Existing law imposes various taxes, including taxes on the privilege of engaging in certain activities. The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill, for the privilege of contracting with a state prison, the Department of Corrections and Rehabilitation, or the Department of General Services to provide a state prison with goods, services, or both, would impose a tax on vendors, as defined, at the rate equal to 10% of the final contract price, as defined, for contracts entered into on or after the effective date of the bill. The bill would require all amounts paid, less refunds, to be deposited into the State Incarceration Prevention Fund, which this bill would establish in the State Treasury, and would continuously appropriate those moneys to the State Department of Education for preschool and after school programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs, less the amount needed to reimburse the California Department of Tax and Fee Administration and the Attorney General for costs incurred in administering these provisions. The bill would prohibit this tax from being passed through to the state by way of higher prices for the goods or services in the contract, and would require a vendor to certify under penalty of perjury that this tax was not passed through to the state. The bill would require a vendor to pay a penalty if it fails to comply with these provisions. The bill would require the Attorney General to enforce this prohibition and would authorize the Attorney General to monitor and, if necessary, investigate any instance where a vendor has passed or attempted to pass the tax through to the state. The bill would require the California Department of Tax and Fee Administration to assess and collect the tax imposed by this part pursuant to the Fee Collection Procedures Law and would provide an appeals process for a vendor from which the state incarceration prevention tax is determined to be due, as provided.

By expanding the application of the Fee Collection Procedures Law, the violation of which is a crime, and by expanding the scope of the crime of perjury, this bill imposes a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

ASSEMBLY THIRD READING

ATR Bill Id:AB 2303

Author:(Thurmond)

As Introduced Ver:February 13, 2018

2/3 vote. Urgency

SUMMARY: Imposes a 10% tax on all private, for-profit prisons for the privilege of contracting with the "department" to provide a state prison with goods, services, or both, and establishes the State Incarceration Prevention Fund (SIPF) for preschool and after school programs for the purposes of providing services that prevent people from being incarcerated and providing early intervention programs. Specifically, this bill:

1. Imposes a 10% tax on a "vendor," on or after the effective date of this part, for the privilege of contracting with the "department" to provide a state prison with goods, services, or both.
2. Establishes the SIPF in the State Treasury.
3. Provides that the 10% tax shall be collected annually by the California Department of Tax and Fee Administration (DTF) pursuant to the Fee Collection Procedures (FCP) Law. For purposes of the FCP Law, the fee shall include the 10% tax and the feepayer shall include the vendor.
4. Defines the "department" as including a state prison, the Department of Corrections and Rehabilitation, or the Department of General Services.
5. Defines the "final contract price" as a mutually agreed upon total amount that a department pays to the "vendor" on completion of the contract, in accordance with contract terms and conditions and their subsequent modification, for goods, services, or both.
6. Defines a "vendor" as a private, for-profit prison that contracts with a department to provide a state prison with goods, services, or both.
7. Provides that a determination by a department that a vendor is required to pay the tax, or a determination by that department regarding the amount of that tax, is not subject to a petition for redetermination to the Office of Tax Appeals.
8. Provides that DTF shall not accept any claim for refund that is based on the assertion that a determination by a department improperly or erroneously calculated the amount of the tax, or incorrectly determined that the vendor is subject to that tax, unless that determination has been set aside by that department or a court reviewing the determination of that department. If it is determined by a department or a reviewing court that a vendor is entitled to a refund of all or part of the state incarceration prevention tax, the vendor shall make a claim to DTF.
9. Requires, on or after January 1, a department to annually transmit to DTF the name and address of each vendor that is liable for the tax and the amount of the tax to be assessed. The department shall also provide DTF with a contact number.
10. Requires DTF to assess and collect the tax annually on or before April 1 of each year.
11. Requires DTF to transmit the payments, less refunds, to the Treasury to be deposited into the SIPF.
12. Provides that all amounts deposited into the SIPF will be continuously appropriated without regard to fiscal years to DTF and the Attorney General (AG) to reimburse administrative costs. The remaining amounts shall be appropriated to the State Department of Education to administer grants for preschool and after school programs for the purpose of providing services to prevent people from being incarcerated and providing early intervention programs.
13. Prevents the tax from being passed through to the state by way of higher prices for the goods or services in the contract.
14. Requires the vendor to certify in the contract, under penalty of perjury, that the tax has not been passed on through to the state by way of higher prices for the goods and services in the contract.
15. Allows the AG to monitor and investigate any instances where a vendor has passed or attempted to pass the tax through to the state.
16. Imposes a penalty in an amount not to exceed 1% of the final contract price for each instance the vendor fails to comply with the provisions of this bill.
17. Allows a vendor to petition for redetermination of the tax within 30 days after service upon that vendor of a notice of determination. If a petition for redetermination is not filed within 30 days, the amount determined to be due becomes final. The petition for redetermination must be in writing and state the specific grounds upon which the petition is founded.
18. Provides that if the petition for redetermination is filed within the 30-day period, the department shall reconsider whether the tax is due and make its decision in writing. The department may eliminate the tax if it is determined that this tax does not apply to the vendor.
19. Provides that if a petition for redetermination is filed, all action to collect the tax shall be stayed pending the final decision by the department.
20. Requires that notice of the department's decision be provided to both the vendor and DTF on the same day.
21. Provides that the tax is due and payable at the time the notice becomes final, and if it is not paid when due, the penalty shall be applied.
22. Provides instructions on how to provide written notice.
23. Provides that if the department determines that a refund is owed to the vendor, the vendor shall make a claim to DTF.
24. Provides that an urgency measure is necessary to begin generating funds for early education programs that will prevent incarceration, and that this bill shall go into immediate effect.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California. Sales tax applies to a very limited number of services that are closely connected to sales of TPP, such as mandatory service charges at a restaurant.
2. Imposes a complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to a retailer registered to collect the California use tax, the purchaser remains liable for the tax, unless the use is exempted. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the DTF.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Significant, one-time costs in excess of $200,000 and ongoing annual costs in excess of $350,000 for the administration and enforcement of the proposed tax program, including:
   1. One-time administrative costs of $100,000 and ongoing annual administrative costs in excess of $250,000 for DTF to develop and operate the proposed tax collection program. DTF administrative costs would be reimbursed from the collected tax.
   2. Unknown costs for DOJ to enforce the provision that prohibits vendors from passing the tax onto the state. DOJ enforcement costs would be reimbursed from the collected tax.
   3. Unknown one-time and ongoing annual General Fund costs, likely in excess of $150,000, for the California Department of Correctiosn and Rehabilitation (CDCR) to develop and implement new processes and work with affected vendors.
2. Increased revenue in the range of $18 million per year from a 10% tax on contacts with a total value of approximately $183 million. However, this estimate is subject to significant uncertainty because this bill lacks key definitions.
3. An increase in CDCR contract prices in the range of $18 million annually. While this bill prohibits private prisons from passing the tax on to customers, it is unclear how this will be enforced. It can be reasonably assumed that much of the tax will ultimately be paid by CDCR through increased prices, and not the private prison.

COMMENTS:

1. The author has provided the following statement in support of this bill:

This bill supplements existing prison population reduction efforts by focusing on reducing contact with the criminal justice system in the first instance. By providing high-quality early education opportunities, this bill addresses the school-to-prison pipeline. Studies show that access to high-quality preschool programs results in a 20% lower likelihood of incarceration. Effective after-school programs bring a wide range of benefits to youth, families, and communities.

Current active contracts between private prisons and the Department of Corrections and Rehabilitation total over $200 million, while these companies face allegations of mismanagement and prisoner abuse. By moving money from corrections to education, we can provide children with a high-quality education, reduce incarceration rates, and end the rampant profiteering of an individual's incarceration.

