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There is an untapped source of revenue that can provide millions of dollars every year to our state – funds that could be used to improve our public schools, expand services for our senior citizens, or begin to address our homeless problem. It would come from closing the loophole in our state income tax law which allows Real Estate Investment Trusts (REITs) to take their earnings out of Hawaii, tax free.

Unlike other businesses operating in Hawaii, REITs are effectively exempt from state income tax. Instead, their shareholders pay the income taxes in the states in which they live. It works well at the federal level because the IRS requires REITs to withhold taxes on the dividends paid to foreign entities owning REIT stock. However, at the state level, it does not work. Of the $720 million earned by REITs in Hawaii in 2014 (that number has increased by 50 percent since then), 99 percent leaves the state tax free, to be taxed elsewhere or nowhere.

When DBEDT did its study on REITs in Hawaii last year, it estimated the amount of REIT property owned here to be $11 billion. Since then, Hilton Hawaiian Village, Hilton Waikoloa, International Market Place and many others have joined the tax-exempt REIT club, bringing the total value of REIT property in Hawaii to $17 billion and the lost Hawaii income tax to more than $50 million. Other local companies are planning to join the club too. Who wouldn’t?

 for a partial listing of properties operating free from income tax in Hawaii. They are not easily identifiable, but soon it may be easier to list commercial properties NOT owned by REITs.

Many REIT properties offer primarily low-paying jobs to our residents, with executive and back office positions based on the mainland. Most do not subsidize our local charities in a material way. And they distort our real estate market pricing for non-REIT investors because they don’t pay taxes and use tax-free equity. With a few exceptions, REITs are not builders; they purchase property built by others. Hilton built their Waikiki property before becoming a REIT. They didn’t need an income tax exemption.

There is no shortage of capital pursuing real estate investments in Hawaii. There is a long line of REITs and non-REITs pursuing every major investment opportunity here. Private equity, pension funds and foreign equity are all active in our market.

We should level the playing field and tax REITs the same way as other real estate investors. Our tax base will just keep shrinking if we don’t act now.

 to see our simple Q&A on REIT issues in Hawaii.