Hawaii is facing a budget crisis, and needs revenue-generating ideas. Luckily, the Legislature already passed a bill that could generate $40 million to $64 million annually through REIT taxation.

REITs (real estate investment trusts) are corporations that own, operate, or finance income-generating real estate. Forty-two REITs operate in Hawaii and their holdings include Ala Moana Center, the Hilton Hawaiian Village, among others. Only one REIT is headquartered here.

REITs in Hawaii were worth $18 billion in 2019, according to the National Association of REITs (NAREIT), with an estimated taxable income of around $1 billion.

Yet very little of that income contributes to Hawaii’s public services.

REITs are exempt from paying federal taxes on income as long as they comply with certain requirements. One major qualification: They must distribute at least 90% of their taxable income to shareholders as dividends. The distributed income is then taxed at the individual shareholder level.

Most states tax REITs the same way. Thus, only the states in which shareholders live enjoy income tax revenue from REIT dividends, not the states in which the revenue was originally generated.

This is a problem for Hawaii. REITs own a disproportionate amount of assets in Hawaii — more than almost any other state — according to NAREIT data. Yet very few Hawaii residents own REIT shares. Under the current tax system, other states are the ones benefitting from some of Hawaii’s most valuable properties.

NAREIT claims that 49% of Hawaii households invest in REITs. But its methodology includes people who own REITs indirectly through retirement accounts. Retirement plans don’t pay taxes, so this figure doesn’t accurately represent REITs’ contribution to our tax base. A better figure comes from the state Department of Business and Economic Development and Tourism’s 2015 study: Only 3.7% of Hawaii households directly invest in, and receive income from, REITs.

With an estimated taxable income of about $1 billion in 2019 taxed at Hawaii’s corporate income tax rate of 6.4%, the state could have received about $64 million in 2019.

This additional revenue could allow the state to fund critical issues like affordable housing, sewage infrastructure, and other basic needs that every Hawaii resident — and REITs here — depend on.

Hawaii wouldn’t be the first state to change its REIT laws. New Hampshire taxes REITs in the same way that previous Hawaii legislation proposed. Its corporate income tax rate is 8.2% (vs. Hawaii’s 6.4%). It has a relatively higher number of REIT shareholders, and a relatively lower number of valuable REIT properties — the opposite of Hawaii. Despite this tax policy, REITs still invest in New Hampshire. Between 2014 and 2017, REIT asset values in New Hampshire grew almost 20%.

Even if the REIT legislation passes, they would still enjoy significant tax benefits. They enjoy federal tax deduction (would pay up to 21% otherwise). Also, Hawaii’s property tax rate is the lowest in the country.

REIT lobbyists have argued that REITs contribute through real property taxes and the general excise tax (GET). This is true but doesn’t tell the whole story. Everyone in Hawaii pays real property taxes and GET — but also pays income taxes.

When Gov. David Ige vetoed the REIT taxation bill in 2019, he claimed it would “discourage the business community from investing in Hawaii.” However, even during the pandemic, Hawaii continues to be one of the most attractive real estate markets. Since last March, our valuable land has only gotten more expensive.

REITs are lucky to operate in Hawaii. Hawaii’s properties are unique — and uniquely valuable.

This is the year for our Legislature and governor to come together to do what’s best for the state: Make REITs pay state corporate income taxes. Everyone else pays their fair share of taxes. REITs should, too.

Catherine Lee works in finance and volunteers with Faith Action for Community Equity on housing issues.