THIRTIETH LEGISLATURE, 2019
STATE OF HAWAII
A BILL FOR AN ACT
RELATING TO DOWN PAYMENTS.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that the size of the State's population is declining. In fiscal year 2016-2017, the United States Census estimated that Hawaii had a net loss of 13,537 people. People who move away from Hawaii often cite Hawaii's high cost of living as the deciding factor in moving.
The legislature further finds that individuals and families relocating out of Hawaii cause economic, social, and cultural burdens for the State. The lack of frequent physical contact with family members can be traumatic to, be disruptive to, and fragment an individual's ohana. This erosion of kinship support networks among existing residents can even delay family-making decisions for younger generations when considering their ability to clothe, feed, and educate their future children.
The legislature further finds that many of the individuals who move out of Hawaii are often the most skilled and educated of the workforce since those individuals have the greatest opportunity for superior career opportunities on the mainland United States. Failure to stem this loss represents a danger to Hawaii's economic future.
The purpose of this part is to encourage former residents to return to Hawaii by assisting them in making a down payment for the purchase of a primary residence.
SECTION 2. Chapter 201H, Hawaii Revised Statutes, is amended by adding two new sections to be appropriately designated and to read as follows:
"§201H-A Returning resident down payment program, established. (a) There is established the returning resident down payment program to be administered by the corporation. The program shall encourage former Hawaii residents to return to Hawaii by awarding funds to assist with the down payment on the purchase of a primary residence.
(b) Subject to available funds, the returning resident down payment program shall award funds of up to one dollar for each dollar of down payment made by a qualified applicant; provided that the total award to an applicant shall not exceed the lesser of ten per cent of the value of the single family residence purchased or $50,000.
(c) To be eligible for an award under the returning resident down payment program, an applicant shall:
(1) Have earned a high school diploma from a high school in the State;
(2) Have ceased residency in the State for the purpose of attending a four-year course of study leading to a baccalaureate degree at a college or university accredited by the United States Department of Education or other entity recognized by the corporation;
(3) Use the award to make a down payment for the purchase of a single family residence as defined in section 521-8; and
(4) Use the single family residence purchased pursuant to subparagraph (3) as a primary residence for not less than two years from the date of purchase.
(d) Any applicant who has received an award and fails to satisfy the requirements of subsection (c)(4) shall repay the award plus interest at the rate of eight per cent.
§201H-B Returning resident down payment special fund. (a) There is established in the state treasury the returning resident down payment special fund into which shall be deposited the following moneys:
(1) Appropriations made by the legislature to the special fund;
(2) The revenue from taxes collected pursuant to section 235- ; and
(3) Repayments to the fund made pursuant to section 201H‑A(d).
(b) Funds in the special fund shall be used for the purposes of the returning resident down payment program."
SECTION 3. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2019-2020 for deposit into the returning resident down payment special fund.
SECTION 4. There is appropriated out of the returning resident down payment special fund the sum of $ or so much thereof as may be necessary for fiscal year 2019-2020 and the same sum or so much thereof as may be necessary for fiscal year 2020-2021 for the returning resident down payment program.
The sums appropriated shall be expended by the Hawaii housing finance and development corporation for the purposes of this Act.
SECTION 5. The legislature finds that real estate investment trusts, under current law, do not pay their full share of taxes. The dividends paid deduction and the corporate structure of real estate investment trusts allow income generated by these corporations to go untaxed in Hawaii, costing the State valuable tax revenue that could be used for the benefit of residents and former residents wishing to return.
According to the department of business, economic development, and tourism, the net annual income for real estate investment trusts has risen quickly in the last several years from approximately $79,900,000 in 2012 to $720,000,000 in 2014. Had real estate investment trusts been subject to the same taxation as other corporations, they would have generated an additional $36,000,000 in state revenue in 2014 alone. The legislature finds it unacceptable that real estate investment trusts are taking advantage of the State's tax laws and real estate market to generate enormous profits that ultimately have little or no benefit to the State.