1. Supporters of this bill state "[p]rivate prison contracts continue to generate extraordinary profits as a result of high incarceration rates. Since the election of President Trump, private prison companies have seen a dramatic increase in their stock prices, even as they face continued allegations of mismanagement and prisoner mistreatment." Supporters argue that this bill "will help decrease California's incarceration rates by providing funding for programs that decrease the likelihood that an individual will come into contact with the criminal justice system. Further, it does so by only affecting private prisons that profit financially from an individual's incarceration."
2. Opponents of this bill state that "[c]urrently [the California Department of Corrections and Rehabilitation] contracts out nearly 100 different occupations many of which are handled by small businesses with less than 50 employees. According to the Legislative Analyst's Office, it costs $71,000 to house an inmate for one year, more than the tuition at Harvard University. It seems like that alone should be sufficient rational to continue contracting out more services instead of stifling that economic growth by taxing it."
3. Committee Staff Comments:
   1. What does this bill do? This bill would impose a 10% tax on private, for-profit prisons for the privilege of contracting with the department to provide a state prison with goods or services. AB 2560 (Thurmond) of 2018, a related bill, imposes a progressive tax on all contracts other than those with private prisons or for healthcare services. The funds from this bill's tax would be deposited in a newly created SIPF. These funds would be provided to preschool and after school programs to prevent people from being incarcerated and to provide early intervention programs.
   2. Who pays the tax? This bill requires that none of the tax imposed on prison contracts be passed on to the state, CDCR, or Department of General Services (DGS). Unfortunately, the economic incidence of a tax does not depend on who is legally obligated to pay the tax but instead depends on the price elasticity of demand and the price elasticity of supply. "Elasticity" refers to the degree to which individuals, consumers, or producers change their demand or the amount of supply in response to changes in price or income. Theoretically, the incidence of a tax would fall only on the consumer (i.e., state, CDCR, or DGS) if the demand for services and goods was perfectly inelastic meaning that, irrespective of the price, the quantity of services or goods purchased would be exactly the same. However, there is no such thing as a perfectly inelastic or elastic product; all markets fall between these two extremes, and ultimately the economic incidence of the tax is shared by both producers and consumers. It is, therefore, impossible to ensure that the 10% tax imposed by this bill will not be passed on to the state. Assuming that the provisions of this bill become law, some taxpayers that supply services to prisons might cease providing those services for fear of being investigated by the AG. Alternatively, certain taxpayers may choose to pass on the tax to the state and pay the 1% penalty, which would also be shared by the state.
   3. Future savings: The fact that the tax will inevitably be shared by both the state and the supplier may be an acceptable consequence when one considers the possibility of reducing future incarceration rates. Studies have shown that a number of adult and juvenile justice and prevention programs have resulted in statistically significant reductions in crime and some of those programs may also render significant financial savings^[1]. As an example, functional family therapy (FFT)^[2] costs, on average, $2,380 per juvenile participant and can be expected to reduce recidivism rates by 18.1%, generating about $52,156 in life-cycle benefits^[3]. The net present value of this juvenile justice program is expected to be $49,776 per youth. As another example, cognitive-behavioral programs^[4], which cost about $107 per offender, are expected to reduce recidivism rates by 6.9%, and generate about $15,469 in life-cycle benefits. The author states that similar results have been founds with preschool and afterschool programs.
   4. Taxing services: California charges a sales and use tax on a very small set of services - those that are essentially inseparable from sales of TPP or that are closely connected to sales of TPP, such as mandatory service charges at a restaurant. The 10% tax imposed by this bill functions as a sales tax; although this bill does not outline the number of services that are covered by the tax, this could potentially be the first time a tax is imposed on standalone services.
   5. Earmarked taxes: Revenues generated by this tax are used to pay for preschool and after school programs that prevent people from being incarcerated and to provide early intervention programs. If this tax were to work as envisioned, funding for preschool and prevention programs would reduce future incarceration and recidivism rates which, in turn, would further reduce funding for these programs. In a way, this tax functions almost as a Pigouvian tax although it is unclear if the tax is meant to reduce crime, the rate of incarceration, or profits generated by private companies contracting with state prisons. As noted earlier, the penalty provision in this bill may unintentionally prevent all contracts from being executed and prevent revenue from being generated to fund preschool and after school programs.

The modern criteria for tax design are guided by efficiency, equity, and simplicity. These principles tend to favor broad-based taxes in order to minimize economic efficiency costs and maximize simplicity^[5]. Narrowly based taxes like the one proposed in this bill are not used very often; but if one is to be enacted, a direct link between the tax source and the expenditure should exist. It is true that private companies profit from contracting with state prisons, but these entities are not necessarily responsible for incarcerating individuals. These private companies do not enact sentencing guidelines nor do they necessarily engage in criminal justice policy. This bill also allocates funds to "preschool and afterschool programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs," but most preschools and afterschool programs are not specifically designed as early intervention programs or to prevent people from being incarcerated. It may be, as the author contends, that individuals who participate in preschool and afterschool programs are less likely to be incarcerated but these programs are not specifically designed with that goal in mind. It is, therefore, unclear if a nexus exists between the wide range of industries that provide goods and services to prisons and preschool and afterschool programs, whose primary goal is to educate the public.

