Bills to get Hawaii income taxes from real estate investment trusts die

State lawmakers have once again taken a pass at trying to abolish a tax break for real estate investment trusts operating in Hawaii.

Two bills introduced in January that would impose the state’s corporate income tax on REITs, which own some of the most profitable commercial real estate in Hawaii, failed to receive a single hearing.

Instead, a bill that would mandate REITs disclose their presence in Hawaii and fine them if they don’t submit tax forms that existing rules already require, appears headed for approval.

Hawaii lawmakers have introduced bills every year since 2014 to eliminate the state tax deduction on dividends paid to REIT shareholders in a divergence from federal tax law and every state but New Hampshire.

Past efforts to tax REITs in Hawaii were largely promoted by local real estate investors who view the trusts as having an unfair competitive advantage. REITs contend the proposed tax change would subject them to unfair double taxation and drive away investment from some of the nation’s biggest companies.

REIT tax bills in recent years have in some cases made it deep into legislative sessions, but died for various reasons that in 2017 included a move by Sen. Rosalyn Baker, a recipient of campaign contributions from REIT lobbyists and executives of local REIT Alexander &Baldwin Inc., to not hold a hearing on a bill in a committee she chaired despite efforts by bill backers.

Baker, a Democrat who represents West and South Maui, said at the time that the bill didn’t seem to be an important issue and that no one asked for the bill to be heard, which was disputed by Rep. Beth Fukumoto, who introduced the REIT bill that year.

In 2019, lawmakers passed a REIT tax bill, but Gov. David Ige vetoed it over concerns that REITs would be discouraged from investing in Hawaii and the measure would limit investment capital flowing to the state.

Last year, a REIT tax bill cleared the full Senate in a unanimous vote but received only one of two House committee hearings in a session interrupted by the coronavirus pandemic.

This year, REIT tax measures failed to receive an initial hearing in the House Economic Development Committee chaired by Rep. Sean Quinlan, (D, Waialua- Kahuku-Waiahole), or in the Senate Commerce and Consumer Protection Committee chaired by Baker.

Quinlan said there is some hesitancy this year to pass a REIT tax bill over concerns that such a change could negatively affect REIT spending on construction projects that represent a bright spot in a local economy hobbled by COVID-19 impacts on tourism and other business operations.

Also, conflicting estimates persist on how much additional tax revenue a REIT tax bill would generate.

Quinlan said a pending REIT information disclosure bill should hopefully clarify the impact a tax change would have, and he expects the effort to tax REITs could resume after this year depending on what any new disclosures show.

“I definitely don’t think it’s a lost cause,” he said.

Rep. Jeanne Kapela, (D- Naalehu-Captain Cook-Keauhou), who co-introduced one of the bills this year to tax REITs, said she was deeply disappointed that House Bill 283 and Senate Bill 785 didn’t move ahead but noted that they could be taken up next year.

“As a strong supporter of taxing REITs, I am committed to doing all I can to move these measures forward during next year’s legislative session,” she said in an email. “Taxing REITs must be part of our strategy for sustaining our state’s fiscal recovery and creating an economy that advances the prosperity of all of Hawaii’s people. As we work to craft an economic recovery that uplifts working families, we need to generate revenue that puts people’s needs before corporate greed.”

REITs were created by Congress in 1960 as a way for small investors to buy stakes in big income- producing properties such as shopping centers and office towers.

The unique business structure requires that REITs distribute at least 90% of their income to shareholders. So it is these shareholders who pay nearly all the income tax on REIT profits.

A disparity with this arrangement exists in Hawaii because so many REITs operate here while most tax revenue flows to other states where the majority of REIT investors reside.

State officials in 2018 identified at least 70 REITs operating in Hawaii.

REIT-owned properties include shopping complexes (Ala Moana Center, Pearlridge Center, Ka Makana Ali‘i, Waikele Center, Waikiki Beach Walk, Prince Kuhio Plaza and Whalers Village), hotels (Hilton Hawaiian Village, Hyatt Place Waikiki Beach, Hyatt Regency Maui, Andaz Maui and Fairmont Kea Lani), rental housing complexes (Bishop Place, Moanalua Hillside Apartments and Lilia Waikiki Tower), the Wet ’n’ Wild Hawaii water park and self-storage facilities.

Local REIT A&B owns 36 properties with a combined 3.9 million square feet of retail, office and industrial space.

Estimates on how much income tax REITs avoid paying in Hawaii vary wildly from $10 million or less annually up to $65 million a year.

The lower figures are from state agencies, and the higher estimates are touted by REIT tax proponents that include the Hawaii Appleseed Center for Law and Economic Justice, the Hawaii State Teachers Association and the Hawaii Alliance for Community-Based Economic Development.

Additionally, Nareit, a national REIT trade association that opened a Hawaii office last year, claims that any gain in corporate income tax revenue from REITs could be offset by application of other advantageous tax policies.

“The bill is not a revenue producing bill,” Nareit said in written testimony on last year’s bill.

Quinlan said one bill advancing this year aimed at collecting more useful tax contribution information — House Bill 286 — hopefully will help clarify the issue.

“Right now the two sides are so far apart,” he said.

HB 286 passed the full house and an initial Senate committee hearing earlier this month. A hearing in the Senate Ways and Means Committee has yet to be scheduled.