The Hawaii Legislature went home Friday night arguing over two major tax bills that were promoted by supporters as big revenue streams into state coffers but opposed by critics who described one bill as a potential investment-killer and the other as illegal and a fatal blow to local neighborhoods.

Lawmakers also killed an increase in the minimum wage that was widely expected to pass but allowed a measure decriminalizing marijuana that was widely expected to die to live for another day.

Senate Bill 301, which would impose Hawaii’s 6.2% corporate income tax on real estate investment trusts, was approved unanimously by conferees in the remaining minutes before time ran out on negotiations at 6 p.m.

If the bill passes both houses and is signed by Gov. David Ige, Hawaii would become the first state in 50 years to impose taxes on real estate investment trusts.

But another major tax bill regulating short-term vacation rentals, Senate Bill 1292, went down in a narrow defeat in a late-evening floor session.

It would have required operators of short-term rentals to pay transient accommodation and general excise taxes, with hosting platforms like Airbnb and HomeAway acting as tax collectors on behalf of the state.

Senator Laura Thielen speaks in opposition AirBnB bill. Likens Vacation rentals to rapid ohia death.
Sen. Laura Thielen, one of the lead opponents of Senate Bill 1292, compared the proliferation of unregulated short-term rentals to rapid ohia death. Sen. Glenn Wakai is in the background. Cory Lum/Civil Beat

After brief but earnest debate, senators voted 12 to 12 to kill SB 1292. Thirteen votes were needed to pass the bill on to Ige for his consideration, but Sen. Kurt Fevella — who indicated yesterday evening his strong opposition to the bill — was absent.

The vote was welcomed by members of Unite Here Local 5, which represents hotel workers. The union lobbied senators and were hopeful they had the votes to kill SB 1292. They did.

The mood in the Senate chamber was both upbeat (for opponents of the bill) and somber (for supporters).

Senator Donovan Dela Cruz speaks in support of AirBnB bill.
Sen. Donovan Dela Cruz, a chief proponent of SB 1292, warned of stark fiscal repercussions for legislative funding if the bill did not pass. Cory Lum/Civil Beat

The 2019 session is not over yet, and more drama is forecast. Final votes on scores of bills will take place next week before session wraps Thursday.

Looming large is the possible resurrection by the Senate of the water rights bill involving Alexander & Baldwin next week.

‘Just Give Us The Check’

As reported Thursday, the legislation that has been called by some the Airbnb bill has been hotly contested for months.

Under the latest draft of the bill, information collected about home-rental operations would be kept confidential, which opponents said would make the state a participant in illegal rental operations. They said the state taxing plan would encourage more vacation home rentals at a time the state desperately needs affordable housing for residents.

Senator Gil Riviere speaks in opposition to the AirBnB bill.
Sen. Gil Riviere, speaking in opposition to SB 1292, said vacation rentals are destroying Hawaii. Cory Lum/Civil Beat

The evening floor debate showed just how divided the Senate was on SB 1292.

“If all this is is a mindless money grab, I can’t support it,” said Sen. Gil Riviere. “It’s terrible that there are people doing illegal activities … we should not condone it — ‘just give us the check.’”

Riviere said 25,000 homes in Hawaii have been converted to short-term rentals, which he called a “huge societal shift.”

“Half a loaf is better than to starve our state coffers another year.” — Sen. Glenn Wakai

But Sen. Glenn Wakai said Hawaii state government needs the money that can come from the rentals.

“The bill is not perfect, but we need to collet taxes that are rightfully due to the state,” he said. “Half a loaf is better than to starve our state coffers another year.”

The yes votes were from Wakai and Sens. Roz Baker, Donovan Dela Cruz, J. Kalani English, Mike Gabbard, Lorraine Inouye, Gil Keith-Agaran, Dru Kanuha, Michelle Kidani, Maile Shimabukuro, Brian Taniguchi and Ron Kouchi.

The no votes were from Riviere, Stanley Chang, Breene Harimoto, Les Ihara, Kai Kahele, Jarrett Keohokalole, Donna Mercado Kim, Sharon Moriwaki, Clarence Nishihara, Karl Rhoads and Laura Thielen.

Both sides blamed their dilemma on what they called the House’s failure to provide a better enforcement mechanism to reduce the spread of vacation rentals.

‘Huge Step’

The bill to tax REITS, meantime, gained surprising traction after it was proposed by a group of grassroots advocates and local businessmen.

REITs, which entered the Hawaii market only about a decade ago, now own more than $18 billion in Hawaii real estate, including such marquee properties as Ala Moana Center, Hilton Hawaiian Village and the International Market Place in Waikiki.

REITs are securities that distribute at least 90% of their taxable income to shareholders annually in the form of dividends. REITs are allowed to deduct those dividends from their taxable income, legally avoiding federal taxes.

Chair Keith Agaran chats with Chair Angus McKelvey during recess. Conference Committee members wait for other members to decide to vote.
Sen. Gil Keith-Agaran, left, and Rep. Angus McKelvey, the lead conferees on the REITs bill, and Rep. Lisa Kitagawa during a recess before the successful vote. Cory Lum/Civil Beat

Shareholders, meanwhile, are taxed on dividend income in their own home states or countries, not in the places where the income was generated.
 That means other places receive the tax income that would otherwise go to Hawaii.

