This post started out as a simple link to a lengthy and interesting report on the market for inmate labor--it's cheap, compliant, and has few protections. It's also state aid/corporate welfare, as the authors note:
In both the North and the South, the contracting out of convict labor was one way in which that state-assisted mechanism of capital accumulation arose. Contracts with the government assured employers that their labor force would be replenished anytime a worker got sick, was disabled, died, or simply became too worn out to continue.
...Penal institutions all over the country became auxiliary arms of capitalist industry and commerce. Two-thirds of all prisoners worked for private enterprise.
Today, strikingly enough, government is again providing subsidies and tax incentives as well as facilities, utilities, and free space for corporations making use of this same category of abjectly dependent labor.
But this post has turned into a lengthy discussion of the "subsidies and tax incentives" referred to in the article, and why the subsidy described is a case in point of "attractive complexity," to borrow a phrase.Now, I do not disagree with the authors of the article that using prison laborers is inherently state aid and corporate welfare: it seems to me the legalized underpayment of the laborers is by itself sufficiently a subsidy to warrant the concern. But I want to take a closer look at what the authors mean by "tax incentives" for corporations using prison labor. I am not aware of such incentives, so I looked to be illuminated by clicking on the link the authors have provided under the word "subsidies".The link takes us to UNICOR where you can read about the work opportunity tax credit (WOTC), which may be available to "[l]ow income ex-offenders (Economically disadvantaged individuals who have been convicted of a felony or released from a prison in the 12 months prior to hire)."--that doesn't look like a subsidy or a tax incentive for prison labor, but let's take a closer look.The WOTC was enacted a part of the "Vow to Hire Heroes Act", P.L. 112-56, signed into law in November 2011. Never heard of it? That's because there was virtually no press coverage of it and anyway who would vote against a law that vowed to hire heroes? Oh, it turns out quite a few people would vote against it when you find out that the vow to hire heroes involves in fact a vow "[t]o amend the Internal Revenue Code ... to repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities."This is a lot less interesting than hiring heroes, and does it ever bring you down the rabbit hole of what legislation is called vs what legislation actually does. This heroic legislation appears instead to be a tax cut of some kind for vendors under government contractors. Here is the relevant legislative text:
TITLE I--THREE PERCENT WITHHOLDING REPEAL AND JOB CREATION ACTSEC. 101. SHORT TITLE.This title may be cited as the '3% Withholding Repeal and Job Creation Act'.SEC. 102. REPEAL OF IMPOSITION OF 3 PERCENT WITHHOLDING ON CERTAIN PAYMENTS MADE TO VENDORS BY GOVERNMENT ENTITIES.(a) In General- Section 3402 of the Internal Revenue Code of 1986 is amended by striking subsection (t).(b) Effective Date- The amendment made by this section shall apply to payments made after December 31, 2011.
