Hawaii House members have killed a bill that would have removed a tax break for certain real estate companies that own prime properties in Hawaii such as Ala Moana Shopping Center and the International Market Place in Waikiki.

That means it’s up to Hawaii senators to decide whether the issue will gain any traction this year.

Real estate investment trusts, or REITs, don’t have to pay corporate income tax to the state as long as they pass on at least 90 percent of their earnings to shareholders. Because many of those shareholders live out of the state or country, that means the State of Hawaii misses out on tax revenue.

Rep. Karl Rhoads listens

Rep. Karl Rhoads said he decided to defer the bill because he had “more questions than answers.”

PF Bentley/Civil Beat

House Finance Committee Chairwoman Sylvia Luke introduced the bill, but she may not have a chance to vote on it: The measure died Wednesday in the committees on judiciary and consumer protection.

House Judiciary Committee Chairman Karl Rhoads said that he decided to defer the bill Wednesday because he had “more questions than answers.”

He reasoned that because the corporate income tax contributes relatively little to Hawaii’s tax base, the bill would not make that much of a financial difference to the state.

There are about 20 REITs in Hawaii that own more than $13 billion worth of property, including lucrative resorts and shopping centers. Ala Moana Shopping Center alone generated $2.86 billion in sales last year.

“If you converted all the REITs into Hawaii corporations I’m not sure we’d get that much more (tax revenue),” Rhoads said.

But the representative said he would be willing to reconsider his decision if the Senate passes the proposal and sends it to the House.

Rep. Angus McKelvey, who leads the House Committee on Consumer Protection, also rejected the bill Wednesday. He didn’t immediately respond to a request for comment Thursday.

Senate President Donna Mercado Kim is behind the Senate version of the measure, Senate Bill 118. Her proposal has been referred to the Ways and Means Committee, chaired by Sen. Jill Tokuda, who plans to schedule a hearing for the bill within the next month.

Meanwhile, lobbyists for real estate investment trusts have been working to convince lawmakers to discard it.

Shoppers gather as there is 1 more day, 2 days if you count today in the name of commercial gift giving. 23dec2014. photograph Cory Lum/Civil Beat

The Ala Moana Shopping Center is one of the properties that would be affected by the bill.

Cory Lum/Civil Beat

The National Association of Real Estate Investment Trusts has hired lobbyists from Ashford & Wriston, a firm that also represents eBay, Walgreens and Shell Oil Company. Last year, NAREIT paid the company more than $14,000 in lobbying fees in a successful fight against a similar proposal.

The vast majority of testimony that lawmakers received Wednesday urged them to oppose the bill. It came from REITs such as General Growth Properties, which owns Ala Moana Shopping Center, and organizations such as the Land Use Research Foundation that warned of potential job loss and disinvestment in Hawaii.

The Department of Taxation submitted testimony that largely echoed that position and didn’t bother to estimate how much revenue the state could gain. But the Hawaii Government Employees Association, a union for government workers, argued that the state could be losing millions of dollars due to the tax loophole.

The only other person to testify in support of the bill was Michael Fergus, a local real estate investor, who said it’s unfair that real estate trusts get a tax break when numerous other companies must pay.

It’s unclear how much support Kim’s bill has in the Senate. But she said she’s committed to the measure after spending the past few months talking to various business people in the community.

Kim said she was against taxing REITs last year because she didn’t understand the issue and feared the bill would discourage investment. She changed her mind after she studied the evidence, she said.

Tokuda is more cautious, but said she is willing to take a look at the proposal.

“I know that this is an issue that got a lot of attention last year and we’d like to continue the discussion,” she said.

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