House Bill 234 aims to address the taxation of real estate investment trusts (REITs) in the State of Hawaii by temporarily disallowing the dividends paid deduction for tax years starting after December 31, 2023, and ending before January 1, 2027. The current treatment of REITs aligns with federal tax provisions, creating notable discrepancies as it leads to lost state income tax revenues when REITs distribute dividends to shareholders residing outside of Hawaii. The bill's intent is to create a more balanced tax structure where all corporations pay a fair tax rate reflective of the resources they use in Hawaii.
The legislature's findings indicate that REITs possess approximately $17 billion in assets within Hawaii, generating an annual income of roughly $1 billion. If subjected to the corporate tax rate, this could yield an estimated $65 million in annual tax revenue for the state. Analysis has suggested that Hawaii has forgone significant tax revenue due to its current reliance on the federal system, with projections highlighting substantial declines in tax collections from REITs and their shareholders.
This legislation proposes to redirect the tax revenues collected from the disallowed deductions into two specific funds: the dwelling unit revolving fund and the rental housing revolving fund. This funding allocation indicates the state's commitment to addressing housing issues, which are critical given the pressures of the local real estate market. By promoting fair taxation of REITs, the bill seeks to enhance state resources available for affordable housing initiatives.
However, the bill's provisions may generate contention among stakeholders. Supporters argue that REITs should contribute fairly to the state's income tax portfolio in light of their substantial business activities. Conversely, some REIT advocates fear that such taxation could discourage investment in Hawaii's thriving real estate sector. As the legislation stipulates that it will be in place only until December 31, 2026, it remains to be seen how this temporary measure will influence long-term policies surrounding housing and taxation in Hawaii.