The legislature believes that there are two ways to ensure that the State is paid its fair share of income taxes from the economic activity generated by real estate investment trusts. First, real estate investment trusts should be required to withhold a proportion of dividends attributable to the State and remit them to the State. Similar to the way other corporate forms are taxed in the State, this will have the same effect on the real estate investment trust as their shareholders being taxed in their home states. Instead of the tax income going to other states, requiring annual tax returns on dividends ensures that tax income goes to this State for business activity generated in this State. Second, repealing the dividends paid deduction will ensure that real estate investment trusts cannot use it as a loophole to escape proper taxation. Under federal law, each real estate investment trust must distribute at least ninety per cent of its taxable income to shareholders. The dividends paid deduction allows real estate investment trusts to escape paying taxes on income generated from doing business in this State. Closing the loophole ensures that the State receives its share of a real estate investment trust's taxable income.
The purpose of this part is to:
(1) Require real estate investment trusts to submit returns based on dividends distributed and income generated in Hawaii; and
(2) Repeal the dividend paid deduction for real estate investment trusts to create a revenue source for the returning resident down payment program.
SECTION 6. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to part VI to be appropriately designated and to read as follows:
"§235- Real estate investment trust returns; withholding on dividends paid. (a) Each real estate investment trust shareholder's pro rata share of income attributable to the State and the shareholder's pro rata share of income not attributable to the State, to the extent modified under this chapter, shall be taken into account by the shareholder for the purposes of this chapter under rules similar to those adopted pursuant to section 235-122(c).
(b) Every real estate investment trust shall make a return for each taxable year, stating specifically:
(1) The items of its gross income and the deductions allowable by this chapter;
(2) The name, address, and social security or federal identification number of each person owning stock in the real estate investment trust at any time during the taxable year;
(3) The number of shares of stock owned by each shareholder at all times during the taxable year;
(4) The income attributable to the State and income not attributable to the State with respect to each shareholder as determined under this chapter;
(5) Any modifications required under this chapter;
(6) The amount of money and other property distributed by the real estate investment trust during the taxable year to each shareholder;
(7) The date of each distribution; and
(8) Any other information the department may prescribe by form or rule.
(c) The real estate investment trust, on or before the day on which the return is filed, shall furnish to each person who was a shareholder during the year a copy of the information shown on the return as the department may prescribe by form or rule. Any return filed pursuant to this section, for purposes of sections 235-111 and 235-112, shall be treated as a return filed by the real estate investment trust under section 235-92.
(d) The department may permit composite returns and payments to be made on behalf of resident shareholders.
(e) A real estate investment trust shall withhold and pay to this State, on behalf of any shareholder, an amount equal to five per cent multiplied by the amount of the shareholder's pro rata share of the income attributable to the State, as reflected on the real estate investment trust's return for the taxable period. A real estate investment trust shall be entitled to recover a payment made pursuant to this subsection from the shareholder on whose behalf the payment was made.
(f) The amount withheld by a real estate investment trust under subsection (e) shall be the minimum tax due to Hawaii by each real estate investment trust shareholder on their Hawaii source income. A real estate investment trust shareholder that is not otherwise required to file Hawaii tax returns need not file a Hawaii return to report the income received and tax paid. Any real estate investment trust shareholder that is tax exempt under federal income tax law shall not be liable for the minimum tax on their real estate investment trust income and may file a claim for refund for the amount withheld and paid to the State by the real estate investment trust.
(g) Any amount paid by the real estate investment trust to this State pursuant to subsection (d) or (e) shall be considered to be a payment by the shareholder on account of the income tax imposed on the shareholder for the taxable period.
(h) All money collected pursuant to this section shall be deposited into the returning resident down payment special fund established pursuant to section 201H-A.
(i) Any officer of any real estate investment trust who wilfully fails to provide any information, file any return or agreement, or make any payment as required by this section or section 231-15.6 shall be guilty of a misdemeanor.
(j) As used in this section:
"Real estate investment trust" means a corporation, trust, or association for which a valid election in accordance with section 856 of the Internal Revenue Code, as amended, is in effect.
"Real estate investment trust shareholder" or "shareholder" means any person who is ultimately responsible for the payment of tax on a portion of the real estate investment trust's income from dividend distributions."
