As federal detention centers continue to capture headlines, state correctional facilities and the property tax principles that govern them offer an interesting look at the fiscal implications these structures can carry. Generally, government-owned property on the state and local level is per se exempt from property tax. Even if a state’s laws do not specifically address the tax treatment of detention centers, prisons, or jails, these facilities are often covered by the standard “owned by a governmental entity and used for public purposes” exemption found in most state tax codes.
However, when governments contract with private companies to construct and/or operate these facilities, the tax treatment can vary. In most cases, ownership is the determining factor. When the facility is owned by a private company, the general rule is that the company will owe property tax. If instead the government retains ownership of the facility but enters into agreement with the private company to service or run its day-to-day activities, then no property tax is due.
When it comes to leases, states like Oregon and Minnesota specify that “publicly owned” property leased to a private for-profit entity is taxable as if owned by the private entity. In Texas, however, if that private entity uses the property for a “public purpose,” it will be considered exempt. Under that provision, “public purpose” specifically includes property “located on land owned by the Texas Department of Criminal Justice.”
In cases where neither party incurs a property tax liability, certain states encourage or even require the formation of payment in lieu of tax (PILOT) agreements with the facility-hosting city or county. Interestingly, states themselves are not always exempt from these payments. For example, Rhode Island offers compensation to local governments for state-owned and operated correctional facilities that are occupied by more than 100 residents at 27 percent of its would-be taxable value. In Connecticut, the state contributes “grants” in lieu of property taxes for facilities administered by its Department of Correction—worth up to 100 percent of the property taxes that would have been levied.
Though ownership of these facilities often implicates liability on a base level, it's clear from the examples above that state application of property tax can depend on more than just that.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think more states should enter into PILOT agreements with local governments?
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