chapter 11. effect of taxes and financial incentives on ... · to fees paid to a consulting...

261chAPTeR 11. Effect of Taxes and Financial Incentives on Family-Owned Forest Land

JohnL.Greene,ThomasJ.Straka, andTamaraL.Cushing1

key FiNDiNGS

• FederalandStatetaxesreducethepre-taxvalueoffamily-ownedforestlandintheSouthbyamountsrangingfromlittlemorethanone-quartertonearlyhalf,withthegreatestshareofthereductionattributabletotheFederalincometaxandStatepropertytaxes.

•MostfamilyforestownersareawareofsomegeneralbusinessprovisionsoftheFederalincometax,buthalforfewerareawareofprovisionsspecificallyforforestsandotherworkinglands,suchasthereforestationincentivesandspecialtreatmentofqualifyingcost-sharepayments.

• Forfamilyforestownerswhodonotgrowtimberforsale,Statepropertytaxesareofgreaterconcernthananyothertax,becausetheyoccurannuallyandareperceivedasbeinghighinrelationtothevalueoftheland.

• State-to-Statevariabilityinpropertytaxesproducesrelativedisadvantagestoholdingforestlandandlikelycontributestoconversionoffamily-ownedforestlandinStatesthattaxpropertyathigherrates.

•OwnersoffamilyforestsandotherworkinglandsaremanytimesmorelikelythanU.S.taxpayersingeneraltoincurtheFederalestatetax.Oftheforestestatesthatoweestatetax,40percentselltimberorlandtopaypartorallofthetax,withroughlyone-quarteroftheacressoldconvertedtootheruses.

• Financialincentiveprogramsaregenerallysuccessfulinpromotingsustainablepracticesamongthefamilyforestownerswhoparticipateinthem,butfundinglevelsandownerconfusionabouttherequirementstoapplyforandparticipateintheprogramslimitthenumberofacresthataretreated.

1JohnL.GreeneisanEmeritusScientist,ForestEconomicsandPolicyResearchWorkUnit,SouthernResearchStation,U.S.DepartmentofAgricultureForestService,ResearchTrianglePark,NC27709;ThomasJ.StrakaisaProfessorofForestryandNaturalResourcesandTamaraL.CushinganAssistantProfessorandExtensionForestrySpecialist,DepartmentofForestryandNaturalResources,ClemsonUniversity,Clemson,SC29634.

iNTRoDucTioN

Taxesonforest-relatedincome,forestland,andforestproductscanencourageorinhibitprivateinvestmentinforestresourcemanagement.Infinancialanalyses,taxesrankwithharvestreturnsandrotationlengthasakeydeterminantoftheviabilityofforestmanagementinvestments.Assuch,theyconstituteanimportantpartoftheoperatingenvironmentforownersandmanagersofprivateforestland,andacriticalfactorindeterminingthelevelofstewardshippracticedandthetypesofproductsandservicesprovided.Forunitsofgovernment,taxesrepresentasignificantsourceoffundingandapowerfultoolforpursuingsocietalgoals.Thesecharacteristicscombinetomakeeffectiveintegrationoftaxconsiderationsbothproblematicandessentialforforestowners,managers,investors,electedofficials,andnaturalresourcepolicymakers.

Ofthe751millionacresofforestlandintheUnitedStates,35percent(264millionacres)isownedbyfamilies—definedtoincludeindividuals,marriedcouples,estates,trusts,andotherunincorporatedgroupsofindividuals—and18percent(138millionacres)isownedbyforestindustry(Butler2009).PrivateforestownershipisevenmoreprevalentintheSouth,with59percentofforestland(128millionacres)heldbyfamilies(ButlerandLeatherberry2004)and27percent(57millionacres)heldbyforestindustry(Smithandothers2009).

ThischapteraddressestheeffectofFederal,State,andlocaltaxesonfamily-ownedforestsintheSouth.Theeffectoftaxesonlandownedbyforestindustryandthecomparativeadvantagesofdifferentbusinessorganizationalmodelsarediscussedinchapter6.

The Federal income Tax

TheFederalincometaxwasestablishedin1913,underthe16thamendmenttotheU.S.Constitution.Theearliestprovisionsthatrecognizetheuniquecharacterofforestmanagementdateto1918(DanaandFairfax1980).TheFederalincometaxhasthegreatestpotentialofanytaxtoaffectfamilyforestowners,becauseitappliestoincomefromallsourcesandtheratesarehighcomparedwithothertaxes.Theeconomiceffect

Chapter 11. effect of Taxes and Financial incentives on Family-owned Forest land

262The Southern Forest Futures Project

ofanincometaxistoincreasethevariablecostofowningormanagingforests.Itthereforeinfluenceshowintensivelyownersmanagetheirholdings(Gregory1972).

Sinceitsinstitution,anumberofprovisionshavebeenaddedtotheFederalincometaxthathelpfamilyforestownerskeeptheirlandinforestandmanageitsustainably.Somearegeneralbusinessprovisions,whileothersarespecificallyforownersofforestsandotherworkinglands.Amongthemostimportantofthegeneralprovisionsare(Greeneandothers2013):

Long-term capital gain treatment of qualifying income—Incomefromthesaleoftimberheldformorethan12monthsgenerallyqualifiesasa“long-termcapitalgain.”Long-termcapitalgainscurrentlyaretaxedtoindividualsatamaximumrateof20percent(comparedwith39.6percentforordinaryincome)andaminimumrateof0percent(comparedwith10or15percentforordinaryincome;CCH2013).Capitalgainsenjoyotheradvantagesoverordinaryincome:theyarenotsubjecttoself-employmenttaxes,atratesupto15.3percent,andtheydonotcounttowardtheamountofincomeretiredpersonsmayearnbeforetheirSocialSecuritybenefitsarereduced.Further,largelossesincapitalinvestmentsmayonlybeappliedagainst$3,000ofordinaryincomeperyear,butagainstanyamountofcapitalgains.

Depletion deduction—Ownerswhosellordisposeoftimberorsuchothernaturalresourcesasoilormineralscanrecovertheirinvestmentintheresourcesoldthroughadepletiondeduction.Thedeductionisequaltotheowner’s“basis”(ameasureofinvestmentinacapitalasset)ineachunitoftheresourcesold.Thisdeductionisavailabletoallownerswhoholdtheirforestfortheproductionofincome,whetherasaninvestmentorpartofatradeorbusiness.

Annual deduction of management costs—Ownersmaydeductthecostofforestmanagementpracticesannually,astheyoccur.Thisdeductiondoesnotapplytoreforestation,whichhasitsownprovisions(seebelow),butdoesapplytofeespaidtoaconsultingforesterorthecostofbrushcontrol,thinning,mid-rotationfertilization,timberstandimprovement,controlofinsectsanddiseases,maintenanceofroadsandfirebreaks,andsimilarpractices,aslongastheyareordinaryandnecessaryfortimbermanagementandrelatedtotheincomepotentialoftheforest.Thisdeductionalsoisavailabletoallownerswhoholdtheirforestfortheproductionofincome.Investors,however,musttakeitasa“miscellaneousitemizeddeduction,”whichcombinedwithothersuchexpensesisdeductibleonlytotheextentitexceeds2percentoftheir“adjustedgrossincome.”

Depreciation deductions—Ownerscanrecoverinvestmentsinqualifyingincome-producingproperty—includingmachinery,buildings,equipment,fences,culverts,and

bridges—asitlosesvalueovertimeduetowearandtear,age,deterioration,orobsolescence.Depreciationdeductionsareavailabletoallownerswhoholdtheirforeststoproduceincome,althoughinvestorsagainmustreportthemasmiscellaneousitemizeddeductionssubjecttothe2percentofadjustedgrossincomefloor.Undercurrentlaw,ownersalsomayelecttotakeafirst-year“bonus”depreciationdeductionequalto100percentofthecostofnewproperty“placedinservice”(availableandreadyforuse)betweenSep.9,2009,andtheendof2011.ThebonusdepreciationdeductionfornewpropertyplacedinservicebeforeSep.9,2009,orduring2012or2013,is50percentofitscost(CCH2010,CCH2013).

The section 179 deduction—Ownerswhoholdtheirforestaspartofatradeorbusinessmayelecttodeductpartorallofthecostofcertaintypesofpropertyinsteadofcapitalizinganddepreciatingit.Thisdeductionisnotavailabletoinvestors,trusts,orestates.Qualifyingpropertyincludestangiblepersonalproperty,butnotimprovementstoland,buildings,orcomponentsofbuildings.For2010throughtheendof2013,themaximumamountofthedeductionis$500,000,reducedby$1foreachdollarover$2millionofsection179propertyplacedinserviceduringtheyear(CCH2010,CCH2013).

Loss deductions—Allownerswhoholdtheirforestlandtoproduceincomemayrecovertheamountoftheirbasisintimberorotherpropertylostinacasualtyevent,theft,orcondemnation.Ownerswhoholdtheirforestaspartofatradeorbusinessalsomayrecovertheirbasisinpropertylostinanoncasualtyevent.(Ownerswhoholdtheirforestforpersonaluse,withoutaprofitmotive,canrecovertheirbasisintimberorotherpropertylostinacasualtyevent,theft,orcondemnationonlytotheextentthatalllossesinayear,minus$100perevent,exceed10percentoftheiradjustedgrossincome.)Ifincome-producingpropertyisdamagedratherthandestroyed,theownermustmakeanefforttosalvageit.Sinceowners’basisintheirtimbertypicallyislowerthanitsactualvalue,asalvageharvestofdamagedtimberoftenresultsinataxablegainratherthanaloss.Buttheownercanpostponerecognitionofthegain,andthetaxonit,byusingthegaintorestoreorreplacethedamagedpropertywithintheallowablereplacementperiod,usually2years.

Theprovisionsforownersofforestsandotherworkinglandsinclude(Greeneandothers2013):

Reforestation incentives—Allownerswhoholdforestlandfortheproductionofincomemaydeductoutrightqualifyingreforestationcostsupto$10,000peryearand“amortize”(writeoffoverasetperiod)anyadditionalamountover8taxyears.

Special treatment of qualifying cost-share payments—Landownersmayelecttoexcludeacalculatedportionof


qualifyingpubliccost-sharepaymentsfromtheirgrossincome.Currently,cost-sharepaymentsfromnineFederalprograms—theConservationReserveProgram,EmergencyForestRestorationProgram,EmergencyWatershedProtectionProgram,EnvironmentalQualityIncentivesProgram,ForestHealthProtectionProgram,LongleafPineInitiative,StateAcresforWildlifeEnhancement,WetlandsReserveProgram,andWildlifeHabitatIncentivesProgram(table11.1)—aswellasanumberofStateprogramsareapprovedforexclusion.Becauseofthewaytheexcludableportioniscalculated,itislikelythatthefullamountofacost-sharepaymentwillbeexcludableiftheaffectedareahasbeenharvestedinthepast3years,butonlyafractionwillbeexcludableitifhasnot.

Enhanced charitable deduction for a qualifying donation of interest in land—Landownersmaytakeacharitablecontributiondeductionfordonationofaninterestinland.Toqualifyforadeduction,thedonationmustconsistofaqualifiedrealpropertyinterest,madetoagovernmentagencyorqualifiedpublicly-supportedorganization,foroneoffourconservationpurposes(see“IncentivesforConservationEasements”).Undercurrentlaw,theannuallimitforthisdeductionis100percentofadjustedgrossincomeforownerswhoearnmorethanhalfoftheirgrossincomefromfarming(definedtoincludeforestland)orranching,and50percentofadjustedgrossincomeforotherowners(LandTrustAllianceWebsite2011).

Thetaxratesanddeductionlimitsforfouroftheaboveprovisionsaretemporary,andwereoriginallyputinplacebylawsenactedbetween2001and2008,collectivelycalledtheBushtaxcuts:

•Thereducedtaxratesforlong-termcapitalgainswereputinplacebytheJobsandGrowthTaxReliefReconciliationActof2003(P.L.108-27),andwerescheduledtosunsetattheendof2010.

•Bonusdepreciation,previouslyavailableonlytotaxpayersaffectedbyaPresidentially-declareddisaster,wasmadegenerallyavailablebytheEconomicStimulusActof2008(P.L.110-185)andextendedthroughtheendof2009(throughtheendof2010forcertainpropertywithalongproductionperiod)bytheAmericanRecoveryandReinvestmentActof2009(P.L.111-5).

•Theincreasedsection179deductionwasputinplacebyTheEconomicStimulusActof2008(P.L.110-185),thenincreasedfurtherandextendedthroughtheendof2011bytheHiringIncentivestoRestoreEmploymentandSmallBusinessJobsActsof2010(P.L.111-147and111-240,respectively).

