Senator Offers Bill to Deny Private Prisons REIT Status

By Christopher Zoukis

Sen. Ron Wyden

Sen. Ron Wyden

The ranking Democratic on the Senates tax-writing Finance Committee has introduced a bill (S. 3247) to exclude private prison companies from the significant tax breaks available to Real Estate Investment Trusts (REITs).

On July 14, Sen. Ron Wyden (D-OR) offered the “Ending Tax Breaks for Private Prisons Act,’’ which would bar companies operating prisons from being eligible for REIT status.

In a brief statement, Sen. Wyden blamed what he called the nations “broken-down tax code” for allowing for-profit prison companies to take advantage of the highly favorable tax treatment accorded REITs.

Created 50 years ago to encourage investments in real estate, REITs have often been compared to mutual funds, since they offer a way to invest in a broad portfolio of assets -- i.e., the properties a REIT owns or finances, just as a owning shares in a mutual fund lets an investor profit from the stocks or bonds the fund owns -- without having to buy those underlying assets.

By law, a REIT is required to pay its investors at least 90% of its taxable income each year, in the form of cash stock dividends, The REIT can deduct those dividends from its taxable income; as a result, those earnings escape being taxed at the corporate level. 

The two largest companies in the private prison industry are the Corrections Corporation of America and the GEO Group, which together account for about 75% of that industry. In 2013, those companies reorganized to operate as REITs, based on their substantial real estate in prisons, jails and immigration detention centers.

In reorganizing, the two companies also persuaded the Internal Revenue Service to let them spin off as new subsidiaries also eligible for REIT status they had set as subsidiaries separate from ownership of prison real estate. These subsidiaries provided company properties with services such as prison management and providing supplies.

This had the advantage of generating income for the parent company REITs that also escaped taxation at the corporation level. Last year, the two main private-prison companies recorded a combined total of more than $3.6 billion, but as a result of being able to take advantage of REIT status, reduced their tax liability by a combined total of about $113 million.

Wydens bill would reclassify as non-deductible corporate profits income which is currently tax-deductible as REIT dividends to their shareholders. MoveOn.org started a drive earlier this year to gather signatures for a petition opposing REIT status for companies managing private prisons.

In offering his bill, Sen. Wyden made clear he views stripping REIT eligibility from private prisons to be part of broader revisions needed to the U.S. criminal justice system. Other opponents of private prisons have begun campaigns against them on other issues besides their eligibility for REIT status. 

Enlace, a Portland, Oregon-based group that identifies its focus as issue of racial and economic justice, has for five years waged a Private Prison Divestment Campaign to persuade pension funds and other large investors to sell any shares they hold in private-prison companies. It has scored success with the University of California and Columbia University pensions, and hopes that Portland this fall will become the first city government to join its effort.

Christopher Zoukis is the author of College for Convicts: The Case for Higher Education in American Prisons (McFarland & Co., 2014) and Prison Education Guide (Prison Legal News Publishing, 2016). He can be found online at ChristopherZoukis.comPrisonEducation.com and PrisonLawBlog.com