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0003105

1. Drake, E.K., Aos, S., & Miller, M.G., Evidence-based public policy options to reduce crime and criminal justice costs: Implications in Washington State. Victims and Offenders (2009); Reynolds, A.J., & Temple, J.A., Prevention and cost-effectiveness in early intervention: A 20-year follow-up of a Child-Parent Center cohort. Minneapolis, McEvoy Lecture Series on Early Childhood and Public Policy, Humphrey Institute of Public Affairs, University of Minnesota (2006); Cohen, M.A., & Piquero, A.R., New evidence on the monetary value of saving a high-risk youth. Journal of Quantitative Criminology (2009). ↑

2. FFT programs involve an FFT-trained therapist working for about three months with a youth in the juvenile justice system and his or her family with the goal of increasing the likelihood that the youth will stay out of future trouble. ↑

3. Life-cycle benefits are measured in terms of the taxpayer and crime victim costs that are avoided because of the reduced long-run level of criminal activity. ↑

4. Cognitive behavior programs are a short-term, goal-oriented psychotherapy treatment that takes a hands-on, practical approach to problem-solving with the goal of changing patterns of thinking or behavior that are behind people's difficulties, and so changing the way they feel. ↑

5. Carling, Tax Earmarking: Is It Good Practice? The Center for Independent Studies (2007). ↑

Date of Hearing: May 2, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2303

Author:(Thurmond) – As Introduced Ver:February 13, 2018

Urgency: Yes State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill imposes a 10% tax on all private, for-profit prisons for the privilege of contracting with the Department of Corrections and Rehabilitation, the Department of General Services (DGS), or a state prison. The California Department of Tax and Fee Administration (CDTFA) will collect the tax each year, and collected taxes will go toward grants for preschool and after school programs.

FISCAL EFFECT:

1. Significant one-time costs in excess of $200,000 and ongoing annual costs in excess of $350,000 for the administration and enforcement of the proposed tax program, including:
2. One-time administrative costs of $100,000 and ongoing annual administrative costs in excess of $250,000 for CDTFA to develop and operate the proposed tax collection program. CDTFA administrative costs would be reimbursed from the collected tax.
3. Unknown costs for DOJ to enforce the provision that prohibits vendors from passing the tax onto the state. DOJ enforcement costs would be reimbursed from the collected tax.
4. Unknown one-time and ongoing annual General Fund costs, likely in excess of $150,000, for CDCR to develop and implement new processes and work with affected vendors.
5. Increased revenue in the range of $18 million per year from a 10% tax on contacts with a total value of approximately $183 million. However, this estimate is subject to significant uncertainty because AB 2303 lacks key definitions. (See Comment #2.)
6. An increase in CDCR contract prices in the range of $18 million annually. While the bill prohibits private prisons from passing the tax on to customers, it is unclear how this will be enforced. It can be reasonably assumed that much of the tax will ultimately be paid by CDCR through increased prices, and not the private prison. (See Comment #3.).

COMMENTS:

1. Purpose. According to the author, AB 2303 will supplement prison population reduction efforts by funding high-quality education opportunities. The author points to studies showing that access to high-quality preschool programs results in a 20% lower likelihood of incarceration.
2. Who is taxed? AB 2303 does not define “private, for-profit prison,” and so the exact universe of affected taxpayers is unknown. As drafted, AB 2303 could affect the California Out-of-State Correctional Facility (COCF) Program, Private Community Correctional Facilities, the California City Correctional Facility, any for-profit Community Transitional Reentry Program and Male Community Reentry Programs. Moreover, CDCR estimates that by Fall 2019, inmates housed in two COCFs will be returned to the state, so there may be fewer taxable vendors in future years.

Tax revenue estimates for AB 2303 are based on proposed 2018-19 spending on contracted facilities for adult corrections and rehabilitation operations, but revenue estimates may be lower if the author chooses to narrow affected vendors.