•TheenhancedcharitabledeductionforaqualifyingdonationofinterestinlandwasputinplacebythePensionPreservationActof2006(P.L.109-280)andextendedthroughtheendof2009bythe2008FarmBill(P.L.110-246).

Asaresult,theprovisionseitherexpiredattheendof2009orweresettoexpireattheendof2010or2011.TheTaxRelief,UnemploymentInsuranceReauthorization,andJobCreationAct(2010TaxReliefAct,P.L.111-312),signedintolawDec.17,2010,reinstatedallfourprovisionsandextendedthemthroughtheendof2012(CCH2010).TheAmericanTaxpayerReliefActof2012(P.L.112-249),signedintolawJan.2,2013,replacedthefirstthreetemporaryprovisionswithpermanentonesandextendedtheenhancedcharitablededucationfordonationofaninterestinlandthroughtheendof2013,preventingallfourprovisionsfromreturningtopre-2002law(CCH2013).

State income Taxes

AllbutthreeoftheSouthernStatestaxincometoindividuals.TheexceptionsareFloridaandTexas,whichdonotlevyanindividualincometax,andTennessee,whichtaxesonlydividendandinterestincome(table11.2).MostStatesthattaxincometoindividualsuseFederaladjustedgrossincomeorFederaltaxableincomeasthestartingpointforcalculatingtheStatetax(Cushing2006);however,theydifferwidelyinhowtheysettaxrateschedules,incorporatepersonalexemptionsanditemizeddeductions,andtreatretirementincomeandcapitalgains(Butlerandothers2010).BecauseofthecloselinkbetweenFederalandStateincometaxes,mostFederaltaxprovisionsthatbenefitfamilyforestownersflowthroughtotheStateincometax(Siegelandothers1996).

Stateincometaxrateschedulesgenerallyrampupquickly.InallSouthernStatesexceptKentuckyandGeorgia,thethresholdforthetoptaxrateisbelowtheceilingforthe15-percentFederaltaxbracket,thesecond-lowestbracket(Bankrate.com2011).ButthetopmarginalStatetaxratesrangeonlyfrom5percentto8percent,wellbelowthetopFederalratesforeithercapitalgains(20percent)orordinaryincome(39.6percent).Forthisreason,althoughStateincometaxeshavethesameeconomiceffectastheFederaltax,theirqualitativeimpactissmaller.

State Property and harvest Taxes

Stateandlocalgovernmentshaveleviedtaxesonlandandotherformsofpropertysincethecolonialperiod,withprovisionswhichrecognizethattaxinglandandtimbertogetherencouragesdeforestationdatingtothe1860s(DanaandFairfax1980).PropertytaxeshavethegreatestimpactofanyStatetaxonfamilyforestowners,becausetheyoccurannuallyandarebasedonthevalueoftheland.Theeconomiceffectofapropertytaxistoincreasethefixedcostofowningland.Itthereforeinfluencesforestowners’decisionsaboutwhethertocontinueholdingtheirland(Gregory1972).

AlloftheSouthernStatesassessortaxfamily-ownedforestlandinitscurrentuseratherthanitshighestandbestuse


Table 11.1—Federal incentive programs of interest to family forest owners

Biomass crop Assistance Program (BcAP)—Authorized in 2008 to provide financial incentives for the collection, harvest, storage, and transportation of biomass material by qualified conversion facilities and the establishment and production of biomass crops. Payments to landowners under the biomass material provisions were suspended early in 2010 pending issuance of final rules and the biomass crop provisions are to be implemented in the future. All program payments must be included in adjusted gross income. BCAP is administered by the Farm Service Agency.a,b

conservation Reserve Program (cRP)—Established in 1985 to help safeguard environmentally sensitive agricultural land by converting it to a long-term, resource-conserving cover. Participants receive annual rental payments under a 10 to 15 year contract. They also may receive incentive payments, and cost-share payments to cover up to 50 percent of the cost of establishing a suitable long-term cover. A calculated portion of cost-share payments may be excluded from adjusted gross income, but all other program payments must be included. CRP is administered by the Farm Service Agency.c

conservation Stewardship Program (cSP)—Authorized in 2008 to assist owners of agricultural and forest land to adopt and maintain practices to conserve soil, water, air, and related resources. Participating owners receive annual payments under a 5-year contract to install and maintain new conservation practices; they also may receive supplemental payments to adopt a resource-conserving crop rotation. All program payments must be included in adjusted gross income. CSP is administered by the Natural Resources Conservation Service.d

emergency Forest Restoration Program (eFRP)—Created in 2008 as a new part of the Emergency Conservation Program. EFRP provides participating forest owners a cost-share of up to 75 percent of the cost of restoring land damaged by a natural disaster, such as a flood, hurricane, tornado, or wildfire. A calculated portion of EFRP cost-share payments may be excluded from adjusted gross income. EFRP is administered by the Farm Service Agency.e

emergency Watershed Protection Program (eWP)—Established to assist in implementing emergency recovery measures from natural disasters that impair or damage watersheds. Affected landowners may receive technical assistance and a cost-share of up to 75 percent (90 percent in limited resource areas) of the cost of clearing or restoring the damage; the administering agency also may elect to purchase perpetual floodplain easements from willing owners. A calculated portion of EWP cost-share payments have been excludable from adjusted gross income since 1978. EWP is administered by the Farm Service Agency.d

environmental Quality incentives Program (eQiP)—Established in 1996 to help farm, ranch, and forest-landowners address management practices that pose a significant threat to soil or water resources. Participating landowners receive technical assistance, incentive payments, and cost-share payments for 1 to 10 years that cover up to 75 percent (90 pecent for new, limited resource, or socially disadvantaged owners) of the cost of implementing conservation practices. A calculated portion of EQIP cost-share payments may be excluded from adjusted gross income. EQIP is administered by the Farm Service Agency.d

Forest land enhancement Program (FleP)—Established in 2002, FLEP combined aspects of two earlier programs. It promoted sustainable management of family forest land by providing technical, educational, and cost-share assistance to owners. A written forest management plan was required to participate. A calculated portion of FLEP cost-share payments could be excluded from adjusted gross income. Administered by the U.S. Forest Service in cooperation with State forestry agencies, the program was not reauthorized in the 2008 Farm Bill.

Forest legacy Program (FlP)—Created in 1990 to protect environmentally important private forest land threatened with conversion to non-forest uses. FLP is not a cost-share program. It operates primarily through the purchase of permanent conservation easements. Up to 75 percent of the total cost of protecting forest land may be Federally funded. FLP is administered by the Forest Service in partnership with the individual States.f

Forest Stewardship Program (FSP)—Established in 1990 to encourage and enable active long-term management of family-owned forest land and increase the economic and environmental benefits it provides. FSP is not a cost-share program. State forestry agency partners use the program to promote forest owner adoption of stewardship practices, for example, by offering a State Forest Stewards program or providing technical assistance to develop Forest Stewardship plans. FSP is administered by the U.S. Forest Service in partnership with the individual States.g

healthy Forest Reserve Program (hFRP)—Authorized in 2003 to restore and enhance forest ecosystems to promote the recovery of at-risk species, improve biodiversity, and enhance carbon sequestration. Participating owners receive assistance to develop a Forest Stewardship Plan, then may elect either a 10-year agreement, which pays 50 percent of the cost of the conservation practices, or a permanent easement, which pays the easement value of the land plus 100 percent of the cost of the practices. All payments must be included in adjusted gross income. HFRP is administered by the Natural Resources Conservation Service.d

landowner incentive Program (liP)—Established in 2003 to help private landowners protect and restore habitat for at-risk plant and animal species. LIP provides funding for States to offer technical assistance and grants to participating landowners to develop and implement habitat management plans. All LIP payments must be included in adjusted gross income. LIP is administered by the U.S. Fish and Wildlife Service in cooperation with the individual States. To participate, States must provide a minimum 25 percent match for Federal funding.h

(Continued)


Table 11.1—(continued) Federal incentive programs of interest to family forest owners

longleaf Pine initiative (lPi)—Initiated in 2006 as a conservation practice under CRP, with the goal of restoring up to 250,000 acres of longleaf pine forest in nine Southern States. Participating landowners receive annual rental payments under a 10 to 15 year contract. They also may receive incentive payments, and cost-share payments to cover up to 50 percent of the cost to plant, protect, and manage longleaf pine stands on suitable sites. A calculated portion of LPI cost-share payments may be excluded from adjusted gross income, but all other payments must be included. LPI is administered by the Farm Service Agency.i

Partners for Fish and Wildlife (PFW)—Established in 1987 to help restore wetlands and other important fish and wildlife habitats on private lands. Participating owners receive technical assistance and a cost-share of up to 100 percent of the cost of implementing conservation practices. Funds for cost-share payments come from Federal, State, and local units of government, soil and water conservation districts, and private conservation organizations. All program payments must be included in adjusted gross income. PFW is administered by the U.S. Fish and Wildlife Service in cooperation with the individual States.j

Red-cockaded Woodpecker (RcW) Recovery Program—Created under the Endangered Species Act of 1973 to help public and private landowners in 11 Southern States conserve red-cockaded woodpeckers and the habitat upon which they depend. Program specifics for private landowners vary by State. In most States, participants receive technical assistance in habitat improvement, but in some States cost-share funding also is available. Any program payments must be included in adjusted gross income. RCW is administered by the Fish and Wildlife Service in cooperation with the individual States.k

Southern Pine Beetle Prevention Program (SPBP)—Established in 2003 to help public and private forest-landowners in the Southern States reduce the susceptibility of their holdings, restore affected areas, and fund research. Program specifics vary by State, but private landowners can receive technical assistance and cost-share payments to cover part of the cost of such treatments as thinning and hazard fuel reduction. A calculated portion of SPBP cost-share payments may be excluded from adjusted gross income. SPBP is administered by the U.S. Forest Service in cooperation with the individual States.l

State Acres for Wildlife enhancement (SAFe)—Initiated in 2008 as a conservation practice under CRP to protect and restore habitat for high-priority wildlife species. Participating landowners receive annual rental payments under a 10 to 15 year contract. They also may receive incentive payments, and cost-share payments to cover up to 50 percent of the cost to establish habitat-enhancing natural covers on suitable land. A calculated portion of program cost-share payments may be excluded from adjusted gross income, but all other payments must be included. SAFE is administered by the Farm Service Agency.m

Wetlands Reserve Program (WRP)—Established in 1985 to encourage conservation of wetlands on privately owned lands. Participating owners elect one of three program options: a permanent easement, which pays 100 percent of the easement value of the land and the cost of wetland restoration practices; a 30-year easement, which pays 75 percent of the easement value and the cost of restoration practices; or a cost-share option, which pays 75 percent of the cost of restoration practices. A calculated portion of WRP cost-share payments may be excluded from adjusted gross income, but all other payments must be included. WRP is administered by the Farm Service Agency.d

Wildlife habitat incentives Program (WhiP)—Established in 1996 to encourage development and improvement of wildlife habitat on private land. Participating landowners receive technical assistance, incentive payments, and cost-share payments under an agreement lasting 1 to 10 years that cover up to 75 percent (90 percent for new, limited resource, socially disadvantaged owners, or Indian tribes) of the cost of implementing conservation practices. A calculated portion of program cost-share payments may be excluded from adjusted gross income. WHIP is administered by the Farm Service Agency.d

aFSA BCAP Fact Sheet: http://www.fsa.usda.gov/Internet/FSA_File/bcap09.pdf. bBiomass Magazine: http://biomassmagazine.com/article.jsp?article_id=3793.cFSA CRP Fact Sheet: http://www.fsa.usda.gov/Internet/FSA_File/crpcont06.pdf.dNRCS Conservation Programs Web page: http://www.nrcs.usda.gov/PROGRAMS/.eFSA EFRP Fact Sheet: http://www.fsa.usda.gov/Internet/FSA_File/2008fbemergencyforestsummary.pdf. fUSFS FLP Web page: http://www.fs.fed.us/spf/coop/programs/loa/flp.shtml. gUSFS FSP Web page: http://www.fs.fed.us/spf/coop/programs/loa/fsp.shtml. hUSFWS LIP Web page: http://wsfrprograms.fws.gov/Subpages/GrantPrograms/LIP/LIP.htm.iFSA LPI Fact Sheet: http://www.fsa.usda.gov/Internet/FSA_File/crplongleaf06.pdf. jUSFWS PFW Southeast Region Web page: http://www.fws.gov/southeast/es/partners/. kUSFWS Red-Cockaded Woodpecker Recovery Web page: http://www.fws.gov/rcwrecovery/., lUSFS SPBP Web page: http://www.fs.fed.us/r8/foresthealth/programs/spb_prevention/spb_prevention.shtml. mFSA SAFE Fact Sheet: http://www.fsa.usda.gov/Internet/FSA_File/safe08.pdf.


