Column: It’s time to close costly REITs loophole
Real estate investment trusts, or REITs, are among the most powerful players in Hawaii’s real estate market. These for-profit corporations own vast amounts of property across the islands, including hotels, office buildings, shopping centers and other commercial real estate. Yet despite doing business here and profiting heavily from Hawaii’s land and economy, REITs do not pay Hawaii’s corporate income tax. A loophole allows them to avoid this tax, which nearly every other for-profit corporation operating in the state must pay.
The result is an unfair shift in the tax burden. Local businesses, working families and individual taxpayers are left to make up the difference, even as state revenues are strained and essential services face growing demands.
REITs and their national lobbying group, the National Association of Real Estate Investment Trusts (NAREIT), argue that taxing REITs under Hawaii’s corporate income tax would amount to “double taxation,” because REIT distributions are already taxed as individual income. That claim is misleading.
REITs are for-profit corporations. Taxing them at the corporate level would treat them exactly the same as other for-profit corporations in Hawaii. Profits would be taxed once at the corporate level, and dividends taxed separately as individual income when received by shareholders. That is how the system works for virtually every other for-profit corporation.
The fact that REITs distribute most of their profits should not exempt them from corporate income tax. Other companies pay corporate taxes first, and then distribute dividends. REITs should not receive special treatment simply because of how they structure their payouts.
This loophole comes at a real cost. Hawaii is estimated to lose roughly $50 million every year because REITs are exempt from the corporate income tax. That money could help support health care, affordable housing, food security and other essentials, especially as federal funding declines and economists warn of a possible recession.
The impact is clear. When Alexander & Baldwin converted to a REIT several years ago, its profits jumped sharply because the company stopped paying Hawaii’s corporate income tax. Other REITs have enjoyed similar windfalls, while the public loses revenue needed to meet rising demands.
Supporters of REITs claim that taxing them would discourage investment. Experience shows otherwise. New Hampshire currently taxes REITs at the corporate level, yet REIT investment there remains strong, even higher than in neighboring rural states such as Vermont and Maine, which do not tax REITs. Taxing REITs does not drive them away; it simply ensures they contribute to the communities from which they profit.
No one enjoys paying taxes. But residents and businesses across Hawaii understand that contributing to the common good is part of living and operating here. REITs benefit enormously from Hawaii’s land, infrastructure, workforce, tourism and legal system. Asking them to pay the same corporate income tax as other businesses is not punitive. It is fair.
Hawaii cannot afford to leave tens of millions of dollars on the table each year. Closing the REIT loophole would strengthen state finances, reduce pressure on working families and small businesses, and ensure accountability from some of the most profitable players in our real estate market.