1. Taxing the state. While supporters argue that AB 2303 pays for certain programs in a way that affects only private prisons, this bill is likely to result in significant costs for CDCR. The provision prohibiting the tax from being passed on to the state is likely unenforceable. Even if vendors did not pass the tax on to the state and DOJ determines it is an enforceable violation, the vender would pay a penalty worth just 1% of the contract price. Therefore, the remaining 9% of the tax would still be paid by the state. Finally, CDCR costs could increase through indirect means such as reduction in available contracting options. In this scenario, a vendor may choose to simply not work with the state, and CDCR would need to find another, and likely more costly, vendor. That new vendor, in anticipation of the 10% tax, would simply charge for its services in that initial agreement.
2. A more efficient way. AB 2303 directs funding to certain preschool and after school programs in a very inefficient manner. The administrative costs associated with the new tax are significant, and the incidence of the tax is likely to fall on the state. A more efficient method would be to directly fund these programs through the state budget. For example, the governor’s proposed 2018-19 budget includes $16 million General Fund for the Statewide Prison to Employment Initiative, which will provide services for regional and local and planning and implementation to integrate reentry and workforce services and direct services to the formerly incarcerated. A similar appropriation to afterschool and preschool programs would result in a more consistent source of funding to these programs without the significant administrative costs and uncertainty associated with this new program.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 16, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 2303 (

Author:Thurmond) – As Introduced Ver:February 13, 2018

2/3 vote. Urgency. Fiscal committee.

SUBJECT: Taxation: prison contracts: goods and services

SUMMARY: Imposes a 10% tax on all private, for-profit prisons for the privilege of contracting with the "department" to provide a state prison with goods, services, or both, and establishes the State Incarceration Prevention Fund (SIPF) for preschool and after school programs for the purposes of providing services that prevent people from being incarcerated and providing early intervention programs. Specifically, this bill:

1. Imposes a 10% tax on a "vendor," on or after the effective date of this part, for the privilege of contracting with the "department" to provide a state prison with goods, services, or both.
2. Establishes the SIPF in the State Treasury.
3. Provides that the 10% tax shall be collected annually by the California Department of Tax and Fee Administration (DTF) pursuant to the Fee Collection Procedures (FCP) Law. For purposes of the FCP Law, the fee shall include the 10% tax and the feepayer shall include the vendor.
4. Defines the "department" as including a state prison, the Department of Corrections and Rehabilitation, or the Department of General Services.
5. Defines the "final contract price" as a mutually agreed upon total amount that a department pays to the "vendor" on completion of the contract, in accordance with contract terms and conditions and their subsequent modification, for goods, services, or both.
6. Defines a "vendor" as a private, for-profit prison that contracts with a department to provide a state prison with goods, services, or both.
7. Provides that a determination by a department that a vendor is required to pay the tax, or a determination by that department regarding the amount of that tax, is not subject to a petition for redetermination to the Office of Tax Appeals.
8. Provides that DTF shall not accept any claim for refund that is based on the assertion that a determination by a department improperly or erroneously calculated the amount of the tax, or incorrectly determined that the vendor is subject to that tax, unless that determination has been set aside by that department or a court reviewing the determination of that department. If it is determined by a department or a reviewing court that a vendor is entitled to a refund of all or part of the state incarceration prevention tax, the vendor shall make a claim to DTF.
9. Requires, on or after January 1, a department to annually transmit to DTF the name and address of each vendor that is liable for the tax and the amount of the tax to be assessed. The department shall also provide DTF with a contact number.
10. Requires DTF to assess and collect the tax annually on or before April 1 of each year.
11. Requires DTF to transmit the payments, less refunds, to the Treasury to be deposited into the SIPF.
12. Provides that all amounts deposited into the SIPF will be continuously appropriated without regard to fiscal years to DTF and the Attorney General (AG) to reimburse administrative costs. The remaining amounts shall be appropriated to the State Department of Education to administer grants for preschool and after school programs for the purpose of providing services to prevent people from being incarcerated and providing early intervention programs.
13. Prevents the tax from being passed through to the state by way of higher prices for the goods or services in the contract.
14. Requires the vendor to certify in the contract, under penalty of perjury, that the tax has not been passed on through to the state by way of higher prices for the goods and services in the contract.
15. Allows the AG to monitor and investigate any instances where a vendor has passed or attempted to pass the tax through to the state.
16. Imposes a penalty in an amount not to exceed 1% of the final contract price for each instance the vendor fails to comply with the provisions of this bill.
17. Allows a vendor to petition for redetermination of the tax within 30 days after service upon that vendor of a notice of determination. If a petition for redetermination is not filed within 30 days, the amount determined to be due becomes final. The petition for redetermination must be in writing and state the specific grounds upon which the petition is founded.
18. Provides that if the petition for redetermination is filed within the 30-day period, the department shall reconsider whether the tax is due and make its decision in writing. The department may eliminate the tax if it is determined that this tax does not apply to the vendor.
19. Provides that if a petition for redetermination is filed, all action to collect the tax shall be stayed pending the final decision by the department.
20. Requires that notice of the department's decision be provided to both the vendor and DTF on the same day.
21. Provides that the tax is due and payable at the time the notice becomes final, and if it is not paid when due, the penalty shall be applied.
22. Provides instructions on how to provide written notice.
23. Provides that if the department determines that a refund is owed to the vendor, the vendor shall make a claim to DTF.
24. Provides that an urgency measure is necessary to begin generating funds for early education programs that will prevent incarceration, and that this bill shall go into immediate effect.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California. Sales tax applies to a very limited number of services that are closely connected to sales of TPP, such as mandatory service charges at a restaurant.
2. Imposes a complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to a retailer registered to collect the California use tax, the purchaser remains liable for the tax, unless the use is exempted. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the DTF.