(table11.3).TheStatesvarysubstantially,however,intheapproachestheyuseandthemethodsbywhichtheyapplythem.SomeStatesdeterminethecurrentusevalueoflandusingsoiltypeandproductivity,whichinvolvesusingaspecifiedcapitalizationratetodiscountprospectivefuturereturnsfromthelandbacktothepresent;othersusefairmarketvalueintheland’scurrentuse,whichemphasizesrecentsalesofcomparableproperties.TheStatesalsovaryinthegoalsfortheirpreferentialpropertytaxprograms,andtherequirementstoparticipateinorwithdrawfromtheprogram(table11.3).

ThreeStates—Alabama,NorthCarolina,andTennessee—expresslyexemptstandingtimberfrompropertytaxes(NationalTimberTaxWebsite2011a).AnotherthreestatesrestrictdeductionofpropertytaxesonStateincometaxreturns:Louisianadoesnotpermitdeductionofpropertytaxes,Virginiadoesnotallowindividualtaxpayerstodeductpropertytaxes,andTennesseedoesnotallowcorporationstodeductpropertytaxes(Cushing2006).

Propertytaxesaresetandleviedatthecountylevel,makingthemthemostdiverseofthetaxesthatfamilyforestowners

faceandthemostdifficulttotrack.SomecountyofficialsintheSouthernStateshaveexpressedinterestindevelopingpropertytaxprovisionsthatdiscourageurbansprawlandencourageprovisionofecosystemservicesfromruralland,butlittleisknownabouthowmanysuchprovisionshavebeenputinplaceortheleveloftheirsuccess.

SevenSouthernStatesalsoimposeaseverancetaxontimberwhenitisharvested.ThreeoftheStates—Georgia,Louisiana,andMississippi—levythetaxonforestowners,whiletheotherfour—Alabama,Arkansas,NorthCarolina,andVirginia—levyitontimberprocessors.AllsevenStatesuseatleastpartoftheirseverancetaxreceiptstosupportaforestryincentiveprogramoranotherforest-relatedpurpose(Cushing2006,NationalTimberTaxWebsite2011a).Theeconomiceffectofaseverancetaxmirrorsthatofanincometax,butattheratesuseditsimpactisminor,havinglittleeffectonanowner’smanagementdecisions.

The Federal estate and Gift Taxes

TheFederalgovernmenthastaxedtransfersofestatessince1916andlifetimegiftssince1932(Siegelandothers2009).TheU.S.Congressperiodicallyredefineswhatconstitutesataxabletransferofwealth;themostrecentchangescamewithpassageoftheEconomicGrowthandTaxReliefReconciliationActof2001(EGTRRA,P.L.107-16)andtheTaxRelief,UnemploymentInsuranceReauthorization,andJobCreationActof2010(2010TaxReliefAct,P.L.111-312).Theeconomiceffectofestateandgifttaxesisdifficulttoquantifybecausetheyoccuratirregularintervals.Theydo,however,increaseriskandputapremiumonkeepingplanningoptionsopen.

TheFederaltaxcodeincludesnumerousprovisionsthatreduceoreliminatetheimpactoftheFederalestateandgifttaxes.Theseprovisionshelpfamilyforestownerskeeptheirholdingsintactthroughatransferfromonegenerationtoanotherandreducethelikelihoodthatheirswillneedtoliquidatetimberorfragmenttheholding.AswiththeFederalincometax,somearegeneralprovisionsavailabletoalltaxpayers,whileothersarespecificallyforownersofforestsandotherworkinglands.Amongthemostimportantgeneralprovisionsare(Siegelandothers2009):

Gifting—Individualsmaymakelifetimegiftsuptotheannualexclusionamount,currently$14,000(InternalRevenueService2012),toasmanydifferentrecipientseachyearastheywishwithoutusingtheeffectiveexemptionamountforgifts(seebelow)orincurringagifttax.Marriedcouplesmaymake“splitgifts”ofdoubletheannualexclusionamount.Inaddition,thereisanunlimitedexclusionforgiftstoqualifyingcharitableorganizationsandqualifyinggiftpaymentsofeducationalormedicalcosts.Thereisno“step-up”inbasis(seebelow)forgifts,butgiftingenables

Table 11.2—State income tax provisions applicable to family forest owners in the South, 2010

StateState-levelincome tax

Preferentialtreatment of

long-termcapital gains

Deduction orcredit for

conservationAlabama Yes – –Arkansas Yes Yes CreditFlorida – – –Georgia Yes – CreditKentucky Yes – –a

Louisiana Yes – –Mississippi Yes – DeductionNorth Carolina Yes – CreditOklahoma Yes – –South Carolina Yes Yes Creditb

Tennessee – – –Texas – – –Virginia Yes – Creditb

– = indicates no applicable provision.aSome family forest owners may qualify for an income tax deduction Kentucky provides for donation of a conservation easement on farmland or open space land for agricultural use.bThe credit is transferrable; that is, any unused portion may be sold to others.Sources: Butler and others 2010, Private Landowner Network Web site 2011.


ownerstoremovefromtheirestateassetsthatarerapidlyappreciatinginvalue.

“Step-up” in basis for bequests—Arecipient’sbasisinanassetreceivedthroughabequestgenerallyisitsfairmarketvalueonthevaluationdate,eitherthedateofthedecedent’sdeathortheearlierof6monthsafterdeathorthedateanyestateassetissold.Thisusuallyresultsina“step-up”inthebasiscomparedwithwhatitwasinthedecedent’shands.EGTRRArepealedtheFederalestatetaxfor2010,andplacedlimitsonthevalueofestateassetsthatcouldreceiveastep-upinbasis.The2010TaxReliefActextendedandenhancedtheFederalestatetaxprovisionsfordecedentsdyingin2011or2012(seebelow),withallestateassetseligibleforastep-upinbasis.Fordecedentsdyingin2010,theexecutorcouldelecttouseeithertheprovisionsofEGTRRAorthe2010TaxReliefAct(CCH2010,CCH2013).

The marital deduction—TheFederaltaxcodeallowsanunlimiteddeductionforthevalueofallpropertypassedfromonespousetotheotherthroughalifetimegiftorbequest.Thisprovisionrecognizestheroleofbothspousesinbuildingupafamily’sassets.Itdoesnoteliminateorreducetheestatetax,however,butmerelypostponesittothetimeofthesurvivingspouse’sdeath.Thiscanbeaconsiderabledisadvantageiftheassets—landorstandingtimber,for

example—appreciategreatlyinvalueduringthetimebetweenthedeaths.

Effective exemption amount for gifts—Thisisacreditagainstthetentativegifttaxdue,whichshieldspartorallofgiftsovertheannualexclusionamountfromtax.The2010TaxReliefActextendedthe$1millionexemptionamountforgiftsmadein2010;forgiftsmadein2011or2012,theActestablisheda$5millionunifiedexemptionamountforgiftsandestates(CCH2010).Underaunifiedexemption,anownercantransferassetsuptotheexemptionamounttorecipientsotherthantheirspouse,eitheraslifetimegiftsorbequests,withoutincurringatax.

Effective exemption amount for estates—Thisisacreditagainstthetentativeestatetaxdue,whichshieldspartorallofanowner’sestatefromtax.Asjustdescribed,the2010TaxReliefActcombinedtheeffectiveexemptionamountsforgiftsandestatesintoa$5millionunifiedexemptionamount.Itappliedtotheestatesofdecedentsdyingin2011,andwheretheexecutorelectedtousetheprovisionsofthe2010TaxReliefActratherthanEGTRRA,totheestatesofdecedentsdyingin2010(CCH2010).TheAmericanTaxReliefActof2012indexedtheunifiedexemptionamountforinflationafterDec.31,2011,sothatitincreasedto$5.12millionfordecedentsdyingin2012and$5.25millionfordecedentsdyingin2013(CCH2013).The2010TaxRelief

Table 11.3—Property tax provisions applicable to family-owned forest land in the South, by State, 2010

State

Property taxtype of

programaPrimarygoalsb

minimumacreage to

enrollc

Requires amanagement

planc

enrollmentperiod

in yearscWithdrawal

penaltyAlabama PT AG 5 Varies Varies NoArkansas PA – – – – –Florida PT AG/OS Varies Varies Continuous NoGeorgia PT OS Varies No 10 YesKentucky PA – – – – –Louisiana PA – – – – –Mississippi PA – – – – –North Carolina PT HAB 20 Yes Continuous YesOklahoma PA – – – – –South Carolina PT AG/FOR 5 Varies Continuous YesTennessee PT OS 15 Yes Continuous YesTexas PT FOR Varies Varies Continuous YesVirginia PT FOR/OS 20 No Continuous Yes

– = indicates no applicable provision.aPA=Preferential assessment; PT=Preferential tax. bAG=Sustain agriculture; FOR=Sustain forestry; HAB=Habitat conservation; OS=Maintain open space.cVaries=Varies from county to county.Source: Butler and others 2010.


Actfurthermadetheunifiedexemptionamount“portable”betweenspouses.Thismeansthatinfamiliesledbyamarriedcouple,anypartoftheunifiedexemptionamountnotusedbytheestateofthefirstspousetodiemaybeaddedtotheunifiedexemptionamountfortheestateofthesecondspouse.Portabilityeffectivelydoublestheunifiedexemptionamount,allowingfamilyassetsof$10millionormoreinvaluetopassuntaxedfromonegenerationtoanother(CCH2010,CCH2013).

Deferral and extension of estate tax—Ifaninterestinaclosely-heldbusinessaccountsformorethan35percentofadecedent’sestate,theFederalestatetaxonthebusinessportionoftheestatemaybedeferredfor4yearsaftertheestatetaxreturnisfiled,withonlyinterestpaymentsdue,thenpaidinupto10annualinstallments.Althoughthisprovisiondoesnotreducetheamountofestatetaxdue,itcanreducetheneedtodisruptanestablishedforestmanagementplaninordertopaytax.

Theprovisionsforownersofforestsandotherworkinglandsinclude(Siegelandothers2009):

Special use valuation—Underspecificconditions,anexecutormayelecttoreducethetaxablevalueofanestatebyvaluingassetsusedforfarming(definedtoincludeforestland)oratradeorbusinessaccordingtotheirvalueinactualuseratherthantheirfairmarketvalue.Themaximumamountofthereductionhasbeenindexedforinflationsince1998andreached$1.07millionin2013(InternalRevenueService2012).Thereare,however,stringentrequirementstoqualifyforandremainundertheprovision,includingarestrictionagainstharvestingspecialuse-valuedtimberfor10years.

Exclusion for land in a qualified conservation easement—Anexecutormayelecttoexcludefromthetaxablevalueofanestateupto40percentofthevalueoflandsubjecttoaqualifiedconservationeasement(seebelow).Thebenefitiscappedat$500,000andthe40percentmaximumexclusionisreducedifthevalueoftheeasementislessthan30percentofthevalueoftheland.Aswiththecharitabledeductionfordonationofaninterestinland,theeasementmustconsistofaqualifiedrealpropertyinterest,madetoagovernmentagencyorqualifiedpublicly-supportedorganization,foroneoffourconservationpurposes(see“IncentivesforConservationEasements”).Thisprovisionoffersmanyofthebenefitsofspecialusevaluationwithfewerrestrictions.Thereis,however,nostep-upinbasisfortheexcludedland.

Estateplanningprofessionalshavedevelopedadditionalstrategies,notspecificallyprovidedintheFederaltaxcode,tofacilitateintergenerationaltransfersoffamilyassets.Theseinclude(Siegelandothers2009):

Forms of business—Twoformsofbusinessorganization,theFamilyLimitedPartnership(FLP)andLimitedLiabilityCompany(LLC),arepopularamongfamilyforestownersasmeanstotransferownershipofaforestenterprisetootherfamilymembersandengagetheminitsmanagement.TheFLPisatypeoflimitedpartnership.InanFLP,thegeneralpartners(typicallytheparents)retainmanagementrightsbutcantransferownershiptothelimitedpartners(typicallythechildren)throughgifts,whichcanbediscountedforminorityinterestand/orlackofcontrol.TheLLCisahybridbetweenapartnershipandacorporation.Likeapartnership,anLLCisapass-throughentityfortaxpurposes,butlikeacorporation,individualmembers’liabilityislimitedtotheamountoftheirinvestmentinthebusiness.Forestownersshouldbeawarethattheseformsofbusinesshavetwodrawbacks:first,thereisnostep-upinbasisforlandortimbertransferredtoothersthroughthebusiness,andsecond,bothFLPsandLLCsareunderscrutinybytheInternalRevenueServiceaspotentialtaxavoidancedevicesthatlackeconomicsubstance.Tohelpavoiddifficulties,ownersshouldensurethattheirFLPorLLChasaclearbusinesspurpose,isheldcompletelyseparatefrompersonalassets,andissetupandrunentirelyasabusiness.

