Hawaiʻi Move To Strip Tax Deduction From REITs Gains Traction

Mar 29, 2019

Ala Moana Center Stage | 2015
Credit Daniel Ramirez / Flickr / CC By 2.0

A bill is advancing through the Legislature that would eliminate a tax deduction for Real Estate Investment Trusts.

More than $16 billion worth of properties in Hawaii are owned by Real Estate Investment Trusts, or REITs, including Ala Moana Center, Bishop Square, the Hilton Hawaiian Village Waikiki Beach Resort, and more.

REITs, established nationwide during the Eisenhower administration, are set up like stock market investments, with rental income paid out to individual shareholders as dividends. By law REITs must distribute at least 90 percent of its income to investors. The REIT is then able to deduct that revenue from its tax liability as it is passed through. It is then the investors who pay taxes on their dividend revenue in their home states.

For six years, critics of REITs in Hawaii have been trying to advance legislation that would strip them of the tax deduction on their earnings in Hawaii. This year the legislation has gone further than ever. Those who want to get rid of the deduction argue that tax revenue is leaving the state.

REITs, on the other hand, argues that what the state might gain in corporate taxes would be offset by what it would lose in General Excise Tax revenue. The state would also likely miss out on the investments REITs make, such as the $600 million spent on Ala Moana Center over the years, or the $350 million redevelopment of International Marketplace, if it positions itself as uniquely hostile to the REIT tax structure.

The House Finance Committee is holding a hearing on the bill today.