Relating To Taxation Of Real Estate Investment Trusts.
The proposed bill would decouple Hawaii's tax treatment of REITs from federal regulations, thus allowing the state to impose income tax on these entities in a manner more equitable to local revenue needs. By eliminating the dividends paid deduction within the specified timeframe, the state is projected to recover approximately $65 million in annual tax revenue, which could significantly bolster funding for essential programs, including housing initiatives. The collected funds are intended to be split evenly between the dwelling unit revolving fund and rental housing revolving fund, which are crucial for supporting affordable housing projects within the state.
House Bill 234 aims to address the taxation of real estate investment trusts (REITs) in Hawaii by proposing a temporary disallowance of dividends paid deductions for the taxable years beginning after December 31, 2023, and ending before January 1, 2027. The legislature recognizes that while REITs provide important access to income-producing real estate, the current income tax treatment in Hawaii allows many of these entities to avoid state income tax due to their alignment with federal rules that benefit out-of-state shareholders. This anomaly has led to significant revenue losses for the state, with findings suggesting Hawaii forgone approximately $36 million in income tax in 2014 alone due to these tax structures.
Supporters of HB 234 argue that it restores equity within the taxation system, ensuring that REITs operating in Hawaii contribute a fair share of taxes commensurate with the benefits they derive from the state. However, opponents may raise concerns regarding the potential negative impact on investment in the local real estate market. Detractors argue that higher tax burdens could discourage investment by REITs and subsequently lead to decreased housing development in a state that already faces significant affordability issues. Balancing these interests will be critical as the bill progresses through the legislative process.