Trusts—Atrustisanarrangementinwhichapersonorinstitutioncalledthetrusteeholdslegaltitletodesignatedpropertyandmanagesitforthebenefitofoneormorebeneficiaries.Atrustisaseparatelegalentityfromitsdonor.A“lifetimetrust”iscreatedduringthedonor’slifeandmayberevocableorirrevocable.Onlyanirrevocablelifetimetrustremovesthetrustpropertyfromthedonor’sestate.A“testamentarytrust”iscreatedatthedonor’sdeath,accordingtoinstructionsinhisorherwill.Thefullvalueofthetrustpropertyisincludedinthedonor’sestate,butthetrustthencanprovideincometosuccessivegenerationsofbeneficiarieswhileshieldingthetrustpropertyfromfurtherestatetax.Trustsmaybeusedforavarietyofpurposes.Forexample,an“irrevocablelifeinsurancetrust”removesalifeinsurancepolicyfromthedonor’sownershipandpreventsitsfullfacevaluefromenteringhisorherestateatdeath.A“qualifiedterminalinterestpropertytrust”isatypeofmaritaldeductiontrustthatmaybeusefulwith“blended”families;itprovidesfortheneedsofthesurvivingspousewhilecontrollingdispositionofthetrustpropertyremainingafterhisorherdeath.

Conservation easements—Thisisthedonationorsaleofoneormoreattributesoflandownership,forexample,therighttosubdividetheland.Theeasementremovestheattribute(s)ofownershipfromtheland.Thistypicallylowersthevalueofthelandandreducesthetaxconsequencesoftransferringittoheirs;however,theeasementpasseswiththelandandisbindingonfutureowners.Toqualifyforeitherofthetaxprovisionsdiscussedabove,aneasementmustinvolvethetransferinperpetuity,bymeansofanoutright


giftor“bargainsale”(asaleatapricebelowtheproperty’sfairmarketvalue),ofaqualifiedrealpropertyinterest,toagovernmentagencyorqualifiedpublicly-supportedorganization,foroneoffourconservationpurposes(see“IncentivesforConservationEasements”).

TheBushtaxcutstemporarilysetseparateeffectiveexemptionamountsforgiftsandestates.Between2001and2009theyincreasedtheeffectiveexemptionamountsforestatesfrom$1millionto$3.5millionanddecreasedthetoprateforgiftandestatetaxesfrom55percentto45percent.For2010,theyrepealedtheFederalestatetax,placinglimitsonthevalueofestateassetsthatcouldreceiveastep-upinbasisandsettingthetopgifttaxrateat35percent,equaltothetopFederalincometaxrate.Theseprovisionsweresettosunsetattheendof2010(Siegelandothers2009).Butasnotedabove,the2010TaxReliefActextendedandenhancedtheestatetax,withallestateassetseligibleforastep-upinbasis.Aswell,itreunifiedtheeffectiveexemptionamountsforgiftsandestates,withthemaximumexemptionincreasedto$5millionandportabilitybetweenmarriedspouses,andreducedthetopestatetaxrateto35percent(CCH2013).TheAmericanTaxpayerReliefActof2012furtherenhancedtheFederalestateandgifttaxprovisionsandmadethempermanent,preventingthemfromreturningtopre-2002lawaftertheendof2012(CCH2013).

State estate, inheritance, and Gift Taxes

TheStatesagainvarywidelyinhowtheytaxintergenerationaltransfersofassets.SomeStatestaxtherighttotransferpropertythroughanestatetax,whileotherstaxtherightofheirstoreceivepropertythroughaninheritancetax.AhandfulofStatestaxgiftsoverspecifiedannualorlifetimeexemptionamounts.Aswell,Statetransfertaxesdifferintheirfilingrequirements,exclusionamounts,andrateschedules;whethertheyarestand-alonetaxesortiedtotheFederaltaxcode;whethertheyare“flat-rate”(onetaxrateappliesregardlessoftheamounttransferred),“graduated”(thetaxrateincreasesinstepswiththeamounttransferred)or“layered”(thetaxratevarieswiththeheir’srelationtothedecedent);andwhethercertainclosely-relatedheirsareexempt(Siegelandothers2009).

BeforetheenactmentofEGTRRA,everyStatehadonitsbooksatleastonetaxthatwasa“pick-up”or“piggy-back”taxdesignedtousethefullavailableamountoftheFederalcreditforStatetransfertaxes.ThisapproachapportionedpartofwhatwouldhavebeentheFederalestateorgifttaxtotheState,withnoadditionaltaxburdenontheestateorthebeneficiaries.EGTRRAphasedouttheFederalcreditforStatetransfertaxesbetween2002and2005,replacingitwithadeduction.ThiseliminatedStatetransfertaxesthatweretiedtotheFederalcredit,throwingStatetaxlawandtaxplanningintoturmoil.IndividualStatesrespondedvery

differentlytothechange.Many“decoupled”theirtransfertaxesfromcurrentFederallaw,tyingthemtotheFederaltaxcodeasitexistedbeforeEGTRRA.Othersmadenochange,allowingtheirestate,inheritance,andgifttaxestophaseoutwiththeFederalcredit.AfewStatestookEGTRRAasanopportunitytorepealtransfertaxesortocraftstand-alonetaxesontransfersofassets(Siegelandothers2009).

OnlyfiveSouthernStatescurrentlylevytransfertaxes:KentuckyandLouisianaeachhaveastand-aloneinheritancetax,NorthCarolinahasastand-alonegifttaxandanestatetaxthatisdecoupledfromcurrentlawandtiedtotheFederaltaxcodeasoftheendof2001,Oklahomahasastand-aloneestatetax,andTennesseehasstand-aloneinheritanceandgifttaxes(table11.4).Virginiarepealeditsestatetaxeffectiveduring2007.

ExceptforNorthCarolinaandVirginia,however,alloftheSouthernStatesstillhavepick-uporpiggy-backtaxesontheirbookswhichwillcomebackintoeffectiftheFederalcreditforStatetransfertaxesisreinstated(table11.4).Ifthatoccurs,sevenadditionalSouthernStates—Alabama,Arkansas,Florida,Georgia,Mississippi,SouthCarolina,andTexas—willhaveanestatetax;KentuckyandLouisianawillhaveanestatetaxaswellasaninheritancetax;Oklahomawillhaveasecondestatetax;andTennesseewillhaveestate,inheritance,andgifttaxes(Siegelandothers2009).

incentives for conservation easements

Conservationeasementsareoneofthemostpowerfultoolsavailabletofamilyforestownerswhowishtopreservetheconservationvalueoftheirlandovertime.Aconservationeasementinvolvesthedonationorsaleofoneormoreattributesoflandownership—therighttobuildadditionalstructuresontheland,forexample,ordevelopitforcommercialorindustrialuse—toagovernmentagencyororganizationthatsharestheowner’svisionfortheland.Theeasementremovesthoseattributesofownershipfromthelandandhelpsensurethatitremainsinforest(Greeneandothers2013).

Aconservationeasementdoesnotinvolvethedonationorsaleofanowner’sentireinterestintheland.Theownercanretaintherighttoliveontheland,manageitfortimberorotherforestproducts,anduseitforotherbenefits.Theeasementalsocanapplyonlytopartoftheproperty,withtheownerretainingallattributesofownershipfortherest.Theownercanpassthefullremaininginterestinthelandtoheirsorsellittoothers,althoughtheeasementpasseswiththelandandisbindingonfutureowners(Greeneandothers2013).

Thetermsforconservationeasementsarenotstandardized,butcanbetailoredtoreflectthevaluesoftheownerand


thereceivingorganization,aswellasthecharacteristicsofthelanditself.Forexample,aneasementonpropertythatcontainshabitatforrareplantorwildlifespeciesmightprohibitanydevelopment,whileaneasementonworkingforestlandmightpermitcontinuedmanagementforforestproductsandtheconstructionofroadsandimprovementsconsistentwiththatuse.Thepurchaserorrecipientoftheeasementisresponsibleforensuringtheeasement’stermsarefollowed(LandTrustAllianceWebsite2011).

Federal provisions—IncomefromthesaleofaconservationeasementistaxableattheFederallevel.Thedonationorbargainsaleofaneasement,however,canprovideacharitablecontributiondeductiononthedonor’sincometaxandafutureestatetaxdeduction(Greeneandothers2013).Thesedeductionsarediscussedabove,butgenerallyrequirethetransferinperpetuity,bymeansofanoutrightgiftorbargainsale,ofaqualifiedrealpropertyinterest,toagovernmentagencyorqualifiedpublicly-supportedorganization,foroneoffourconservationpurposes.Thequalifiedrealpropertyinterestmaybetheowner’sentireinterest(butnotsolelyamineralinterest),aremainderinterest,oraperpetualrestrictiononhowthepropertymaybeused,aswithaconservationeasement.Thefourconservationpurposesare:outdoorrecreationbyoreducationofthegeneralpublic;protectionofarelativelynaturalhabitatforfish,wildlife,orplants;preservationofopenspaceforscenicenjoymentbythegeneralpublicor

pursuanttoaclearconservationpolicyoftheFederal,State,orlocalgovernment;andconservationofanhistoricallyimportantlandareaorcertifiedhistoricstructure.

FouroftheFederalincentiveprogramsavailabletofamilyforestownersinvolveconservationeasements.TheForestLegacyProgramfundsupto75percentofthecostofplacingforestlandunderaneasement.UndertheHealthyForestReserveandWetlandsReservePrograms,ownersmayelecttoreceivepaymentsfortheeasementvalueoftheirlandaswellasthecostofconservationpracticestheyimplement.UndertheEmergencyWatershedProtectionProgram,theadministeringagencymayelecttoaddressimpairmentordamagetowatershedscausedbyanaturaldisasterthroughthepurchaseoffloodplaineasementsfromwillingowners(SRSForestEconomicsandPolicyWebsite2011).Theprovisionsoftheseprogramsaresummarizedintable11.1.

State provisions—BecauseofthecloselinkbetweenFederalandStateincometaxes,mostFederaltaxprovisionsthatbenefitfamilyforestownersflowthroughtotheStateincometax(Siegelandothers1996).IndividualStates,however,offertheirownincentivesforconservationeasements.PropertytaxreliefproportionaltothedecreaseinvalueoflandplacedinaneasementgenerallyisavailableineveryState,butisrequiredbylawinFlorida,Georgia,Kentucky(forlanddedicatedtotheStateNaturePreservesSystem),SouthCarolina,Tennessee,andVirginia.Arkansas,Georgia,North

Table 11.4—State estate, inheritance, and gift tax provisions applicable to family forest owners in the South

State

currently hasa State-level

estate tax


inheritance tax


gift tax

Special usevaluation for

estate tax

Phased-outtax still onthe books

Alabama – – – – Estate taxArkansas – – – – Estate taxFlorida – – – – Estate taxGeorgia – – – – Estate taxKentucky – Yes – – Estate taxLouisiana – Yes – – Estate taxMississippi – – – – Estate taxNorth Carolina Yes – Yes No NoOklahoma Yes – – No Estate taxSouth Carolina – – – – Estate taxTennessee – Yes Yes – Estate taxTexas – – – – Estate taxVirginia – – – – No

– = indicates no applicable provision.Sources: Butler and others 2010, Siegel and others 2009.


Carolina,SouthCarolina,andVirginiaeachhaveenactedanincometaxcreditfordonationofaqualifyingconservationeasement.InVirginia,salesofeasementsover30yearsindurationareexemptfromtheStatecapitalgaintax.Aswell,Alabama,Florida,Georgia,andTexasoperateconservationtruststopreserveworkingagriculturalandforestland(PrivateLandownerNetworkWebsite2011).

incentives for Forest Sustainability

Forestsustainabilityisoneaspectofsustainabledevelopment(USDAForestService2004).Inabroadsense,forestsustainabilitycanbedescribedasinvolving:

“…thecontinuedexistenceanduseofforeststomeethumanphysical,economic,andsocialneeds;thedesiretopreservethehealthofforestecosystemsinperpetuity;andtheethicalchoiceofpreservingoptionsforfuturegenerationswhilemeetingtheneedsofthepresent.”(USDAForestService2002)

Atamorespecificlevel,itcanbedefinedas:

“Thestewardshipanduseofforestsandforestlandsinaway,andatarate,thatmaintainstheirbiodiversity,productivity,regenerationcapacity,vitality,andpotentialtofulfill,nowandinthefuture,relevantecological,economic,andsocialfunctionsatlocal,national,andgloballevels,andthatdoesnotcausedamagetootherecosystems.”(Helms1998)

Federal programs—TheFederalgovernmentsponsorsawiderangeofincentiveprogramstoencouragesustainablemanagementoffamily-ownedforestsandotherrurallands.MostareadministeredbyagenciesoftheDepartmentofAgriculture—theFarmServiceAgency,ForestService,orNaturalResourcesConservationService.ThreeprogramsareadministeredbytheFishandWildlifeServicewithintheDepartmentofInterior.Virtuallyalloftheprogramsprovidetechnicalassistancetohelpownersselectandimplementconservationpracticesthatwillbeeffectiveontheirland.Manyalsoprovidefinancialincentives,suchascost-sharepaymentstocoverpartorallofthecostofconservationpractices,landrentalpaymentsoveratermofyears,orothertypesofpayments.