SECTION 7. Section 235-2.3, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:
"(b) The following Internal Revenue Code subchapters, parts of subchapters, sections, subsections, and parts of subsections shall not be operative for the purposes of this chapter, unless otherwise provided:
(1) Subchapter A (sections 1 to 59A) (with respect to determination of tax liability), except section 1(h)(2) (relating to net capital gain reduced by the amount taken into account as investment income), except sections 2(a), 2(b), and 2(c) (with respect to the definition of "surviving spouse" and "head of household"), except section 41 (with respect to the credit for increasing research activities), except section 42 (with respect to low-income housing credit), except sections 47 and 48, as amended, as of December 31, 1984 (with respect to certain depreciable tangible personal property), and except section 48(d)(3), as amended, as of February 17, 2009 (with respect to the treatment of United States Department of Treasury grants made under section 1603 of the American Recovery and Reinvestment Tax Act of 2009). For treatment, see sections 235-110.91, 235-110.7, and 235-110.8;
(2) Section 78 (with respect to dividends received from certain foreign corporations by domestic corporations choosing foreign tax credit);
(3) Section 86 (with respect to social security and tier 1 railroad retirement benefits);
(4) Section 91 (with respect to certain foreign branch losses transferred to specified 10-percent owned foreign corporations);
(5) Section 103 (with respect to interest on state and local bonds). For treatment, see section 235-7(b);
(6) Section 114 (with respect to extraterritorial income). For treatment, any transaction as specified in the transitional rule for 2005 and 2006 as specified in the American Jobs Creation Act of 2004 section 101(d) and any transaction that has occurred pursuant to a binding contract as specified in the American Jobs Creation Act of 2004 section 101(f) are inoperative;
(7) Section 120 (with respect to amounts received under qualified group legal services plans). For treatment, see section 235-7(a)(9) to (11);
(8) Section 122 (with respect to certain reduced uniformed services retirement pay). For treatment, see section 235-7(a)(3);
(9) Section 135 (with respect to income from United States savings bonds used to pay higher education tuition and fees). For treatment, see section 235-7(a)(1);
(10) Section 139C (with respect to COBRA premium assistance);
(11) Subchapter B (sections 141 to 150) (with respect to tax exemption requirements for state and local bonds);
(12) Section 151 (with respect to allowance of deductions for personal exemptions). For treatment, see section 235-54;
(13) Section 179B (with respect to expensing of capital costs incurred in complying with Environmental Protection Agency sulphur regulations);
(14) Section 181 (with respect to special rules for certain film and television productions);
(15) Section 196 (with respect to deduction for certain unused investment credits);
(16) Section 199 (with respect to the U.S. production activities deduction);
(17) Section 199A (with respect to qualified business income);
(18) Section 222 (with respect to qualified tuition and related expenses);
(19) Sections 241 to 247 (with respect to special deductions for corporations). For treatment, see section 235-7(c);
(20) Section 250 (with respect to foreign-derived intangible income and global intangible low-taxed income);
(21) Section 267A (with respect to certain related party amounts paid or accrued in hybrid transactions or with hybrid entities);
(22) Section 280C (with respect to certain expenses for which credits are allowable). For treatment, see section 235-110.91;
(23) Section 291 (with respect to special rules relating to corporate preference items);
(24) Section 367 (with respect to foreign corporations);
(25) Section 501(c)(12), (15), (16) (with respect to exempt organizations); except that section 501(c)(12) shall be operative for companies that provide potable water to residential communities that lack any access to public utility water services;
(26) Section 515 (with respect to taxes of foreign countries and possessions of the United States);
(27) Subchapter G (sections 531 to 565) (with respect to corporations used to avoid income tax on shareholders);
(28) Subchapter H (sections 581 to 597) (with respect to banking institutions), except section 584 (with respect to common trust funds). For treatment, see chapter 241;
(29) Section 642(a) and (b) (with respect to special rules for credits and deductions applicable to trusts). For treatment, see sections 235-54(b) and 235-55;
(30) Section 646 (with respect to tax treatment of electing Alaska Native settlement trusts);
(31) Section 668 (with respect to interest charge on accumulation distributions from foreign trusts);
