Senate lawmakers are once again considering a bill to impose the state’s corporate income tax on real estate investment trusts, an idea that Gov. David Ige vetoed last year because he worried the plan would prompt major investors to abandon Hawaii.
State tax officials estimated last year that taxing the trusts, or REITs, would haul in only about $9 million in extra corporate income tax revenue for the state, which is a relatively modest sum in a state that is expected to collect more than $7.4 billion in taxes this year.
But interim state Tax Director Rona Suzuki said last week that calculation made assumptions that may be incorrect, and the state is now seeking more information from the REITs doing business in Hawaii.
“There were a couple of assumptions in there that were big assumptions, I would say big assumptions in there, but we don’t know if they’re true or not,” she said.
Suzuki said the state has identified 70 real estate investment trusts that operated in Hawaii in 2018, and some of them are major players in the local retail, hotel and housing sectors. She estimated those trusts had about $1.3 billion in gross income that year.
They include Brookfield Properties REIT, which owns Ala Moana Center, the Prince Kuhio Plaza in Hilo and Whalers Village in Lahaina; and also Host Hotels &Resorts, Inc., which owns Hyatt Regency Maui on Kaanapali Beach, the Andaz Maui at Wailea Resort, the Fairmont Kea Lani on Maui, and Hyatt Place Waikiki Beach.
Another well-known REIT doing business in Hawaii is Douglas Emmett Inc., which owns over 2,000 workforce rental apartment units.
REITs are required to distribute at least 90% of their profits to their shareholders each year, and under the federal tax code they are allowed to deduct those distributions to shareholders from their corporate income tax liabilities.
Hawaii and every other state except for New Hampshire allow the REITs to claim similar deductions to reduce their state corporate income tax liabilities, but critics have been lobbying Hawaii lawmakers for several years to abolish that tax break.
Suzuki said REITs in
Hawaii are required to notify the state how much they claimed as their federal corporate income tax deduction for their shareholder distributions, but that requirement has not been enforced.
“What we don’t know is how much was pulled out for dividends paid, so we don’t know what the dividend paid deduction is,”
Suzuki said. “There was an assumption made the last time (to calculate the revenue potential for the state), and we don’t know if that assumption is correct.”
She said tax officials requested additional data last week from REITs in Hawaii for tax years 2016, 2017 and 2018 to try to learn more.
Paul Oshiro, a former state lawmaker who lobbies for the REIT created by Alexander &Baldwin in 2017, told members of the Ways and Means Committee Tuesday that if the state abolishes the dividends deduction for REITs, that “will pose a significant risk to Hawaii’s economy.”
“Should this occur, REITs and their investors may prefer to invest in other states,” Oshiro said. “Hawaii along with REITs with properties in Hawaii will be at a competitive disadvantage in attracting investors, in capital to support continued investment, economic development, jobs, and growth in our state.”
But Senate Bill 2697, which would eliminate the deduction and require REITs to pay state corporate income taxes, was supported by the Hawaii State Teachers Association.
HSTA President Corey Rosenlee said in written testimony that REITs now own about $17 billion in real estate in Hawaii, which is more than any other state on a per capita basis. That is at least partly because Hawaii has the lowest property tax rates in the nation, he wrote.
Rosenlee argued that eliminating the dividends deduction for REITs would generate an extra $65 million a year for the state in tax revenue, money that could be used to boost pay for teachers who work in hard-to-fill specialties such as special education or Hawaiian language education.
Lawmakers approved a bill last year to eliminate the corporate income tax deduction for REITs but Ige
vetoed the measure, saying he was worried the bill would reduce outside investment in Hawaii.
The Senate Ways and Means Committee has deferred action on SB 2697 until Thursday.
Senate Bill 2697, which would eliminate the deduction and require REITs to pay state corporate income taxes, was supported by the Hawaii State Teachers Association.
