Hawaii is losing tens of millions of dollars each year due to a specific tax loophole utilized by real estate investment trusts (REITs). This financial mechanism, known as the dividends paid deduction (DPD), allows these large property-owning corporations to significantly reduce or eliminate their state corporate income tax obligations. The loophole diverts revenue that could otherwise support public services such as affordable housing, education, and health systems.
Key Takeaways
- REITs use the dividends paid deduction (DPD) to avoid state corporate income tax in Hawaii.
- This loophole costs Hawaii an estimated $30 million to $50 million annually.
- Most REIT shareholders with Hawaii properties are non-residents, meaning profits leave the state untaxed.
- The deduction allows REITs to gain a competitive advantage over local businesses.
- Efforts to close the loophole face opposition from national real estate trade groups.
Understanding the REIT Tax Structure in Hawaii
Real estate investment trusts, or REITs, are corporations that own and manage income-generating real estate. These properties include hotels, shopping centers, apartment buildings, and industrial parks. REITs are often multi-billion dollar entities. Under federal law, REITs can deduct all dividends paid to shareholders from their taxable income. This applies as long as they distribute at least 90% of their profits. This deduction, the DPD, results in REITs paying little to no corporate income tax.
Hawaii's state tax code aligns with federal law. This means the DPD is automatically adopted at the state level. Consequently, REITs operating in Hawaii can claim this deduction. They pay almost no state corporate income tax. Properties like Ward Village, Waikiki Beach Walk, Hilton Hawaiian Village, and major shopping centers are owned by these entities.
Key Statistic
A state study revealed that REITs with properties in Hawaii were shielding approximately $720 million in income each year. This translates to an annual loss of tens of millions of dollars in state revenue.
Impact on State Revenue and Local Economy
The financial impact on Hawaii is substantial. The estimated annual revenue loss ranges from $30 million to $50 million. These funds could address critical needs within the state. For example, they could fund affordable housing initiatives. They could also repair public schools and strengthen public health systems. The current system means profits generated from Hawaii's land, infrastructure, workforce, and tourism flow out of the state, untaxed by Hawaii.
According to the Department of Business, Economic Development and Tourism (DBEDT), between 95% and 99% of REIT shareholders with Hawaii property holdings live outside the state. Only a small fraction, 0.5% to 3%, of Hawaii resident taxpayers reported owning shares in REITs with local properties. This structure ensures that the wealth generated in Hawaii primarily benefits distant investors.
"The taxable income flows out of state, untaxed by Hawaiʻi. This is not anti-business — it’s pro-community. Fair taxation ensures that the benefits of economic activity are shared, not siphoned away."
Fueling Speculation and Disadvantage for Local Businesses
Beyond revenue loss, the DPD loophole contributes to market speculation. REITs benefit from a tax advantage that local businesses do not have. This allows them to bid higher for properties and acquire more land. This dynamic can accelerate gentrification and displacement of local residents and businesses. The system concentrates wealth in the hands of external investors. Meanwhile, local residents face higher costs and fewer public services.
For instance, high-rise construction in Kakaʻako, part of the Ward Village project, is owned by a real estate investment trust. These developments contribute to the rising property values and the competitive landscape for land acquisition.
Background Information
Real Estate Investment Trusts (REITs) were created by Congress in 1960. The aim was to allow individual investors to invest in large-scale income-producing real estate. This is similar to how they invest in other industries through mutual funds. The DPD was intended to avoid double taxation on corporate profits and shareholder dividends. However, its application at the state level, particularly in states with high non-resident ownership, has created unintended revenue gaps.
Political Factors Behind the Loophole's Persistence
The existence of Hawaii's REIT tax carve-out is not a foregone conclusion. It is influenced by political factors. The national REIT trade association, Nareit, actively campaigns to protect the DPD. They engage in extensive lobbying, public relations, and consultant-led campaigns. These efforts often warn that taxing REITs would deter investment in the state. However, REITs operate profitably in other states that either impose entity-level taxes or limit the deduction.
Campaign contributions from REIT-linked entities also play a role. Between 2018 and 2024, these donations totaled approximately $133,750. These funds were distributed across various election cycles. They targeted influential committees and policymakers. In a smaller state like Hawaii, even modest contributions can grant access and shape policy discussions. This can slow down reform efforts. This illustrates how structural power operates, favoring organized capital over local needs.
- Lobbying Efforts: Nareit spends significantly to maintain the DPD.
- Campaign Contributions: Over $133,750 in donations from 2018-2024.
- Influence: These contributions can secure access to policymakers and shape narratives.
The Path to Fairer Taxation
Ending the DPD at the state level would level the playing field. It would place REITs on the same tax footing as other businesses in Hawaii. These companies use Hawaii's roads, employ its workers, and profit from its communities. They should contribute to the public systems that enable their profits. Restoring the estimated $30 million to $50 million in lost revenue each year would provide significant benefits.
This revenue could fund new housing projects. It could expand school meal programs. It could also support investments in climate resilience. These actions would not require raising other taxes. Closing the loophole would also help slow speculative land acquisitions. It would keep more wealth circulating within the local economy.
Advocates argue that this is not an anti-business stance. Instead, it is a pro-community approach. Fair taxation ensures that the economic benefits are shared more broadly. It prevents wealth from being siphoned away to distant shareholders. Hawaii has a choice to make. It can choose fairness over extraction. It can choose stability over speculation. It can choose sovereignty over subservience to external investors. The question is not if REITs can afford to pay, but if Hawaii can afford not to make them pay.