Table11.1providesabriefdescriptionoftheFederalincentiveprogramsofparticularinteresttofamilyforestowners.Asnotedabove,ownerscanelecttoexcludeacalculatedportionofcost-sharepaymentsfromnineprogramsfromtheiradjustedgrossincome,makingthepaymentstax-free(Greeneandothers2013),andfourprogramsinvolveuseofconservationeasements.

State programs—Stateagenciesparticipateintheon-the-groundmanagementofsixFederalincentiveprograms:theForestLegacy,ForestStewardship,andSouthernPineBeetlePreventionProgramsadministeredbytheForestServiceandtheLandownerIncentive,PartnersforFishandWildlife,andRed-cockadedWoodpeckerRecoveryProgramsadministeredbytheFishandWildlifeService.Aswell,educationalandtechnicalassistanceforforestmanagementgenerallyisavailableineverySouthernState,throughStateforestryandcooperativeextensionpersonnel.

Inaddition,manyStatesoffertheirownincentiveprogramsforfamilyforestowners.Louisiana,Mississippi,NorthCarolina,SouthCarolina,andVirginiaofferreforestationcost-shareprograms,whileTexasofferstechnicalassistanceandcost-sharepaymentsforpracticestosuppressoakwilt.OwnersmayexcludeacalculatedportionofpaymentsfromallsixprogramsfromadjustedgrossincomeincalculatingtheirFederalincometax.MississippiandTexasalsoprovidetaxincentivesforreforestation,MississippithroughareforestationtaxcreditandTexasthrougha50percentpropertytaxreductionforreforestingfollowingaharvest.AndthroughitsForestHealthProgram,Mississippiinformsforestownersiftheyhavepestdamageontheirpropertyandprovidestechnicalassistanceonhowtosalvagedamagedtimberandreduceorpreventfurtherdamage(PrivateLandownerNetworkWebsite2011,SRSForestEconomicsandPolicyWebsite2011).

Provision of ecosystem Services

Ecosystemservicesarecommonlydefinedasthebenefitspeopleobtainfromecosystems.Ecosystemservicesincludebasicservices—provisioningserviceslikedeliveryoffood,freshwater,woodandfiber,andmedicine—aswellasservicesthatareequallycriticalbutlesstangibleandhardertomeasure:regulatingserviceslikecarbonsequestration,erosioncontrol,andpollination;culturalserviceslikerecreation,ecotourism,andeducationalandspiritualvalues;andsupportingserviceslikenutrientcycling,soilformation,andprimaryproductivity(USDAForestServiceValuingEcosystemServicesWebsite2011).

Federal programs—Toensurethatthefullrangeofecological,social,andeconomicbenefitsfromfamily-ownedlandsismaintainedinquantityandqualityovertime,alloftheFederal-sponsoredincentiveprogramssummarizedintable11.1haveatleastoneobjectivethatfocusesonconservationofnaturalresources,protectionofnaturalsystems,enhancedstewardship,orsustainablemanagement.Consequently,alloftheprograms,aswellasmostoftheFederalincomeandestatetaxprovisionssummarizedabove,promotetheprovisionofecosystemservices.


State programs—ItistheStates,however,thatmostdirectlyaddressprovisionofecosystemservices.Educationalandtechnicalassistanceformanagementofwildlifehabitatorriparianareas,waterquality,resourceconservation,andprotectionfrominvasivespeciesgenerallyisavailableinallStates,throughtheirforestry,wildlife,andcooperativeextensionpersonnel.Additionally,individualStatesofferawiderangeofprogramsthatdirectlyaddressecosystemservices(PrivateLandownerNetworkWebsite2011,SRSForestEconomicsandPolicyWebsite2011):

•AlabamasponsorsTREASUREForest,avoluntaryprogrampromotingsoundandsustainablemultiple-useforestmanagement,andtheAlabamaAgriculturalandConservationDevelopmentCommissionProgram,whichprovidescost-sharepaymentsforsoilconservation,waterqualityimprovement,reforestation,andforestimprovementpractices.

•Arkansashasenactedanincometaxcreditforcreatingorrestoringwetlandorriparianzones.

•ThroughitsRuralandFamilyLandsProtectionProgram,Floridapurchasesperpetualeasementsonworkingagriculturalorforestedlandsthatcontainsignificantnaturalareasorwaterresources.

•GeorgiasponsorsGeorgiaGROWS,arecognitionprogrampromotingsoundmanagementandstewardshipoffamily-ownedforestland.

•TheKentuckySoilErosionandWaterQualityCostShareandSoilStewardshipProgramshelpfarmandforestownersaddresssoilerosion,waterquality,andotherenvironmentalissues.

•LouisianaprovidesrelieffromState,parish,anddistrictpropertytaxesforownerswhoenteracontractover25yearsindurationthatallowstheStatetousetheirlandasawildlifemanagementarea.

•Mississippioffersapropertytaxexemptionforownersofcoastalwetlands.

•TheNorthCarolinaAgriculturalCost-ShareProgramreimbursesupto75percentofthecostofcontrollingrunoffofsediment,nutrients,animalwastes,andpesticidesfromworkinglands.

•TheOklahomaConservationCost-ShareProgramreimbursesthecostofapplyingsoilandwaterconservationpractices.

•TheTennesseeFarmWildlifeHabitatProgramreimbursesupto75percentofthecostofimprovinghabitatfordeclininggrasslandandshrublandwildlifespecies,includingbobwhitequail,cottontailrabbits,andsongbirds.

•TexassponsorstheEastTexasWetlandsProject,whichreimbursesupto50percentofthecostofrestoring,enhancing,orcreatingwetlandsonlandsubjecttoa30-yearorperpetualeasement;theLoneStarLandStewardAwardProgram,arecognitionprogramthatpromoteswildlifeconservationandhabitatmanagement;theWildlifeGrantProgramforhabitatimprovementprojectsclosely

tiedtotheTexasWildlifeActionPlan;andpropertytaxreductionsforaesthetictimbermanagement,protectionofcriticalwildlifehabitat,andstreamsidemanagement.

•VirginiahasenactedtaxcreditsforaportionofthevalueoftimberretainedinariparianbufferandthecostofapprovedequipmentusedtoimplementBestManagementPractices(BMPs);aswell,theVirginiaBMPCost-ShareProgramreimbursesupto$50,000ofthecostofimplementingpracticestoaddressnonpointsourcepollution.

PrivatelysponsoredprogramsavailableintheSouthernStatesincludeStateTreeFarmprogramscoordinatedbytheAmericanForestFoundation(AmericanTreeFarmSystemWebsite2011)andtheLongleafRestorationProgramsponsoredbyTheLongleafAlliance(TheLongleafAllianceWebsite2011).

meThoDS AND DATA SouRceS

Fromthetimeprivateforestownersfirstbecameinterestedinlong-termmanagement,researchershavebeensuggestingwaystoimprovethemanagementandsustainabilityoffamilyforestholdings:financialincentivesforownerswhodemonstrateinterestinmanagingtheirforest(FolweilerandVaux1944);technicalassistance,leveragedthroughcoordinatedmanagementofneighboringforestownerships(Cloud1966);reducedproperty,estateandinheritancetaxes,morefavorabletaxcreditsanddeductions,morefavorablecapitalgaintaxtreatmentoftimberincome,andcost-sharingofforestmanagementexpenses(Fecsoandothers1982);incentiveslinkedtospecificmanagementpractices,suchasreforestation(Greene1998);andincentiveprogramsforecosystemservices,suchaswildlifehabitatorprotectionofwaterquality(GreeneandBlatner1986,Koontz1999).

Family Forest owner Awareness and use of Federal income Tax Provisions

MostoftheliteratureonincometaxesconcernsFederaltaxationofforest-relatedincomeandfocusesonthetaxlawitself.Itconsistsoftaxguidesforforestowners(seeGreeneandothers2013,HooverandKoontz2010),popularizeddescriptionsofhowparticularincometaxprovisionsaffectforestowners(seeHaney2011,WangandGreene2011),orbackgroundpaperspreparedforpolicymakers(seeDialogGrouponForestedLandsandTaxation2001,Granskogandothers2002).Asmallnumberofstudieshaveanalyzedtheeffectofcurrentorproposedincometaxprovisionsonreturnstohypotheticalfamilyforestowners(Baileyandothers1999;Klemperer1989;Smithandothers2007,2008;StrakaandGreene2007).

Ina2001studyconductedinSouthCarolina,researcherswiththeClemsonUniversityDepartmentofForest


ResourcesandtheForestServiceSouthernResearchStationinvestigatedwhetherfamilyforestownerswereawareofFederalincometaxprovisionsthatprovideincentivesforfollowingsoundmanagementpractices,whethertheyhadusedprovisionstheywereawareof,andtheirreasonsforusingornotusingeachone.Theprovisionsexaminedwere:long-termcapitalgaintreatmentofqualifyingincome,annualdeductionofmanagementcosts,depreciationandthesection179deduction,lossdeductions,specialtreatmentofqualifyingcost-sharepayments,andthereforestationincentives.Atthetimethestudywasconducted,thereforestationincentivesconsistedofa10percentinvestmenttaxcreditonupto$10,000peryearofqualifyingexpensestoestablishorreestablishtrees,plustheabilitytoamortizeupto$10,000peryearofqualifyingcostsover8taxyears(theamountanownercouldamortizewasreducedbyhalfofanyreforestationtaxcredittaken).

Dataforthestudywerecollectedbymeansofamailedquestionnairesenttofamilyforestownersrandomlyselectedfromalistofcurrent,past,andprospectivemembersmaintainedbytheStatechapterofanationalforestownerorganization,usingtheDillman(2000)tailoreddesignmethod.Inadditiontoknowledgeanduseofeachincometaxprovision,severaldemographiccharacteristicsweresurveyed:totalacresowned;forestedacresowned;primaryreasonforowningforestland;whethertheownerbelongedtoaforestownerorganization;whethertheownerhadawrittenforestmanagementplan;owneroccupation;andownereducation,age,andhouseholdincome,bylevel.Theresponsecategoriesforprimaryreasonforowningforestlandandforowneroccupation,education,andagecorrespondedcloselytothoseusedbyBirch(1996).

State Property Taxes

Aswithincometaxes,mostoftheliteratureonStatepropertytaxesconsistsoflandownerguides(seeBaughmanandReichenbach2009,KaysandSchultz2002)andsummariesofStatetaxprovisions(seeChang1996,Rodenbergandothers2004).StatepropertytaxstudiesbyHickmanandothersinTennessee,Virginia,andTexasaredistinguishedbytheirinclusionofeconomicanalysesaswellassummariesofthelaw(Gayerandothers1987,Hickman1982,HickmanandCrowther1991).

Hibbardandothersconductedastudythatexaminedtheuse,structure,andeffectivenessofforestpropertytaxesthroughouttheU.S.InasurveyofStateprogramadministratorsconductedaspartofthestudy,theresearchersfoundthatStatepropertytaxprogramsonlymarginallyconformedtoacceptedattributesofa“good”tax(equity,efficiency,simplicity,stability,adequacy,andvisibility),andonlymodestlyaccomplishedprogramobjectives(Hibbardandothers2003).

Otherresearchershavefoundthatpropertytaxprogramrequirementscanbeatoddswithfamilyforestownerobjectivesfortheirland.Oneexample,identifiedinstudiesinPennsylvania(JacobsonandMcDill2003)andNewYork(Kernan2004),isanoveremphasisontimbermanagementandproduction.

Inanationalstudycompletedin2010,researchersfromsixinstitutionsdocumentedtheFederal,State,andlocaltaxpoliciesthataffectfamilyforestownersandevaluatedtheirimpactonowners’decisionsregardingtheirland.ThecollaboratinginstitutionsweretheForestServiceNorthernandSouthernResearchStations,theUniversityofMassachusettsAmherstFamilyForestResearchCenter,UniversityofMinnesotaDepartmentofForestResources,UtahStateUniversityDepartmentofEnvironmentandSociety,andYaleSchoolofForestryandEnvironmentalStudies.Dataforthestudywerecollectedusingseveralmethods:areviewoftheexistingliterature;systematicdocumentationandverificationoftheFederal,State,andlocaltaxprovisionsthataffectfamilyforestowners;asurveyofStatepropertytaxprogramadministrators;andfocusgroupsoffamilyforestownersandnaturalresourceprofessionalsinselectedStates.Thedatawerequantitativelyanalyzed,thensynthesizedwiththeassistanceofapanelofforestry,conservation,andtaxprofessionalsandfamilyforestowners.

