Hawaii would become the first state in 50 years to impose corporate income taxes on real estate investment trusts under a measure headed to Gov. David Ige for his consideration.

On Tuesday the state House voted overwhelmingly, 43 to 7, in favor of Senate Bill 301, which would impose the state’s 6.2 percent corporate tax on real estate investment trusts, also known as REITs. The Senate passed the bill unanimously the same day.

Real estate investment trusts swept into Hawaii in a big way in the past decade, and now own more than $18 billion in real estate, including such marquee properties as Ala Moana Center, Hilton Hawaiian Village and the International Market Place in Waikiki.

Hilton Hawaiian Village entrance. 29 july 2015. photograph Cory Lum/Civil Beat
Hilton Hawaii Village and other real estate investment trusts would face higher taxes under a law headed to the governor’s desk. Cory Lum/Civil Beat

REITs are securities that hold real estate and distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends. Shareholders pay taxes on that income in their home state and countries, but few of them live in Hawaii and pay little in the way of corporate income taxes.

A group of grassroots advocates and small businesses organized a few years ago to raise public awareness to what they called the injustice of REITs not paying their fair share. Proponents were thrilled Tuesday by their victory, which many had considered unlikely against such well-funded adversaries.

“It will result in fairer taxation,” said Mike Fergus, a Hawaii real estate developer who lobbied for the bill’s passage.

REIT operators said that passing the tax would stifle investment in Hawaii and potentially lead to revenue and job loss if construction and remodeling projects withered.

“Hawaii needs investment from companies who are long-term investors and not ‘flippers,’” said Dara Bernstein, senior vice president and tax counsel for the National Association of Real Estate Investors. “If this measure is enacted, it will discourage long-term investors in affordable and student housing.”

A trade group representing the REIT industry spent heavily on lobbying, outreach and advertising to convey that message broadly and block the bill, but were unable to convince lawmakers, who voted for the measure in large numbers.

Only one other state, New Hampshire, taxes REITs, under a law passed in 1970 when REITs made up a very small part of the nation’s real estate market. REITs continue to operate in New Hampshire despite the tax.

It is unclear whether Gov. David Ige will veto the measure or sign it.

Governor David Ige Budget presser closeup1.
Gov. David Ige now gets to decide if he’ll support legislation taxing large real estate investment trusts. Cory Lum/Civil Beat

The state Department of Business, Economic Development and Tourism last week sought to discourage lawmakers from passing the bill, circulating a memo that the measure could create unintended consequences by making Hawaii a less attractive place for investment. The department is headed by a close ally of the governor, Mike McCartney, who faces a confirmation hearing Thursday.

Evelyn Azcon Hao, president of Faith Action for Community Equity whose members, dressed in blue T-shirts, had lobbied hard at the Capitol for the measure, said she wants to discuss the bill with Ige as soon as possible.

“We’re hopeful we’ll get a chance to meet with him and he will sign it into law,” Hao said.

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