March 28 – State lawmakers tried again to abolish a tax break for real estate mutual funds operating in Hawaii.
Two bills introduced in January that would impose state corporation tax on REITs, which own some of the most profitable commercial real estate in Hawaii, did not get a single hearing.
Instead, a bill is emerging that would require REITs to disclose their presence in Hawaii and impose a fine if they fail to submit tax forms, which are already required by applicable regulations, for approval.
Hawaii lawmakers have passed bills every year since 2014 to remove the state withholding tax on dividends paid to REIT shareholders, contrary to federal tax law and all states except New Hampshire.
Previous efforts to tax REITs in Hawaii were largely sponsored by local real estate investors who view the trusts as an unfair competitive advantage. REITs claim the proposed tax change would subject them to unfair double taxation and drive out investments from some of the largest companies in the country.
REIT tax laws over the past few years have made it deep into legislative sessions in some cases, but have died from a variety of reasons including a 2017 move by Senator Rosalyn Baker, campaign input from REIT lobbyists and executives at local REIT Alexander & Baldwin Inc. … not to hold a hearing on a draft law in a committee that she chaired despite the efforts of donors.
Baker, a Democrat who represents west and south Maui, said at the time that the bill did not appear to be a major issue and that no one asked for the bill to be heard, something from Rep. Beth Fukumoto who introduced it , the REIT bill was disputed this year.
In 2019, lawmakers passed a REIT tax bill, but Governor David Ige vetoed it on fears that it would deter REITs from investing in Hawaii and that the move would limit the investment capital that the state would receive.
Last year, a REIT tax bill unanimously cleared the entire Senate but only received one of two House Committee hearings in a meeting interrupted by the coronavirus pandemic.
That year, REIT tax measures did not get an initial hearing on the House Economic Development Committee, chaired by Rep. Sean Quinlan (D, Waialua-Kahuku-Waiahole) or the Senate Commerce and Consumer Protection Committee, chaired by Baker.
Quinlan said there are some concerns about getting a REIT tax bill passed this year as concerns exist that such a change could negatively impact REIT spending on construction projects that are a bright spot in a local economy that the impact will bring COVID-19 will affect tourism and other business operations.
In addition, there are still conflicting estimates of how much additional tax revenue a REIT tax charge would generate.
Quinlan said a pending REIT information disclosure bill should hopefully clarify the impact a tax change would have, and he anticipates that efforts to tax REITs could resume after this year depending on what new disclosures are made demonstrate.
“I definitely don’t think it’s a lost cause,” he said.
MEP Jeanne Kapela (D-Naalehu captain Cook-Keauhou), who co-introduced one of the REIT taxation bills this year, said she was deeply disappointed that House Bill 283 and Senate Bill 785 had not made progress, however determined that they could be accepted next year.
“As a strong proponent of REIT taxation, I am determined to do everything I can to move these measures forward during the next year’s legislature,” she said in an email. “Taxing REITs must be part of our strategy to sustain the fiscal recovery of our state and create an economy that promotes the prosperity of all people in Hawaii. As we work to create an economic recovery that strengthens working families, we need to generate revenue that stimulates people’s needs over corporate greed. “
REITs were launched by Congress in 1960 to give small investors the opportunity to buy shares in large, income-generating properties such as shopping malls and office towers.
The unique business structure requires REITs to distribute at least 90% of their income to shareholders. So it is these shareholders who pay almost all of the income tax on REIT profits.
There is an inequality with this regime in Hawaii because it has so many REITs operating here, while most of the tax revenue goes to other states where the majority of REIT investors are based.
State officials identified at least 70 REITs operating in Hawaii in 2018.
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 total of 3.9 million square meters for retail, office and industrial space.
Estimates of how much Hawaii income tax REITs don’t have to pay vary widely from $ 10 million or less per year to $ 65 million per year.
The lower numbers come from government agencies, and the higher estimates are touted by REIT tax advocates 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.
In addition, Nareit, a national REIT trade association that opened an office in Hawaii last year, claims that gains on corporate tax revenues from REITs could be offset by the application of other beneficial tax policies.
“The bill is not an income-generating bill,” said Nareit in a written reference to last year’s bill.
Quinlan said a bill that was developed further this year aimed at gathering more useful information on tax contributions – House Bill 286 – will hopefully help clarify the problem.
“Right now the two sides are so far apart,” he said.
HB 286 passed the full house and a first Senate committee hearing earlier this month. A hearing in the Senate Committee for Ways and Means is still pending.
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