(32) Subchapter L (sections 801 to 848) (with respect to insurance companies). For treatment, see sections 431:7-202 and 431:7-204;
(33) Section 853 (with respect to foreign tax credit allowed to shareholders). For treatment, see section 235-55;
(34) Section 853A (with respect to credits from tax credit bonds allowed to shareholders);
(35) Section 857(b)(2)(B) (with respect to the deduction for dividends paid by real estate investment trusts); provided that the deduction shall remain available for dividends generated from trust-owned housing that is affordable to households with incomes at or below one hundred per cent of the median family income, as determined by the United States Department of Housing and Urban Development;
(35)] (36) Subchapter N (sections 861 to 999)
(with respect to tax based on income from sources within or without the United
States), except sections 985 to 989 (with respect to foreign currency
transactions). For treatment, see
sections 235-4, 235-5, and 235-7(b), and 235-55;
(36)] (37) Section 1042(g) (with respect to sales
of stock in agricultural refiners and processors to eligible farm
(37)] (38) Section 1055 (with respect to
redeemable ground rents);
(38)] (39) Section 1057 (with respect to election
to treat transfer to foreign trust, etc., as taxable exchange);
(39)] (40) Sections 1291 to 1298 (with respect to
treatment of passive foreign investment companies);
(40)] (41) Subchapter Q (sections 1311 to 1351)
(with respect to readjustment of tax between years and special limitations);
1)] (42) Subchapter R (sections 1352 to 1359)
(with respect to election to determine corporate tax on certain international
shipping activities using per ton rate);
(42)] (43) Subchapter U (sections 1391 to 1397F)
(with respect to designation and treatment of empowerment zones, enterprise
communities, and rural development investment areas). For treatment, see chapter 209E;
(43)] (44) Subchapter W (sections 1400 to 1400C)
(with respect to District of Columbia enterprise zone);
(44)] (45) Section 1400O (with respect to
education tax benefits);
(45)] (46) Section 1400P (with respect to housing
(46)] (47) Section 1400R (with respect to
Section 1400T (with respect to
special rules for mortgage revenue bonds);
(48)] (49) Section 1400U-1 (with respect to
allocation of recovery zone bonds);
(49)] (50) Section 1400U-2 (with respect to
recovery zone economic development bonds);
(50)] (51) Section 1400U-3 (with respect to
recovery zone facility bonds); and
(51)] (52) Subchapter Z (sections 1400Z-1 to
1400Z-2) (with respect to opportunity zones)."
SECTION 8. Section 235-71, Hawaii Revised Statutes, is amended by amending subsection (d) to read as follows:
"(d) In the case of a real estate investment trust
there is imposed on the taxable income, computed as provided in sections 857
and 858 of the Internal Revenue Code but with the changes and adjustments made
by this chapter (without prejudice to the generality of the foregoing, the
deduction for dividends paid is limited to [
such] the amount of dividends
as is attributable to income taxable under this chapter[ )], and for
taxable years beginning after December 31, 2019, no deduction for dividends paid
shall be allowed), a tax consisting in the sum of the following: 4.4 per cent if the taxable income is not
over $25,000, 5.4 per cent if over $25,000 but not over $100,000, and on all
over $100,000, 6.4 per cent. In addition
to any other penalty provided by law any real estate investment trust whose tax
liability for any taxable year is deemed to be increased pursuant to section
859(b)(2)(A) or 860(c)(1)(A) after December 31, 1978, (relating to interest and
additions to tax determined with respect to the amount of the deduction for
deficiency dividends allowed) of the Internal Revenue Code shall pay a penalty
in an amount equal to the amount of interest for which such trust is liable
that is attributable solely to such increase.
The penalty payable under this subsection with respect to any
determination shall not exceed one-half of the amount of the deduction allowed
by section 859(a), or 860(a) after December 31, 1978, of the Internal Revenue
Code for such taxable year."
SECTION 9. In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.
SECTION 10. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.
SECTION 11. This Act shall take effect on July 1, 2019, and shall apply to taxable years beginning after December 31, 2019.
Returning Resident Down Payment Program; Special Fund; Real Estate Investment Trust; Deductions; Appropriation
Encourages certain former Hawaii residents to move back to Hawaii by establishing the returning resident down payment program to provide matching funds for the down payment on a residence. Funds the program with real estate investment trust taxes. Repeals dividend paid deduction for real estate investment trusts. Appropriates funds.
The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.