Theliteraturereviewinitiallyfocusedonpeer-reviewedpublicationsfromthepast10to15years,butwasexpandedtoincludeearlier,seminalworksandnon-peerreviewedpublications.FederaltaxprovisionsaffectingfamilyforestownersweredocumentedusingsourcesfromtheNationalTimberTaxWebsite(2011b).ThewebsitealsowasthestartingpointfordocumentingStatetaxprovisions;gapswerefilledinusingStategovernmentwebsitesandothersources,thenverifiedusingakeyinformantineachState,anemployeeofeithertheStateforestryagencyordepartmentofrevenue.

ThesurveyofStatepropertytaxadministratorsfocusedonpreferentialpropertytaxprograms,definedasvoluntaryprogramsthatreducethepropertytaxburdenonownersinreturnforrequiringthemtorestrictuseoftheirland,haveawrittenforestmanagementplan,orpayapenaltyforremovinglandfromtheprogram.ThesurveywasconductedusingamailedquestionnairesenttoaselecteddepartmentofrevenueemployeeineachState.Thequestionnaireaskedtherespondentstousea5-pointLikertscaletoratetheirState’spreferentialpropertytaxprogramaccordingtotheeightpolicyeffectivenesscriteriausedbyHibbardandothers(2003):

•Theprogramhasclearlyarticulatedgoals;•Themagnitudeofthetaxbreakissignificant;•TheprogramcomplementsotherStateforestryincentiveprograms;

•Theforestlandvaluationmechanisms,eligibility


requirements,withdrawalpenalties,andminimumenrollmentperiodsreflectprogramgoals;

•Theprogramisadministeredconsistentlyfromcountytocounty;

• Fundingfortheprogramhasbeenstableandpredictable;•Theprogramisperiodicallyreviewedtoensurethatobjectivesarebeingmet;and

•Guidancethroughtheapplicationprocessisavailabletoforestowners.

Therespondentsalsowereaskedtoestimatetheaveragesavingsforenrolleesinthepreferentialpropertytaxprogram,thepercentageofeligibleforestownersenrolled,andtheoveralleffectivenessoftheprograminprotectingforestresourcesinareashighlysusceptibletodevelopment.Administratorsfrom33ofthe38Statesthathaveapreferentialpropertytaxprogramapplicabletofamilyforestownersreturnedacompletedquestionnaire,foraresponserateof87percent.

Ten2-hourfocusgroupsof8to10familyforestownerswereheld,twoeachinNewHampshire,Wisconsin,SouthCarolina,Alabama,andWashington.TheStateswereselectedtorepresentabroadrangeofproperty,income,andestateorinheritancetaxpolicies.Participantswereselectedfromlocalpropertytaxrolls.Ownerswhoheldbetween10and999acresofforestlandwerescreenedtoprovideamixofholdingsizes,harvestingexperience,acquisitionhistory(inheritedornon-inherited),estateplanningstatus(formalplanornoformalplan),anddemographics(gender,age,andformaleducation).

Parallelfocusgroupsof6to10forestryandconservationprofessionalsalsowereheldinNewHampshire,Wisconsin,SouthCarolina,andWashington(logisticalproblemsprecludedaprofessionalsfocusgroupinAlabama).ParticipantsincludedmembersofStateforestryagencies,universityextensionsystems,andnongovernmentalorganizationsaswellasprivateconsultingforesters.Thesegroupscoveredthesametopicsastheforestownerfocusgroups.

combined impact of Federal and State Taxes

FamilyforestownersfacecombinationsofFederalandStatetaxesontheirforest-relatedincomeandforestland,yetwithfewexceptionsresearchershavestudiedtaxesinisolationfromoneanother.Onlytwostudieswereidentifiedinthepast25yearsthatconsideredFederalandStatetaxesincombination.FollowingpassageoftheTaxReformActof1986(P.L.99-514),BettingerandotherscalculatedtheeffectofFederalandStateincometaxesonhypotheticalfamilyforestownersintheSouth(Bettingerandothers1989)andWest(Bettingerandothers1991).SmithandothersupdatedthisworkfollowingpassageoftheEconomicGrowthandTaxReliefReconciliationActof2001andJobsandGrowth

TaxReliefReconciliationActof2003,thefirstBushtaxcuts,calculatingtheeffectofFederalandStateincometaxesforfamilyforestownersIntheNorth(Smithandothers2007)andWest(Smithandothers2008).

Inastudyinitiatedin2003,researcherswiththeUniversityofGeorgiaWarnellSchoolofForestResourcesandtheForestServiceSouthernResearchStationquantifiedtheeffectofFederalandStatetaxesonprivateforestownersbycalculatinglandexpectationvalue(LEV)fortypicalforestmanagementregimesin22timber-producingStatesintheSouth,North,andNorthwest.Thecalculationsweremadepre-taxandagainaftereachFederalorStatetaxwasapplied.Usingthisapproach,itwaspossibletodeterminetherelativeeffectofeachtypeoftaxaswellasthecombinedeffect.Separatecalculationsweremadeforfamily,corporate,andinstitutionalforestowners.

Thestudywasframedbyseveralassumptions:thatforestownersofalltypesareprofit-orientedandemploytimbermanagementpracticesappropriatetothatobjectiveand“typical”fortheirregion;theownersmeettherequirementsforcurrentusepropertytaxvaluation;theydeductpropertytaxesannuallyagainstboththeFederal,andasallowed,Stateincometaxes;andtheycapitalizereforestationexpendituresandoffsetthemagainstharvestreturns.ThelastassumptionwasbasedonstudiessuchasGreeneandothers(2004)andSmithandothers(2007,2008),whichfoundthatmanyforestownersareunawareofFederalincometaxprovisionsdevelopedforownersofforestsandotherworkinglands.

SpreadsheetsweredevelopedtoperformtheLEVcalculationsbasedonuserinputforState,managementexpenses,timberprices,propertytaxperacre,Federalincometaxrate,Stateincometaxrate,harvesttaxperunitoftimber,anddiscountrate.FollowingKlemperer(1988)andChang(1996),pre-taxLEVwasusedasthebasereference,andreductioninLEVaseachtaxwasaddedasthemeasureoftheeconomiceffectofthattax.Adiscountrateof5percent,real(withnoadjustmentforinflation),wasusedforallLEVcalculations.Becauseitisuniformacrossthenation,theeffectoftheFederalincometaxwascalculatedfirst,followedbytheStatepropertytax,harvesttax,andincometax.

ForeachstudyState,datawerecollectedontypicaltimbermanagementpractices,includingspeciesorspeciesmix,rotationlength,andharvestvolumes;typicalcostsforstandestablishmentandtimbermanagement;averagestumpagepricesfortheproductsobtained;applicablepropertytaxperacre;harvesttaxesperunitoftimber;andapplicableFederalandStateincometaxrates.

Thedataweregatheredfromnumeroussources,includingpublishedpricereports;Statetaxwebsites;andcorrespondencewithconsultingforesters,Stateagencyand


cooperativeextensionforesters,anduniversityfaculty.FortheCoastalPlainStatesoftheSouth,managementpracticesandharvestvolumesweredeterminedusingtheSiMS2003growthandyieldmodel(ForesTechInternational2003).TimberproductpricesweretakenfromTimberMart-South(2003),usingtheregionalpinesawtimberandpulpwoodmarketsegmentsdefinedbyYinandothers(2002).TheFederalincometaxratesandtheincome,property,andharvesttaxratesusedforeachStatewerethoseineffectin2003.

effect of the Federal estate Tax

MostoftheliteratureontheeffectoftaxesontransfersofassetsfromonegenerationtoanotherrelatestotheFederalestatetaxandconcernsthetaxlawitself.Itconsistsofestateplanningguidesforforestowners(seeBeckerandJacobson2008,Siegelandothers2009)andpopularizeddescriptionsofhowparticularestatetaxprovisionsaffectforestowners(seeSiegel2010;Tuftsandothers2003a,2003b).Ahandfulofcasestudieshaveusedhypotheticalfamilyforestownerstoanalyzeaspectsofintergenerationaltransfersofforestland,includingtheeffectofformofforestownershipandassetsusedtopaytheestatetaxonnetreturnsfromtheforest(Howard1985)andtheinteractionbetweenFederalandStatedeathtaxes(Petersandothers1998;Waldenandothers1987,1988).

Withthemanystrategiesavailabletoreduceoreliminatetheimpactoftheestatetax,onemightexpectthatonlyownerswhofailtoplanwouldowetax.Manyowners,however,failtotakeadvantageoftheestateplanningtoolsavailabletothembecausetheyareunawareofthefullvalueoftheirholdings,overwhelmedbythecomplexityandever-changingnatureofestatetaxlaw,unabletoconfronttheirpersonalmortality,orunwillingtoacceptthelossofcontrolthatmostestateplanningstrategiesentail.Further,thestringentrequirementsforspecialusevaluationmakeitdifficultformanagedforestlandtoqualifyfororremainunderthatprovision(Petersandothers1998,Siegelandothers2009).

Inastudyinitiatedin1999,researcherswiththeMississippiStateUniversityCollegeofForestResourcesandtheForestServiceSouthernResearchStationinvestigatedtheeffectoftheFederalestatetaxonownersoffamilyforestsandotherworkinglands.ThestudyrepresentedthefirstattempttoquantifytheeffectoftheFederalestatetaxonfamilyforests.

Dataforthestudywerecollectedbymeansofamailedquestionnaire,usingtheDillman(1978)totaldesignmethod.AdraftversionofthequestionnairewaspretestedusingmembersoftheMississippiForestAssociation.TherevisedquestionnairewassenttolandownersrandomlyselectedfromthemembershiplistsoftheNationalWoodlandOwnersAssociationandAmericanTreeFarmSystemandanationwidedatabaseoffarmandranchownersmaintainedbyJ.D.EsseksatNorthernIllinoisUniversity.Questionnaire

recipientswerefirstaskedwhethertheyhadbeeninvolvedinthetransferofanestatebetween1987and1997,aperiodwhentheunifiedexemptionamountshieldedaconstant$600,000ofestatevaluefromtax.Thosewhorespondedaffirmativelywereaskedaseriesofquestionsaboutthecharacteristicsoftheestate,whetherspecialusevaluationhadbeenused,andwhatassetswereusedtopayanyFederalestatetaxdue.

ThenumberoffamilyforestholdingsaffectedwasestimatedbymultiplyingthepercentofpositiveresponsesbyBirch’s(1996)estimateofthenumberof“individual”and“other”privateforestownershipunitsintheUnitedStates.Thenumberofacresaffectedwasestimatedbymultiplyingthatfigurebythemeanacreageresponseforthequestion.Chi-squaretestsatthe5percentlevelofsignificancewereusedtotestfordifferencesbetweentheresponsesfromforestownersandotherownersofworkinglands.

effectiveness of Financial incentive Programs in Promoting Sustainable Practices

Researchhasshownthatalargepercentageoffamilyforestownersareunawarethatfinancialandtaxincentiveprogramsexistorwhattheprogramscandoforthem(Anderson1960,ChristensenandGrafton1966,Farrell1964,Greeneandothers2004,PerryandGuttenberg1959);thatmanyownerswhoparticipateinanincentivewouldhavedonethesupportedpracticeanyway(BrockettandGerhard1999,Jamesandothers1951),althoughtheincentivegenerallyenablestheownerstotreatadditionalacres(BlissandMartin1990,Royer1987);andthatfavorablepropertyandcapitalgaintaxprovisionshavelittleshort-termeffectonforestownerbehavior(BrockettandGerhard1999,Kluenderandothers1999,Stoddard1961).

Threeapproaches,however,haveconsistentlybeenfoundtoinfluencefamilyforestownerstoapplysustainablepracticesontheirland:technicalassistance,cost-sharepayments,andprogramsthatputownersindirectcontactwithaforesterorothernaturalresourceprofessional.Jamesandothers(1951)foundthatownersprefertechnicalassistancetofinancialortaxincentives.GreeneandBlatner(1986)furtherfoundthatdirectcontactwithaprofessionalisassociatedwithownersbecomingforestmanagers.Eganandothers(2001)foundthattheaspectsoftheForestStewardshipProgramthatinvolvecontactwithaprofessional—gettingamanagementplanandtechnicalassistance—werethethingsownerslikedbestabouttheprogram.

Inanationwidestudyconductedin2005,researchersfromfiveinstitutionsidentifiedandassessedthesuccessofpublicandprivateincentiveprogramsinencouragingfamilyforestownerstousesustainablepracticesontheirlands.ThecollaboratinginstitutionsweretheForestServiceSouthernResearchStation,theClemsonUniversityDepartment


ofForestryandNaturalResources,PennsylvaniaStateUniversitySchoolofForestResources,UniversityofMinnesotaDepartmentofForestResources,andUtahStateUniversityDepartmentofSociology,SocialWork,andAnthropology.