FISCAL EFFECT: Unknown

COMMENTS:

1. The author has provided the following statement in support of this bill:

This bill supplements existing prison population reduction efforts by focusing on reducing contact with the criminal justice system in the first instance. By providing high-quality early education opportunities, this bill addresses the school-to-prison pipeline. Studies show that access to high-quality preschool programs results in a 20 percent lower likelihood of incarceration. Effective after-school programs bring a wide range of benefits to youth, families, and communities.

Current active contracts between private prisons and the Department of Corrections and Rehabilitation total over $200 million, while these companies face allegations of mismanagement and prisoner abuse. By moving money from corrections to education, we can provide children with a high-quality education, reduce incarceration rates, and end the rampant profiteering of an individual's incarceration.

1. Supporters of this bill state "[p]rivate prison contracts continue to generate extraordinary profits as a result of high incarceration rates. Since the election of President Trump, private prison companies have seen a dramatic increase in their stock prices, even as they face continued allegations of mismanagement and prisoner mistreatment." Supporters argue that this bill "will help decrease California's incarceration rates by providing funding for programs that decrease the likelihood that an individual will come into contact with the criminal justice system. Further, it does so by only affecting private prisons that profit financially from an individual's incarceration."
2. Opponents of this bill state that "[c]urrently [the California Department of Corrections and Rehabilitation] contracts out nearly 100 different occupations many of which are handled by small businesses with less than 50 employees. According to the Legislative Analyst's Office, it costs $71,000 to house an inmate for one year, more than the tuition at Harvard University. It seems like that alone should be sufficient rational to continue contracting out more services instead of stifling that economic growth by taxing it."
3. Committee Staff Comments:
   1. What does this bill do? This bill would impose a 10% tax on private, for-profit prisons for the privilege of contracting with the department to provide a state prison with goods or services. AB 2560 (Thurmond), a related bill, imposes a progressive tax on all contracts other than those with private prisons or for healthcare services. The funds from this bill's tax would be deposited in a newly created SIPF. These funds would be provided to preschool and after school programs to prevent people from being incarcerated and to provide early intervention programs.
   2. Who pays the tax? This bill requires that none of the tax imposed on prison contracts be passed on to the state, DCR, or DGS. Unfortunately, the economic incidence of a tax does not depend on who is legally obligated to pay the tax but instead depends on the price elasticity of demand and the price elasticity of supply. "Elasticity" refers to the degree to which individuals, consumers, or producers change their demand or the amount of supply in response to changes in price or income. Theoretically, the incidence of a tax would fall only on the consumer (i.e., state, DCR, or DGS) if the demand for services and goods was perfectly inelastic meaning that, irrespective of the price, the quantity of services or goods purchased would be exactly the same. However, there is no such thing as a perfectly inelastic or elastic product; all markets fall between these two extremes, and ultimately the economic incidence of the tax is shared by both producers and consumers. It is, therefore, impossible to ensure that the 10% tax imposed by this bill will not be passed on to the state. Assuming that the provisions of this bill become law, some taxpayers that supply services to prisons might cease providing those services for fear of being investigated by the AG. Alternatively, certain taxpayers may choose to pass on the tax to the state and pay the 1% penalty, which would also be shared by the state.
   3. Future savings: The fact that the tax will inevitably be shared by both the state and the supplier may be an acceptable consequence when one considers the possibility of reducing future incarceration rates. Studies have shown that a number of adult and juvenile justice and prevention programs have resulted in statistically significant reductions in crime and some of those programs may also render significant financial savings^[1]. As an example, functional family therapy (FFT)^[2] costs, on average, $2,380 per juvenile participant and can be expected to reduce recidivism rates by 18.1%, generating about $52,156 in life-cycle benefits^[3]. The net present value of this juvenile justice program is expected to be $49,776 per youth. As another example, cognitive-behavioral programs^[4], which cost about $107 per offender, are expected to reduce recidivism rates by 6.9%, and generate about $15,469 in life-cycle benefits. The author states that similar results have been founds with preschool and afterschool programs.
   4. Taxing services: California charges a sales and use tax on a very small set of services - those that are essentially inseparable from sales of TPP or that are closely connected to sales of TPP, such as mandatory service charges at a restaurant. The 10% tax imposed by this bill functions as a sales tax; although this bill does not outline the number of services that are covered by the tax, this could potentially be the first time a tax is imposed on standalone services.
   5. Earmarked taxes: Revenues generated by this tax are used to pay for preschool and after school programs that prevent people from being incarcerated and to provide early intervention programs. If this tax were to work as envisioned, funding for preschool and prevention programs would reduce future incarceration and recidivism rates which, in turn, would further reduce funding for these programs. In a way, this tax functions almost as a Pigouvian tax although it is unclear if the tax is meant to reduce crime, the rate of incarceration, or profits generated by private companies contracting with state prisons. As noted earlier, the penalty provision in this bill may unintentionally prevent all contracts from being executed and prevent revenue from being generated to fund preschool and after school programs.

