “glaring loophole” in the state tax code because it effectively allows the trusts to avoid paying Hawaii corporate income taxes.
Lawmakers have debated and studied the idea of eliminating the deduction since 2014. Two years ago the state Legislature ordered a study of the issue by the state Department of Business, Economic Development and Tourism that concluded the deduction for REITs costs the state an estimated $36 million a year in lost tax revenue.
This year a bill to eliminate the deduction for most REITs was approved by the House in a 47-3 vote, but stalled in the Senate when Baker (D, West Maui-South Maui) refused to consider it in her Senate Commerce, Consumer Protection and Health Committee. Baker, who is chairwoman of that committee, also declined to schedule a hearing for a similar Senate version of the bill.
In an emailed response to questions, Baker said that “no one, not even the introducer, asked for the bill to be heard. It didn’t seem to be an important issue. There were many bills that didn’t get heard because of the volume of bills referred to my committee.”
State Rep. Beth Fukumoto introduced HB 1012 with the support of seven of her colleagues, including then-House Democratic Majority Leader Scott Saiki, and said her office did try to get Baker to consider the bill.
Fukumoto said in a written statement that “we called and requested a meeting with the chair to discuss the bill, but the meeting wasn’t scheduled.”
Michael Fergus, a Hawaii developer and investor who has been a leading proponent of the bill, said he has likewise been unable to meet with Baker to discuss it.
“I met with a lot of the senators,” said Fergus, who has been lobbying lawmakers on the issue for about five years. “Everybody that I wanted to meet with has met with me, even the governor, even (former Gov. Neil) Abercrombie and I met with (Gov. David) Ige a couple of times before he became governor. Everybody is willing to meet with me and talk to me about it except for one person — Roz Baker.”
While Baker said the bill didn’t seem important to her, it was apparently a priority issue for others.
The National Association of Real Estate Investment Trusts and real estate investment trusts including Douglas Emmett Inc., Park Hotels & Resorts, Public Storage, and GGP Ala Moana all testified publicly against HB 1012, and together spent more than $41,000 this year lobbying lawmakers, according to state records.
Alexander & Baldwin Inc. spent an additional $20,800 lobbying lawmakers this year. A&B is the state’s fourth-largest private landowner, and last month its board of directors voted to convert the company to a real estate investment trust.
According to state Campaign Spending Commission records, Baker has received more than $16,700 in campaign contributions since 2007 from lobbyists for REITs, and from A&B executives.
When asked if there was any connection between those political donations and her decision to block HB 1012, Baker replied in an email that “your questions make lots of very negative and inaccurate assumptions which I do not plan to address from Boston.” Baker was attending the National Conference of State Legislatures’ Legislative Summit in Boston last week.
VIEWS ON REITS
REITs were established by the federal government in 1960 to allow individual investors to own shares of large, income-producing real estate assets such as hotels or shopping centers.
The investment trusts are required to pay out at least 90 percent of their taxable incomes each year as dividends to their investors, and those dividends are deductible from the REITs’ corporate income taxes. That means the dividends are generally not subject to state corporate income taxes when they are paid out by the REIT, but many individual investors pay income taxes on the dividends they receive.
Hawaii and almost all other states treat REITs for tax purposes in a way that mirrors the approach used by the federal government. The one exception among the states is New Hampshire, which does not allow REIT dividends paid to investors to be deducted from the trusts’ state corporate income tax obligations.
Representatives of REITs that operate in Hawaii told lawmakers this year the trusts’ investments in the state create thousands of construction and other jobs, and generate tens of millions of dollars each year in tax revenue.
Eliminating the state tax deduction for the dividends they pay out would discourage REITs from investing in Hawaii, they contend. REIT supporters also point out the trusts pay plenty of other taxes, including excise taxes, property taxes and hotel room taxes.
The National Association of Real Estate Investment Trusts hired Hawaii economist Paul Brewbaker to study the tax deduction issue, and Brewbaker concluded REITs had invested $11 billion or more in Hawaii as of 2015. His report found REITs were associated with 11,700 jobs and $95 million in tax revenue.
If Hawaii requires the REITs to pay state corporate income taxes while the individual investors also pay personal income taxes on their dividends, that amounts to double taxation, Brewbaker wrote.
Douglas Emmett Inc., which owns more than 1.6 million square feet of downtown Honolulu commercial space including Bishop Square, Bishop Place and Harbor Court, warned in written testimony to lawmakers that “by imposing a double tax on REITs, Hawaii will be at a competitive disadvantage compared with 48 other states.”
Peter Savio, who lobbied lawmakers to eliminate the tax deduction, maintains that REITs that have been investing in Hawaii will not suddenly abandon the state.
“We’re not chasing away the buyers,” Savio said. “It’s not going to have an impact on our market because there are hundreds and hundreds and thousands of other buyers worldwide who will buy these assets, bring the same money, and the same professional ability, except they pay taxes.”
As for the claim that eliminating the REIT deduction would amount to “double taxation,” Savio replied: “Welcome to everyone else who lives in Hawaii. Why are these mainland companies excluded? Why does every other company have to pay taxes? You’ve got to remember, these are the crown princes of tax avoidance.”
“I think they should pay taxes. It’s not fair that they don’t,” Savio said.
The perception that more REITs are investing in Hawaii and more companies are looking to adopt the REIT model has caught some lawmakers’ attention, including that of House Finance Committee Chairwoman Sylvia Luke.
Luke said she believes there is a significant amount of additional tax revenue to be gained by the state if lawmakers eliminate the deduction. “Clearly, it looks like a lot of the corporations and entities are looking at REITs to do real estate transactions, so if that’s the case, then the state is losing out,” Luke said.
House lawmakers approved another bill to require that REITs pay corporate income taxes in Hawaii in 2014, but then-state Sen. Ige, who was Ways and Means chairman at the time, deferred action on the bill.