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Senate Bill Would End Tax Breaks for Private Prison Companies

Truthout – By Mike Ludwig – Tuesday, 19 July 2016
2016_0719pr_

New legislation would make it harder for private prisons to masquerade as real estate investment trusts. (Photo: Pixabay)

Senator Ron Wyden (D-Oregon) introduced legislation last week that would make it tougher for private prison companies to take advantage of federal rules that provide massive tax breaks for special real estate firms, a move that racial justice and prison divestment activists say is an important step toward confronting the corporations that control around 8 percent of the nation’s prisons and immigrant jails.

As Truthout has reported, the nation’s two largest prison firms, GEO Group and Corrections Corporations of America (CCA), avoided a combined $113 million in federal taxes in 2015 alone. Large portions of the companies are allowed to file with the IRS as Real Estate Investment Trusts, or REITs, which enjoy a special tax status designed to encourage real estate investment.

The bulk of CCA and GEO Group’s multibillion-dollar revenue stream comes from taxpayers, but both companies have seen their corporate tax rate plummet by 30 percent or more since they secured REIT status in 2012, according to annual financial reports. CCA, which owns 66 jails and prisons nationwide and runs an additional 11 facilities on behalf of the government, reported a net income tax benefit of nearly $138 million in 2013 alone.

Federal law requires the bulk of these tax benefits to be paid out to shareholders in the form of dividends, so the extra cash is not reinvested into programs and resources for prisoners and jailed immigrants, or to pad the salaries of private prison guards, who can earn wages as low as $15 per hour. Activists also say these dividends encourage wealthy investors to profit from mass incarceration and lobby for the racist policies that drive it.

“Private prisons are one part of a larger system of mass criminalization that has to be fought on many fronts,” said Amanda Aguilar Shank, an organizer with the racial and economic justice group, Enlace. “Part of dismantling this system is recognizing the huge economic investment we are making in criminalizing and locking up enormous sectors of our community, and finding ways to divest and reinvest those resources into life-giving services like housing, education and health care.”

Established as a special tax status more than 50 years ago, REITs were originally intended to be passive investment vehicles, allowing groups of investors to put money into real estate properties without actually buying and servicing them, much like mutual funds. REITs are required to distribute 90 percent of their taxable income back to shareholders?annually in the form of cash or stock dividends, which in turn are tax-deductible for the REIT.

REITs are supposed to stick to the real estate business, but CCA and Geo Group provide dozens of (non-real-estate-related) services and products to jails, prisons, immigrant jails and the people held captive in them. Both companies also run entire facilities.

The IRS has allowed companies to break themselves up in order to meet REIT requirements and enjoy the tax breaks, so CCA and GEO Group spun off sections of their companies that provided services, such as education and health care, or incorporated them as “subsidiaries” of the REIT.

These spin-offs are supposed to pay federal taxes, but both companies have convinced the IRS that the bulk of their business is essentially renting space out to the federal and state governments to house prisoners, so the majority of their income is now tax-exempt. Wyden’s legislation would close this loophole by preventing “active business activities” from filing as REIT subsidiaries.

“This legislation would significantly weaken the for-profit prison industry,” Shank said, “and it would divest resources from tax subsidies for private prisons, freeing up millions of dollars that could be reinvested in services that actually keep our communities safe.”

Wyden blamed a “broken-down tax code” for allowing private prison firms to take advantage of REIT status, but he made it clear that the bill is not just about taxes. With the nation roiling over racist police violence, Wyden noted that the bill is part of a broader effort to reform a criminal legal system that has disproportionately negative impacts on immigrants and people of color.

“As part of rethinking our criminal justice system, particularly as it results in the mass incarceration of low-income and minority individuals, the tax rules for REITs must be changed so that we are not encouraging companies to unjustly profit from prison detention services,” Wyden said in a statement.

Meanwhile, prison corporations are not happy about the bill. CCA spokesman Steve Owen told Truthout that the “rationale for this bill is deeply misguided” and Congress has better things to do “than legislating winners and losers in an independent, IRS-driven REIT qualification process that is already time-tested, rigorous and fair.”

“The fact is, we provide problem-solving alternatives that help our government partners address some of their biggest corrections challenges, such as dangerous overcrowding and skyrocketing costs,” Owen said. “Our company has made significant public commitments to help inmates successfully re-enter society, including helping thousands of people earn a GED.”

Critics of the industry, however, say prisons run by private companies are more violent than public prisons and have higher rates of recidivism among prisoners. Plus, private companies that provide telecommunications and other services to prisoners make business decisions that increase the likelihood that incarcerated people will become returning customers, such as banning in-person visits with family members despite research showing that maintaining family ties reduces recidivism.

“Because private prison profits come from people spending time behind bars, it’s no surprise the companies make business decisions resulting in higher recidivism,” said Donald Cohen, executive director of In the Public Interest, a watchdog group that recently published a brief on the subject.

It’s unclear at this point whether Wyden’s bill will make it out of committee, but Shank said that grassroots pressure to reform the criminal legal system and abolish private prison is only building, so lawmakers should decide whether they want to be on the right side of history, or not.

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