A group of grassroots advocates, including Faith Action in Community Equity, became critics of REIT practices in Hawaii, saying they consider it an equity issue, particularly at a time when social needs are so great.

They say that it is unfair that property owners that operate as REITs pay no income taxes to Hawaii while the owners of other properties owned in a more traditional way are required to pay the tax.

“Our natural resource is paradise and REITs are making money off it.” — Rep. Angus McKelvey

Representatives of the REIT industry said imposing taxes on them would stifle investment in Hawaii, and the industry spent heavily on lobbying to block the bill’s passage.

After the conference committee vote Friday, Rep. Angus McKelvey, who had supported the REIT measure, was jubilant and said REIT industry lobbyists fought the bill until the very last minute.

McKelvey said it is not clear how much money the REIT tax will generate. He said he hoped the state tax department would pursue it aggressively.

“Our natural resource is paradise and REITs are making money off it,” he said. “This is a huge step in instilling a political philosophy of using our natural resources to give our people tax relief.”

McKelvey said lawmakers added a four-year sunset to the bill so it could be reviewed and repealed in the future.

Will Weed Be Decriminalized?

Hawaii may move to decriminalize small amounts of pakalolo after a conference committee between House and Senate lawmakers agreed on a bill Friday that would replace criminal penalties for possessing 3 grams or less of marijuana with a $130 fine.

House Bill 1383 is one of the last marijuana-related measures left alive this session. Measures attempting to legalize pakalolo for recreational use failed earlier this year.

Chair Karl Rhoads and Chair Chris Lee talk before the HB1383 Decriminilization conference committee today.
Sen. Karl Rhoads, left, and Rep. Chris Lee talk before voting on the marijuana decriminalization bill, which passed. Cory Lum/Civil Beat

House Judiciary Chair Chris Lee proposed a similar draft to the one passed Friday after a meeting of House Democrats in February. That version carried a $200 fine.

Lee and Sen. Karl Rhoads, his Senate counterpart, agreed to lower the fine amount.

If the measure passes a final vote in the House and Senate and is signed into law, Hawaii will decriminalize the smallest amount of marijuana in the U.S. Maryland decriminalized 10 grams or less of marijuana last year.

Hawaii will join 22 other states and the District of Columbia in removing criminal penalties for small amounts of weed, according to the National Conference of State Legislatures.

When Lee first wrote the bill, he originally included a more robust schedule of fines that included removing criminal penalties for possessing up to 1 pound of marijuana. Fines ranged between $200 and $500 depending on how much weed someone possessed.

Lawmakers also agreed to a draft of House Bill 673 that would allow medical marijuana licenses to transfer if a licensee dies or becomes unable to continue working.

The measure would have provided workplace protections that prohibited discrimination against marijuana cardholders, but the conference committee led by Rep. John Mizuno and Sen. Roz Baker made a compromise to remove it.

Baker wanted to include the discrimination protection, but the House didn’t agree. They were concerned that employers would have no way of actually determining whether someone is too impaired to work or not.

No Ranked Choice Voting

Lee and Rhoads weren’t able to come to an agreement Friday on proposals that would have implemented a ranked choice voting system for empty U.S. representative spots, vacant county council seats and special federal elections.

Lee said during a hearing Friday that Senate Bill 427 and House Bill 626 did not receive clearance from the House Finance Committee to move forward.

Two measures that would have made registering for voting easier are both dead.

Senate Bill 412 would have automatically registered anyone to vote who applies for a drivers license. And House Bill 1485 would have allowed high schoolers to pre-register to vote.

No Hike In Moorage Fees

A controversial bill affecting state small boat harbors, opposed by boat owners and keenly sought by the Department of Land and Natural Resources, Senate Bill 1257, died Friday after the House and Senate failed to reach an agreement on the wording of the bill.

The bill would have raised moorage fees for boaters at the Ala Wai Boat Harbor and Keehi Lagoon Harbor, something DLNR’s harbor administrators say is long overdue and that would allow them to make much-needed repairs.

Boaters said that the state has starved the marinas of funds and allowed them to badly deteriorate. Some liveaboards said they were unable to afford any increase in fees and could become homeless if they faced steep increases.

Child Sex Abuse Bill Fails

A measure repealing statutory limitations on the time in which survivors of childhood sexual abuse may file suit was killed Friday — even though it sailed through the session with zero opposition.

Still, House Majority Leader Della Au Belatti said that the House would defer House Bill 18 to take more time to look at the statute of limitations involving child sex assault.

Conference Committee meeting overflow Capitol. AM session.
Overflow at a conference committee hearing Friday morning at the Capitol. Cory Lum/Civil Beat

“Next to murder and rape, the most heinous crime is child sex abuse,” she said.

But Rep. Cynthia Thielen, the bill’s author, said, “This is a sad day for childhood victims of sexual abuse. These keiki didn’t have the chance to ‘defer’ their sexual abuse when they were minors. This is a win for pedophiles.”

More Tax Credits For Films

Lawmakers did agree to increase the cap on film tax credits, from $35 million a year to $50 million. Assuming Senate Bill 33 is approved next week, the legislation will sunset in 2024.

The bill also requires that the University of Hawaii and the Hawaii Technology Development Corporation craft a memorandum of understanding for a no-cost lease agreement of UH West Oahu campus land.

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