The modern criteria for tax design are guided by efficiency, equity, and simplicity. These principles tend to favor broad-based taxes in order to minimize economic efficiency costs and maximize simplicity^[5]. Narrowly based taxes like the one proposed in this bill are not used very often; but if one is to be enacted, a direct link between the tax source and the expenditure should exist. It is true that private companies profit from contracting with state prisons, but these entities are not necessarily responsible for incarcerating individuals. These private companies do not enact sentencing guidelines nor do they necessarily engage in criminal justice policy. This bill also allocates funds to “preschool and afterschool programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs,” but most preschools and afterschool programs are not specifically designed as early intervention programs or to prevent people from being incarcerated. It may be, as the author contends, that individuals who participate in preschool and afterschool programs are less likely to be incarcerated but these programs are not specifically designed with that goal in mind. It is, therefore, unclear if a nexus exists between the wide range of industries that provide goods and services to prisons and preschool and afterschool programs, whose primary goal is to educate the public.

• 1. Related Legislation: AB 2560 (Thurmond) imposes a progressive tax for the privilege of contracting with the department to provide a state prison with goods or services. The revenues generated from AB 2560 would also be deposited in a newly created SIPF. Unlike this bill, AB 2560 imposes the tax on a broader group of vendors. AB 2560 will be heard by this Committee today.
  2. Hello Again: AB 43 (Thurmond), would have enacted provisions similar to this bill. AB 43 was held on the Assembly Committee on Appropriations’ Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

California Alternative Payment Program Association

California Federation of Teachers

California for Justice

California Teachers Association

First 5 Contra Costa

LA's Best After School Enrichment Program

National Association of Social Workers

Partnership for Children & Youth

Rubicon Programs

Think Together

Opposition

Howard Jarvis Taxpayers Association

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. Drake, E.K., Aos, S., & Miller, M.G., Evidence-based public policy options to reduce crime and criminal justice costs: Implications in Washington State. Victims and Offenders (2009); Reynolds, A.J., & Temple, J.A., Prevention and cost-effectiveness in early intervention: A 20-year follow-up of a Child-Parent Center cohort. Minneapolis, McEvoy Lecture Series on Early Childhood and Public Policy, Humphrey Institute of Public Affairs, University of Minnesota (2006); Cohen, M.A., & Piquero, A.R., New evidence on the monetary value of saving a high-risk youth. Journal of Quantitative Criminology (2009). ↑

2. FFT programs involve an FFT-trained therapist working for about three months with a youth in the juvenile justice system and his or her family with the goal of increasing the likelihood that the youth will stay out of future trouble. ↑

3. Life-cycle benefits are measured in terms of the taxpayer and crime victim costs that are avoided because of the reduced long-run level of criminal activity. ↑

4. Cognitive behavior programs are a short-term, goal-oriented psychotherapy treatment that takes a hands-on, practical approach to problem-solving with the goal of changing patterns of thinking or behavior that are behind people's difficulties, and so changing the way they feel. ↑

5. Carling, Tax Earmarking: Is It Good Practice? The Center for Independent Studies (2007). ↑