A recent editorial on real estate investment trusts (REITs) concluded with the statement: “State lawmakers must carefully weigh this ripe-for-debate issue — with the aim to most effectively benefit Hawaii’s taxpayers, not another state’s coffers” (“Consider ending REIT tax setup,” Star-Advertiser, Our View, Feb. 15).

As a Hawaii taxpayer and REIT employee, I completely agree with this point.

However, enacting any of the bills being considered by the Legislature to repeal the deduction REITs receive on dividends they pay their shareholders will have the opposite effect.

These bills, if enacted, will likely reduce the general excise tax (GET) REITs generate for Hawaii, and will send the message that Hawaii is an unfriendly place to invest in projects delivering long-term benefits to our communities.

REIT-owned projects can be found throughout Hawaii — places that residents depend on to enhance their quality of life — including Pearlridge center, Hale Pawa‘a Medical Center, Wet’n’Wild, and Hale Mahana University of Hawaii student housing.

Taxing REIT shareholder dividends is not a pot of gold. At the Feb. 12 hearing before the House Consumer Protection and Commerce Committee on House Bill 475, the state Department of Taxation (DOTAX) noted that bill passage would result in corporate income tax revenues from REITs of about $2.2 million in the first year and $10 million annually thereafter.

This objective analysis from DOTAX contrasts sharply with claims by the bill’s proponents about a windfall of “$50 to $60 million” in new corporate income tax for Hawaii.

DOTAX provided additional warnings about these lower estimates, noting REITs would likely “respond in ways that reduce substantially any latent tax liability,” which would further lower the revenue generated for the state.

DOTAX also cautioned lawmakers to not rely on the numbers quoted by the bill’s proponents based on a Department of Business, Economic Development and Tourism (DBEDT) study on the repeal of the dividends paid deduction (DPD).

According to the DBEDT study, “[i]t is important to note there are some limitations to the estimates … the estimates do not take into account how REITs would change their behavior if the DPD were repealed.” The DBEDT study also did not fully consider the likelihood of REITs investing less in Hawaii, which might jeopardize thousands of construction, resort, retail and health-care job opportunities.

Contrary to the assertions of those eager to tax REITs, repealing the deduction for dividends REITs pay their shareholders will likely reduce state tax revenue. For example, if this change in law were to occur, hotel-owned REITs would certainly review their form of ownership and operation in Hawaii. Why is this important?

Because federal tax law prohibits REITs from operating hotels, and hotel REITs pay Hawaii twice or three times the amount of GET that a non-REIT hotel owner pays. Essentially, REIT hotel owners must lease their hotels to a for-profit, subsidiary corporation whose rent to the REIT is subject to additional GET not faced by non-REIT hotel owners.

Available data show that REIT-owned hotels pay the state of Hawaii an additional GET of about $16 million annually, considerably more than the “possible” $10 million increase in corporate tax projected by DOTAX. Should any of these bills be enacted, the state of Hawaii could lose as much as $6 million.

Thousands of Hawaii households have a stake in the outcome of these bills, as REITs are a significant contributor to their retirement savings and other investment funds, including the Hawaii Employees’ Retirement System. REIT success contributes to their financial well-being.

If the purpose, as the Honolulu Star-Advertiser concluded, is “to most effectively benefit Hawaii’s taxpayers,” then lawmakers should reject this bill and allow Hawaii to continue receiving the many benefits in jobs, investment, quality of life and economic stimulus that REITs provide.