Proposed Pennsylvania DOC Contracting Tax Could Undermine, Not Help, Recidivism Reduction

Commentary

Proposed Pennsylvania DOC Contracting Tax Could Undermine, Not Help, Recidivism Reduction

Tax could divert resources from current efforts aimed at reducing recidivism, increase costs to taxpayers.

The Pennsylvania Department of Corrections (PADOC) has been a recent leader among the states in using performance-based contracting in community corrections and prison mental health services to target chronically high recidivism rates, with promising early results. Yet, a proposed bill in the Pennsylvania Senate would impose a new tax on the agency’s private and nonprofit service delivery partners that, counter to its intention, threatens to undermine the cause of recidivism reduction, not support it.

House Bill 453 (as amended in the Senate) would assess a 1% tax on entities contracting with PADOC, covering all contracts over $5 million in annual value. The proceeds from the proposed tax would be dedicated to a new “First Chance Trust Fund” (FCTF) to support scholarships and provide grants to programs aimed at at-risk youth and the children of prison inmates.

While the intention of the FCTF is indeed noble, the proposed tax to fund it has some major downsides, and there are other ways to avoid using limited tax dollars to create this program.

Critique 1: Proposed FCTC Tax Represents Bad Tax Policy

The proposed FCTC tax is bad tax policy for two key reasons:

  • The tax targets productive activity, and does so in an unproductive way:
    • The tax targets various industries providing support services across a spectrum of PADOC activities aimed at helping, not harming, public safety in Pennsylvania. PADOC currently contracts for a wide range of services, including various prison health care services, community corrections, prison food service and inmate telephone services.
    • Public-private partnerships in corrections are governed by complex agreements. Adding another layer of complexity that merely serves the purpose of rebating the government some of the tax dollars it already promised contractors serves no beneficial purpose.
    • To the extent that the tax would divert resources from meeting performance metrics that govern PADOC contracts, the tax is wasteful.
  • Also, the proposed tax violates one of the Tax Foundation’s core principles of tax policy, which is that taxes should be neutral and should not “favor or punish specific industries, activities, and products.”
    • Worse, as written, PADOC has the discretion to selectively apply or waive the imposition of the tax at its own administrative discretion, which undermines the certainty of tax treatment from the perspective of potential PADOC business and nonprofit partners.
    • If the proposed program for at-risk youth is truly a “game changer” and will provide the “first chance” that its sponsors suggest, then why shouldn’t this program be funded out of general revenues, as opposed to a discriminatory tax aimed at one category of businesses and nonprofits?

Critique 2: Proposed Tax Will Increase Public Safety Costs to Taxpayers, Threaten Existing Recidivism Reduction Efforts

In a press release, PADOC Secretary John Wetzel says the new program will have “no cost to taxpayers,” yet tax revenues fund government agencies like PADOC, as well as the contracts they enter.

  • If those contract values increase—which they would in response to the imposition of a new tax—then taxpayer costs will increase, along with the overall costs of recidivism reduction.
    • PADOC should anticipate the reaction from any rational industry player when contracts come up for rebidding, which is that they will simply adjust their bids with an extra 1% cost to make up for it.
  • But even if PADOC were to hold the unrealistic notion that imposing a new tax would not affect pricing—which is the only way “no cost to taxpayers” would hold true—then you would be left with an even more perverse situation: PADOC would be asking their vendors to divert resources away from providing the current level of community corrections, health care and other services aimed at reducing recidivism among inmates.
    • This would effectively represent the PADOC asking its current vendors to skimp on services aimed at reducing recidivism among current offenders in order to divert those funds to a new program aimed at reducing recidivism among at-risk youth, bringing to mind the old adage, “what one hand giveth, the other taketh away.”
  • Thus, the proposed tax isn’t new money. It’s simply cannibalizing streams of existing money—either through overcharging taxpayers through artificially inflated bids or skimping on current service delivery—to avoid having to ask the legislature for additional funds to start a new program.

Critique 3: Proposed Tax Could Spread to Other Agencies, Raising the Costs of State Government

While taxing private sector contractors might represent a political path of least resistance in the short-term, its effects over the longer term could be quite painful, given that the legislation would authorize other state agencies beyond PADOC to impose the same tax on contractors.

  • If other agencies follow suit, the costs of providing transportation, healthcare, K-12 education, higher education, and other services could increase.
  • Given the state’s current $3 billion budget problem, making changes that put upward pressure on costs would be especially devastating.
  • If fiscal challenges persist, the state’s contractors will become an easy revenue target, with a strong temptation to ratchet up the new tax well beyond the 1% level.

Critique 4: Pennsylvania Should Continue to Embrace Innovation in Contracting for Results on Recidivism Reduction and Other Causes

Pennsylvania has recently shown itself as a leader in corrections-related contract innovation. By renegotiating its community corrections contracts, tying financial incentives directly to a contractor’s performance at meeting specified recidivism reduction targets, it achieved an 11% overall recidivism reduction in 2014 alone. PADOC has implemented similar contracts covering the delivery of prison mental health services.

Innovative contracting could also provide a viable, alternative pathway for launching the proposed FCTF:

  • Since 2014, the Commonwealth and several localities attempted to establish privately financed Social Impact Bond (SIB) programs related to criminal justice, public health and education, but they have been unsuccessful in starting one so far.
    • These SIBs look to tap into private capital by tying investor (usually philanthropic) repayment to a program’s ability to meet desirable societal goals. Those providing the capital would see a positive return on investment based on meeting certain performance benchmarks consistent with those goals.
  • If the programs supported by the FCTF can be structured to provide clear, socially desirable benchmarks that represent successes in providing support and resources for at–risk youth, then structuring the FCTF as a privately financed SIB could prove successful, avoiding the need to impose a counterproductive new tax on PADOC contractors.
    • Success could be tied to keeping youth away from prison, or academic achievements in both high school and in higher education.
    • Such a restructuring would provide investors in the SIB with much stronger incentives to forge success in the FCTF than using unrelated private contractors using different recidivism reduction metrics involving the inmates themselves.

Conclusion

House Bill 435, in its modified form, would divert resources away from PADOC contractors to a new First Chance Trust Fund for at-risk youth by taxing contractors an extra 1% tax on contracts whose values exceed $5 million. While certainly well-intentioned, the proposed contractor tax would place upward pressure on corrections costs while inviting imitation by other agencies, all at a time when Pennsylvania and many of its local governments continue to face persistent fiscal pressures that demand reducing, not raising, spending.

Instead of implementing a counterproductive, backdoor tax on PADOC contracts, a potentially better option exists through a social impact bond (SIB) vehicle that would allow motivated investors to invest in projects that work toward socially desirable goals, rewarding SIB investors when stated goals are met. Ensuring at-risk youth have the chance to receive a good education and avoid prison could likely be measured and monitored in ways that make setting up the proposed FCTF as an SIB worthy of consideration, and a superior alternative to the proposed tax.

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

Austill Stuart is a policy analyst at Reason Foundation, a non-profit think tank advancing free minds and free markets.