What, you don't know what the repealed s. 3402(t) said? Me neither. So let's look at that. It seems 3402(t) imposed a 3% withholding tax on all payments made under government services contracts. Is this really the subsidy for hiring prison labor that bothers the authors of the article? The work opportunity tax credit itself doesn't seem to help vendors--it might help the workers (though I don't even think they are a "targeted group") but not the employers. The rest of the vow to hire heroes act is about using VA funds for retraining. But if this repeal of the 3% tax is the problem, it doesn't seem to warrant the subsidy label.This is because as we know, a withholding tax is not a surtax but simply a mechanism for withholding taxes, and you get credit for the withholding when you fill out your income taxes, so it seems like 3402(t) is just an administrative provision, what is the big deal? In other words, where is the subsidy if you repeal the withholding? But there is another complication here: it seems 3402(t) withheld amounts were creditable only against "income" taxes, and not "employment" taxes, i.e., not the employer-portion of social security/FICA/FUTA type taxes.This means, it seems, that under 3402(t), the government would withhold 3% from payments made under government contracts, and the vendors in those contracts would be paying, in effect, a flat 3% excise tax that would not be deductible against the employer's share of social security taxes owed in respect of its employees, but only against the vendor's income taxes. If the vendor was a small business with low income itself, the 3% acts like a flat 3% income tax floor that disappears once the vendor's actual income tax is sufficient to soak up the withheld tax. Yes, an AMT for vendors with government contracts. But both the withholding tax and the repeal seem like really small potatoes--the AMT only kicks in if your income is tiny and then only imposes a tiny alternative tax.So first, why in the world would Congress write a tiny AMT for government vendors, and then why would they repeal it? The answer to the former may be revenue raising--3402 was enacted under the Tax Increase Prevention Act of 2005 (TIPRA), in which it was, of course, not a tax increase prevention but in fact a tax increase for some, but so obscure, who would notice? (there are other revenue raisers in TIPRA, such as in the context of the s. 911 foreign earned income tax exemption, so this is not shocking despite the contrary title). And the answer to the latter might be, enacting job creating legislation is trendy, and it's better if the legislation is viscerally appealing but doesn't cost too much.So now we get to [see] how it is that an act vowing to hire heroes turns up looking like a "subsidy" for vendors using prison laborers: previously, all vendors had a tiny AMT imposed on their government contracts, and now they don't; some government vendors use prison labor; ergo vendors using prison labor just got a tiny tax cut in the form of tiny AMT repeal.As a subsidy it looks pretty obscure. Perhaps I am missing something fundamentally obvious to someone in the industry, or in the business of tax accounting for government contracts. But looking at the Congressional record on the subject, it seems like a dog and pony show.The GOP's statement on the repeal begins with this:
The effect of the repeal of the withholding requirement would be to avoid a decrease in cash flow to these contractors, which would allow them to retain these funds and use them to create jobs and pay suppliers. This would complement the Administration's other efforts to help small businesses.
And from its sponsor, Tim Johnson (R) of Illinois:
Mr. Speaker, H.R. 674 is an extremely crucial piece of legislation that will permanently repeal the 3 percent withholding requirement on all government contracts. ... H.R. 674 will remove any uncertainty from contractors that this tax would eventually be placed upon them.
During these difficult economic times, this extra tax would limit access to capital, increase operating expenses, and take money out of local economies fortunate enough to have contracts to build infrastructure. That means, not only would businesses be burdened, but whole communities as well, because these local contractors would not be able to hire more local workers. As a result, infrastructure projects would slow, further burdening businesses, communities, and citizens that rely on infrastructure for transportation to work, running water for their families, and interstates to move goods and services.
That's a lot of faith in the incentivizing effects of a tiny tax cut that probably isn't even a tax cut at all for the majority of vendors. Crucial? It's hardly even noticeable.Coming back up from the rabbit hole, maybe these are subsidies and tax incentives for hiring prison labor, and if so, we can see why they might be provocative when labelled as such. But equally, we can catch a glimpse of just how fragile our hopes might be for the tax-cut-fueled job creation effort, and we can confirm what Steve Dean has shown: that a lot of the complexity of the code is really deliberately manufactured out of politics. Attractive complexity: it attracts politicians and it attracts controversy.
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You may have been sent to the wrong Unicor page originally. Many states offer an "Inmate Labor credit" of as much as 10% of wages paid: https://www.ftb.ca.gov/forms/2010/10_3507.pdf.
Once out of prison an employer can then receive up to 35% of wages paid as a tax credit: http://www.unicor.gov/about/about_fpi_programs/inmate_transition/ippwotcredit.cfm.
It also allows a "Work Opportunity Tax Credit" WOTC of $2,400.00 per ea. ex offender employed - and free bonding insurance provided by the Gov.: http://www.wiep.uscourts.gov/employment/Employment_Brochure.pdf.
Hope this helps you understand that businesses get tax credits for employing inmates while in prison under the federal Prison Industry Enhancement Certification Program (PIECP) and after release can get additional tax credits for employing the ex-offender.
Prison Industry Consultant
and Advisor to PHEWA's
Criminal Justice Network