The Senate Ways and Means Committee is scheduled to hear Senate Bill 2697 on Tuesday.

It would disallow dividend deduction for real estate investment trusts — that is, it would allow the state of Hawaii to impose corporate income taxes on REITs.

SB 2697 is very similar to Senate Bill 301, which called for the same thing in the 2019 Hawaii Legislature. It was vetoed by Gov. David Ige.

The new bill has the same author — Sen. Gil Keith-Agaran — but this time has more cosponsors and only one Senate committee to pass, not three like the previous legislation.

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What’s different in part is an introduction in the new bill that explains that existing state law conforms to federal law on REITS “but creates an anomaly because a real estate investment trust that does business in Hawaii, but pays dividends to shareholders out of the state, results in no Hawaii income tax collected either from the real estate investment trust or from its shareholders, due to the fact that shareholders pay any tax on dividends to the state in which they reside, not where the income was generated.”

The bill states that REITs in Hawaii own real estate assets valued at about $17 billion. If taxed by the state that would work out to about $65 million a year for state coffers.

In his veto message Ige wrote, “This bill is objectionable because it could discourage the business community from investing in Hawaii. Disallowing the dividends paid deduction for REITs could potentially stifle economic development and scare away investment capital to address our aging infrastructure. From an economic development perspective, REITs provide stable economic growth and long-term benefits — including job creation — that will extend the supply chain into rental and commercial properties.”

Had the bill become law, Hawaii would have become the first state in 50 years to impose corporate income taxes on REITs.