Thestudywasconductedinthreephases:asystematicreviewoftheresearchliteratureonthetax,cost-share,andotherfinancialincentivesavailabletofamilyforestowners;anationwidesurveyofselectedforestryofficials;andfocusgroupswithfamilyforestownersintheSouth,North,andWest.

PublicationsfortheliteraturereviewwereidentifiedthroughasearchofdatabasesincludingtheUniversityofMinnesotaSocialSciencesinForestrywebsiteandCABIPublishing’sForestryAbstracts.Theidentifiedpublicationsweresummarizedandanalyzedfortheirconclusionsabouttheeffectivenessofthevariousincentiveprogramsandtheirapparenteffectonforestownermotivationsandpractices.

Thesurveyofforestryofficialswasdonebymeansofamailedquestionnaire,usingtheDillman(2000)tailoreddesignmethod.OneofficialineachStatewasselectedtoreceivethequestionnaire,basedontheiroverallknowledgeoffinancialincentiveprograms.TheappropriatepersonineachStatewasidentifiedusingpeerrecommendations;inmostcasesitwastheindividualintheStateforestryagencywhomanagedtheForestStewardshipProgram.Thedraftquestionnairewaspre-testedwiththeidentifiedofficialineachoftheresearchers’homestateandrefinedusingtheirfeedback.

ThequestionnaireaskedtheofficialstonameanddescribethepublicandprivatefinancialincentiveprogramsavailabletofamilyforestownersintheirState.Infollow-upquestionstheywereaskedtousea4-pointLikertscaletoassessforestowners’awarenessofeachprogramtheyhadidentified,itsoverallappealamongtheownersawareofit,anditseffectivenessinencouragingsustainableforestryandenablingownerstomeettheirobjectivesofforestownership.Theofficialsalsowereaskedtoestimatethepercentofprogrampracticesthatremainedinplaceandenrolledacresthatremainedinforestovertime,andtosuggestwaystoimproveownerparticipationintheprogramanditsadministrativeeffectiveness.

NineFederalfinancialincentiveprogramswereexamined:theForestStewardshipProgram,ConservationReserveProgram,EnvironmentalQualityIncentivesProgram,ForestLandEnhancementProgram,ForestLegacyProgram,LandownerIncentiveProgram,SouthernPineBeetlePreventionProgram,WetlandsReserveProgram,andWildlifeHabitatIncentivesProgram(table11.1).Threetypesofnon-Federalfinancialincentiveprogramsalsowereexamined:preferentialpropertytaxprogramsforforestland,

otherState-sponsoredincentiveprograms,andprogramssponsoredbyprivateentities.

Althoughthequestionnairewasextensive—89questionson30pages—follow-upe-mailsandtelephonecallsproduceda100percentuseableresponse.TheLikertscaleratingsandtheofficials’writtencommentswerecompiledandsummarized.Tukeytestsatthe5percentlevelofsignificancewereusedtoidentifystatisticallysignificantdifferencesbetweentheofficials’ratingsforeachprogramattribute.

ThefinalstudyphaseconsistedoffocusgroupswithfamilyforestownersinSouthCarolina,Pennsylvania,Minnesota,andOregon.TwofocusgroupswereconductedineachState,onewithmembersofforestownerorganizationsandonewithotherfamilyforestowners.Theparticipantsineachgroupwereidentifiedthroughanapproachsimilartothatusedforthesurveyofforestryofficials.Thenumberofparticipantsinthefocusgroupsrangedfrom7to17andaveraged11.

ThefocusgroupsessionswereconductedusingtheprotocoldescribedbyDanielsandWalker(2001),withamoderatorguidingdiscussionbymeansofachartmountedonthemeetingroomwallandverbalpromptsfromapreparedguideline.Datawerecollectedbyrecordingthesessionsandbytakingnotes.Therecordingsandnotesforeachsessionwerequalitativelyanalyzed,againfollowingDanielsandWalker(2001),firstbyasingleresearcher,thenindiscussionamongtheentireresearchteam.Theresultsforeachregionwerecodedintermsofthemeswithoutconsiderationforwhatmightbethemesinotherregions.Oncetheregion-specificthemeswereidentified,theywerecomparedacrossregionstoidentifyemergentpatterns.Thedatawerethenre-analyzedtolookspecificallyforthepresenceorabsenceoftheemergentpatternsineachregion.

ReSulTS

Family Forest owner Awareness and use of Federal income Tax Provisions

InthestudyofSouthCarolinafamilyforestowners,87percentofthesurveyrespondentswereawareofatleastoneFederalincometaxprovision.Nearly80percentwereawareoftwoprovisionsavailabletotaxpayersingeneral:treatmentofqualifyingincomeasalong-termcapitalgainandannualdeductionofmanagementcosts.Incontrast,justover40percentwereawareofspecialtreatmentofqualifyingcost-sharepayments,oneoftheprovisionsavailabletoownersofworkinglands(Greeneandothers2004).

Long-term capital gain treatment of qualifying income—Some78percentoftherespondentswereawarethatincomefromthesaleordisposaloftimbercanqualifyasalong-term


capitalgain.Ofthosewhowereawareoftheprovision,85percenthadusedit(table11.5).Respondentswhowereawareoftheprovisiontendedtoownmoreacresoflandandmoreforestedacresthanthosewhowerenot;theyalsoweremorelikelytobelongtoaforestownerorganizationandtohaveawrittenforestmanagementplan,andtendedtohavehigherlevelsofformaleducationandhouseholdincome.AsshowninTable11.6,mostrespondentswhowereawareoftheprovisionbuthadnotuseditbelieveditdidnotapplytotheirsituation(36percent)orthatthebenefitwastoosmalltobotherwith(21percent).

Annual deduction of management expenses—Overall,78percentoftherespondentswereawaretheycoulddeductordinaryandnecessaryforestmanagementexpensesannually,andofthosewhowereawareoftheprovision,85percenthadusedit(table11.5).Respondentswhowereawareoftheprovisiondifferedfromthosewhowerenotinthesamewaysasabove:theytendedtoownmoreacresoflandandmoreforestedacres,weremorelikelytobelongtoaforestownerorganizationandtohaveawrittenforestmanagementplan,andtendedtohavehigherlevelsofformaleducationandhouseholdincome.Mostrespondentswhowereawareoftheprovisionbuthadnotuseditbelieveditdidnotapplytotheirsituation(35percent)orthatthebenefitwastoosmalltobotherwith(33percent;table11.6).

Depreciation and the section 179 deduction—Abouthalfoftherespondents(51percent)wereawaretheycouldrecoverthecostofequipmentandotherpropertypurchasedfortheproductionofincomeontheirforeststhroughdepreciationorthesection179deduction.Ofthosewhowereawareoftheprovisions,66percenthadusedoneorboth(table11.5).Respondentswhowereawareoftheprovisionsdifferedfromthosewhowerenotinthattheytendedtoownmoreacresoflandandmoreforestedacres,weremorelikelytoowntheirforestlandprimarilyfortimberproduction,weremorelikelytobelongtoaforestownerorganizationandtohaveawrittenforestmanagementplan,weremorelikelytobesalariedprofessionals,andtendedtohavehigherlevelsofformaleducationandhouseholdincome.Mostrespondentswhowereawareoftheprovisionsbuthadnotusedthembelievedtheprovisionsdidnotapplytotheirsituation(57percent)orthatthebenefitwastoosmalltobotherwith(21percent;table11.3).

Loss deductions—Only60percentoftherespondentswereawaretheycouldtakeadeductionfortimberorotherincome-producingassetslostinacasualty,theft,condemnation,orforownerswhoheldtheirforestasatradeorbusiness,inanoncasualtyevent.Further,only23percentofthosewhowereawareoftheprovisionhadusedit(table11.5).Respondentswhowereawareoftheprovisiondifferedfromthosewhowerenotonnearlyallofthedemographiccharacteristicstested:theytendedtoownmoreacresoflandandmoreforestedacres,weremorelikelytoowntheir

Tabl

e 11

.5—

Num

ber

and

perc

ent o

f for

est o

wne

r re

port

ing

awar

enes

s and

use

of b

enefi

cial

Fed

eral

inco

me

tax

prov

isio

ns

Res

pons

e to

sur

vey

long

-term

capi

tal g

ains

trea

tmen

t

man

agem

ent

expe

nse

dedu

ctio

n

Dep

reci

atio

n,Se

ctio

n 17

9ade

duct

ion

loss

dedu

ctio

nsR

efor

esta

tion

ince

ntiv

esc

ost-s

hare

paym

ent

excl

usio

nTa

x cr

edit

Am

ortiz

atio

nAw

are

of th

e pr

ovis

ion

364

77.8

%36

377

.6%

235

51.4

%27

760

.2%

255

54.8

%26

056

.4%

194

42.1%

Had

use

d th

e pr

ovis

ion

308

84.6

%30

884

.8%

155

66.0

% 6

423

.1%19

978

.0%

207

79.6

%13

770

.6%

Had

not

use

d th

e pr

ovis

ion

5615

.4%

5314

.6%

8034

.0%

213

76.9

%56

22.0

%53

20.4

%57

29.4

%N

ot a

ware

of t

he p

rovi

sion

104

22.2

%10

522

.4%

222

48.6

%18

339

.8%

210

45.2

%20

143

.6%

267

57.9

%

a Allo

ws

a ta

xpay

er to

ded

uct t

he c

ost o

f cer

tain

type

s of

pro

perty

as

an e

xpen

se, r

athe

r tha

n re

quiri

ng th

e co

st to

be

capi

taliz

ed a

nd d

epre

ciat

ed.

Sour

ce: G

reen

e an

d ot

hers

200

4.


forestlandprimarilyforrecreationortimberproduction,weremorelikelytobelongtoaforestownerorganizationandtohaveawrittenforestmanagementplan,weremorelikelytobesalariedprofessionals,andtendedtohavehigherlevelsofformaleducationandhouseholdincome.Mostrespondentswhowereawareoftheprovisionbuthadnotuseditbelieveditdidnotapplytotheirsituation(49percent)orthatthebenefitwastoosmalltobotherwith(16percent;table11.6).

Reforestation incentives—Justoverhalfoftherespondents(55percent)wereawareofthereforestationtaxincentives,butamongthosewhowereaware,80percenthadusedoneorbothincentives(table11.5).Respondentswhowereawareofthereforestationtaxcredittendedtoownmoreacresoflandandmoreforestedacres,weremorelikelytobelongtoaforestownerorganizationandtohaveawrittenforestmanagementplan,andtendedtohaveahigherlevelofhouseholdincome.Respondentswhowereawareofthereforestationamortizationdeductiontendedtoownmoreacresoflandandmoreforestedacres,weremorelikelytoowntheirforestlandprimarilyforrecreationortimberproduction,weremorelikelytobelongtoaforestownerorganizationandtohaveawrittenforestmanagementplan,weremorelikelytobeasalariedprofessionalorafarmer,andtendedtohavehigherlevelsofformaleducationandhouseholdincome.Mostrespondentswhowereawareoftheprovisionsbuthadnotusedthembelievedtheydidnotapplytotheirsituation(51percent)orthatthebenefitwastoosmalltobotherwith(31percent;table11.6).

Special treatment of qualifying cost-share payments—Only42percentoftherespondentswereawaretheycouldexcludeacalculatedportionofqualifyingpubliccost-sharepaymentsfromtheirgrossincome(table11.5),makingittheleast-knownprovisionsurveyed.Ofthosewhowereawareoftheprovision,71percenthadusedit.Respondentswhowereawareoftheprovisionweremorelikelythanthosewhowerenottobelongtoaforestownerorganizationandtohaveawrittenforestmanagementplan,andtendedtohaveahigherlevelofhouseholdincome.Mostrespondentswhowereawareoftheprovisionbuthadnotuseditbelievedthebenefitwastoosmalltobotherwith(29percent)orthatitdidnotapplytotheirsituation(22percent;table11.6).

State Property Taxes

Survey of State property tax administrators—EstimatesoffamilyforestownerparticipationinStatepreferentialpropertytaxprogramsvariedwidely.Just48percentoftheadministratorswhorespondedtothesurveyestimatedthathalformoreofeligiblefamilyforestownerswereenrolledintheirState’sprogram.AdministratorswhoindicatedthegreatestpercentofeligibleforestlandenrolledgenerallywerefromStatesintheWestorSouth.

