Hawaii hotel workers rally for bill to eliminate tax exemption

Unionized hotel workers Thursday demonstrated outside the state Capitol to support a bill that would eliminate a tax exemption for some companies that own hotels and other commercial real estate in Hawaii.

About 150 members of the Unite Here Local 5 union participated in the effort urging the Legislature to end what the union calls a tax loophole for real estate investment trusts, or REITs.

Local 5 spokesman Bryant de Venecia said it’s not fair that hotel- owning REITs continue to enjoy a state tax benefit while many workers haven’t returned to work since the corona­virus pandemic upended Hawaii tourism two years ago.

“Our members are still not back to work,” he said. “We’re losing jobs.”

Hawaii lawmakers have considered bills to amend state tax policy on REITs every year since 2014 but haven’t had a single bill become law.

In 2019 such a bill did pass, but Gov. David Ige vetoed it over concerns that investment capital flowing to the state through REITs would diminish.

REITs generally don’t pay much if any corporate state income taxes in Hawaii or any other state, except New Hampshire, as a policy that mirrors federal law because of rules applying to profits for such companies established by Congress in 1960 as a way for small investors to buy stakes in big income-producing properties such as hotels, shopping centers and office towers.

Under federal law REITs must distribute at least 90% of their income to shareholders. So it is these shareholders who pay nearly all the income tax on REIT profits while the companies are allowed a tax deduction on dividends paid to their shareholders.

In recent years traditional real estate investment companies have complained that the arrangement is unfair to them and costly for Hawaii because so many REITs operate here — at least 70 identified by state officials in 2018 — while most tax revenue flows to other states where the majority of REIT investors reside.

REIT-owned hotels in Hawaii include Hilton Hawaiian Village, Hyatt Place Waikiki Beach, Courtyard Waikiki Beach, Hyatt Regency Maui, Wailea Beach Resort, Andaz Maui and Fairmont Kea Lani.

REITs also own shopping malls that include Ala Moana Center, Pearlridge Center, Ka Makana Ali‘i, Waikele Center, Waikiki Beach Walk, Prince Kuhio Plaza and Whalers Village, as well as self-storage facilities, the Wet ’n’ Wild Hawaii water park and rental housing complexes including Bishop Place, Moanalua Hillside Apartments and Lilia Waikiki Tower.

Local REIT Alexander &Baldwin Inc. owns about 37 properties with a combined 3.9 million square feet of retail, office and industrial space.

Some REITs have posted financial losses during the pandemic while others have achieved profits.

REITs have contended the tax change suggested in bills before Hawaii’s Legislature would subject them to unfair double taxation and discourage them from investing in property here.

Estimates on how much annual income tax REITs avoid paying in Hawaii vary wildly from $10 million or less up to $65 million, though industry representatives have argued that REITs could use other advantageous tax rules to achieve comparable savings if Hawaii’s REIT tax policy is changed.

The bill introduced this year to disallow the state tax deduction on dividends paid to REIT shareholders is Senate Bill 2246 and would also establish a tax on prolonged vacant property.

Sens. Stanley Chang and Jared Keohokalole introduced the bill, which also is sponsored by Sens. Clarence Nishihara and Brian Taniguchi.

SB 2246 has not yet been scheduled for a hearing. Two bills introduced in 2021 to achieve the same REIT tax change, House Bill 283 and Senate Bill 785, did not receive hearings and remain pending as well.