Tabl

e 11

.6—

Rea

sons

fore

st o

wne

rs w

ho w

ere

awar

e of

ben

efici

al F

eder

al in

com

e ta

x pr

ovis

ions

cite

d fo

r no

t usi

ng th

e pr

ovis

ions

Res

pons

e to

sur

vey

lon g

-term

capi

tal g

ains

trea

tmen

t

man

agem

ent

expe

nse

dedu

ctio

n

Dep

reci

atio

n,Se

ctio

n 17

9ade

duct

ion

loss

dedu

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nsR

efor

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tion

ince

ntiv

esc

ost-s

hare

paym

ent

excl

usio

nTa

x cr

edit

Am

ortiz

atio

nIt’

s to

o co

mpl

icat

ed2

3.8%

35.

5%3

3.9%

115.

8%1

2.0%

00.

0%5

10.2

%Be

nefit

is to

o sm

all t

o bo

ther

with

1120

.8%

1832

.7%

1621

.1%31

16.2

%16

31.4

%10

23.3

%14

28.6

%It

does

n’t a

pply

to m

y si

tuat

ion

1935

.8%

1934

.5%

4356

.6%

9348

.7%

2039

.2%

2251

.2%

1122

.4%

I don

’t wa

nt to

use

it1

1.9%

11.

8%2

2.6

%5

2.6%

23.

9%0

0.0%

714

.3%

Oth

er20

37.7

%14

25.5

%12

15.8

%51

26.7

%12

2.35

%11

25.6

%12

24.5

%

a Allo

ws

a ta

xpay

er to

ded

uct t

he c

ost o

f cer

tain

type

s of

pro

perty

as

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xpen

se, r

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r tha

n re

quiri

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st to

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capi

taliz

ed a

nd d

epre

ciat

ed.

Sour

ce: G

reen

e an

d ot

hers

200

4.


Oftheadministratorswhoprovidedaresponse,83percentestimatedthatparticipatingintheirState’sprogramreducedtheannualpropertytaxburdenbyhalformore.Ontheonehand,someadministratorsexpressedregretthatforestownerscouldnotqualifyfortheirState’sagriculturalpreferentialpropertytaxprogram,whichtypicallyprovidesgreatertaxrelief,whileothersexpressedfrustrationat“taxdodgers”and“loopholes”thatallowedtheirState’sprogramtobemisused.

OnlyathirdoftheadministratorsrespondedthattheirState’sprogramhadalloftheattributesofaneffectivepropertytaxpolicy.Themostcommonlynotedshortcomingswerelackofconsistencyfromcountytocountyandlackofstablefunding,followedbylackofcomplementaritywithotherprograms(Butlerandothers2010).

Family forest owner focus groups—Propertytaxeswerebyfarthetaxofgreatestconcerntothefamilyforestownersinthisstudy,comingupunpromptedasaconcerninall10focusgroups.Thisisnotasurprise,sincepropertytaxesoccuronanannualbasisasopposedtobeingarareevent,aswithtaxesontimberincome,oronce-in-a-lifetime,aswithanestateorinheritancetax.ParticularlyoutsidetheSouth,ownersperceivedtheirpropertytaxesashigh,outofsyncwithwhattheirlandwasworth,andinevitablyincreasing.

SomeforestownershadneverheardabouttheirState’spreferentialpropertytaxprogram,whileotherswereuncertainaboutwhethertheywereenrolledinaprogram.ThelatterwasparticularlythecaseintheSouth,whereprogramrequirementsaretheleastrestrictive;ownersinStateswithmorerigorousprogramsweremorelikelytoknowwhatprogramtheywereenrolledinanditsrequirements.Theprimarymeansforfindingoutabouttaxprogramswasconversationswithneighbors,friends,andrelatives,followedbycountyassessors,forestersorloggersworkingontheland,andcommunitymeetings.

Atthesametime,manyownerswhowereenrolledtheirState’sprogramwerehighlypositiveaboutitandrecommendedittothosewhowerenotenrolled.Theycitedbenefitsincludingthatthereducedpropertytaxeswerehelpingthemkeeptheirland,andtheprogrampromotedopenspaceandsustainability,encouragedtreeplantingandgrowth,andimprovedforestmanagement.Someownersbecameinterestedatthispoint,whileothersremainedwary.

Reasonsforwarinessaboutparticipatinginapreferentialpropertytaxprogramincludeduncertaintyaboutpenaltiesforwithdrawinglandandwhathappenedifthelandwassoldorpassedtoheirs.Privacyandfreedomofactionweremajorobjectivesformanyowners,withtheresultthatsomeoptednottoenrollintheirState’sprogramduetofearoflosing

managerialcontroltothegovernmentorbeingrequiredtoallowpublicaccessontheirland(Butlerandothers2010).

combined impact of Federal and State Taxes

ThefullstudyreportedhereestimatedtheeffectofFederalandStatetaxesonprivately-ownedforestlandin22StatesintheSouth,North,andNorthwest,bycalculatingpre-andafter-taxlandexpectationvalue(LEV)undertypicalmanagementregimesforfamily,corporate,andinstitutionalforestowners(Cushing2006).Thissection,however,summarizesonlytheresultsforfamilyforestownersintheSouthernStates.

Pre-tax LEV—AmongtheCoastalPlainStates,pre-taxLEVrangedfrom$373peracreforTexasto$796peracreforAlabama,withameanof$585peracreandamedianof$539peracre(table11.7).Oklahomawasnotincludedintheanalysis.Thespreadsheetsforall10includedStateswerebuiltaroundthesameloblollypinemanagementplanandassumedthesamecostsforstandestablishmentandtimbermanagement.Theonlysourcefordifferencesinpre-taxLEVwasvariationinthestumpagepricesforthepulpwood,chip-n-saw,andsawtimberproduced.

IntheStatesoftheAppalachian-Cumberlandhighlands,pre-taxLEVwasjust$271peracreforKentucky,dueprimarilytolongrotationlengthsandlowharvestyieldsformixeduplandhardwoodtimber.Pre-taxLEVforTennesseewascomparabletothatfortheCoastalPlainStates,at$579peracreforuneven-agemanagementofmixedoak-hickorytimber(table11.7).Therewasnostatisticallysignificantdifferenceintheresultsforthetwosubregions(Cushing2006).

Effect of the Federal income tax—AlthoughfamilyforestownersineveryStatepaidthesame15percentFederalcapitalgaintaxontheirnetharvestreturns,theeconomiceffectofthetaxvariedwiththesizeandfrequencyofharvestreturnsandtheamountofcapitalizedreforestationexpenses.IntheCoastalPlainStates,LEVdecreasedbyamountsrangingfrom$91peracreforTexasto$153peracreforAlabama,inroughlythesameorderaspre-taxLEV(table11.6).Theabsoluteandrelativechangeswereinverselyrelatedtooneanother,however,withthe$91peracrechangeforTexasequatingtoa24percentreductioninLEVandthe$153peracrechangeforAlabamaequatingtoa19percentreduction.

IntheAppalachian-Cumberlandhighlands,theFederalincometaxhadasimilarbutsmallereffect,decreasingLEVby$48peracre(18percent)inKentuckyand$87peracre(15percent)inTennessee(table11.6).Thedifferenceintheresultsforthetwosubregionswasstatisticallysignificant(Cushing2006).


Effect of property tax—Propertytaxratesonfamily-ownedforestlandvariedwidelyacrosstheCoastalPlainStates,fromjustover$1peracreperyearinArkansastonearly$5peracreperyearinGeorgia.Asaresult,theamountbywhichpropertytaxdecreasedLEValsovariedwidely,from$18peracre(4percent)forArkansasto$71peracre(10percent)forGeorgiaand$51peracre(14percent)forTexas.TheresultsfortheStatesoftheAppalachian-Cumberlandhighlandswereatthelowendofthesamerange(table11.6).Therewasnostatisticallysignificantdifferenceintheresultsforthetwosubregions(Cushing2006).

Effect of harvest tax—Onlyharvesttaxesleviedonforestownerswereincludedinthestudy;taxesleviedontimberprocessorswereexcluded.OfthethreeSouthernStatesthatlevyaharvesttaxonforestowners,LouisianaandGeorgiaexpressedthetaxasapercentageoftimberstumpageprice,whileMississippiexpresseditasaflatrateperunitharvested.InallthreeStatesthetaxratewasquitelow,resultinginadecreaseinLEVrangingfrom$6peracre(1percent)forMississippito$35peracre(7percent)forLouisiana(table11.6).

Effect of State income tax—Asdiscussedabove,FloridaandTexasdonottaxincometoindividualsandTennesseetaxesonlydividendandinterestincome.InmostoftheSouthernStatesthattaxincometoindividualsthetopmarginaltaxratefor2003fellbetween5and6percent;theexceptionswereNorthandSouthCarolina,withtopmarginaltaxratesof8.25percentand7percent,respectively.IntheCoastalPlainStates,StateincometaxdecreasedLEVbyamountsrangingfrom$41peracre(8percent)forVirginiato$57peracre(11percent)forNorthCarolina.IntheAppalachian-Cumberlandhighlands,StateincometaxdecreasedLEVby$17peracre(6percent)inKentucky(table11.6).Therewasnostatisticallysignificantdifferenceintheresultsforthetwosubregions(Cushing2006).

effect of the Federal estate Tax

Theresearchresultssummarizedinthissectionarefromanationalsurvey(Greeneandothers2006).Thesamplesizeprecludessegmentingthefindingsintoregionalestimates;however,itisknownthattheSouthernStatesaccountforabouttwo-fifths(41percent)offamilyforestholdingsandhalf(51percent)offamily-ownedforestlandintheUnitedStates(ButlerandLeatherberry2004).

Family forest land transferred—Duringthesurveyperiod,9percentoftheforestownerrespondentshadbeeninvolvedinthetransferofanestate.Amongtheserespondents,84percentwerefamilymembersofthedecedent;theremaining16percentwerefriends,businessassociates,orprofessionalswhohadservedthedecedent.Roughly

halfoftheestates(49percent)hadbeenheldinindividualownershipbythedecedent,withanother27percentheldjointlywithotherindividuals,andtheremaining24percentheldbypartnerships,corporations,orsuchotherformsofbusinessasFamilyLimitedPartnershipsorLimitedLiabilityCompanies.Some64percentofthedecedentownershadusedafinancialorlegalprofessionaltohelpthemplantheirestate(table11.8).

Thevalueofthedecedents’grosstaxableestatesrangedfrombelowthe$600,000unifiedcreditamounttoover$3million.Thetotalareaoftheforestestatesrangedfrom10to20,000acres,withameanof1,225acresandamedianof200acres;theforestarearangedfrom8to20,000acres,withameanof1,024acresandamedianof156acres(table11.8).Expandedtofamily-ownedforestlandsthroughouttheUnitedStates,thesefindingsmeananestimated77,200forestestates,with79.1millionacresofforestland,weretransferredeachyearatthedeathoftheirowners(Greeneandothers2006).

Special use valuation—Withforestland,specialusevaluation(seeabove)canbeappliedtothelandonlyortoboththelandandtimber.Just33percentofforestestatesqualifiedforand26percentelectedtousespecialusevaluation.Oftheestatesthatusedspecialusevaluation,26percentappliedittothelandonlyand74percentappliedittoboththelandandtimber.

Applyingspecialusevaluationreducedthetaxablevalueofforestestatesbyamountsrangingfrom$0to$750,000,withameanof$325,000andamedianof$250,000,bothwellunderthe$750,000maximumfortheprovisionduringthestudyperiod.Expandednationally,thesefindingsmeananestimated20,000forestestateselectedtousespecialusevaluationeachyear,resultinginacombinedtotalreductionintheirtaxableestatevaluesontheorderof$6.5billion(Greeneandothers2006).

Assets used to pay the Federal estate tax—Asubstantialmajorityofsurveyrespondents(62percent)reportedthatnoFederalestatetaxwasdueinthetransferstheywereinvolvedwith.Inmostinstanceswhereestatetaxwasdue,insuranceorotherassetswereusedtopayit.Butin42percentofthetransfers,timberorlandwassoldtopaypartorallofthetax.

In22percentofalltransfers,timberwassoldtopayestatetax,with75percentofthesalesnecessarybecauseotherassetswerenotsufficienttopaythetax.Theforestsizeofownershipsthatneededtoselltimberrangedfrom79to10,000acres,withameanof3,035acresandamedianof670acres.Theareaharvestedrangedfrom5to1,100acres,withameanof498acresandamedianof430acres.Expandednationally,thesefindingsmeananestimated


Table 11.8—Characteristics of the estates of forest owners and other owners of working lands

Survey question ResponseForest owners other rural owners

Number Percent Number Percent

Involved in an estate transfer?aNo 1,110 91.3 578 86.1Yes 106 8.7 93 13.9

Relationship of respondent to the decedent

Family member 85 84.2 84 94.4Friend or business associate 9 8.9 4 4.5Professional advisor/trustee 7 6.9 1 1.1

Form of ownership in which land was held

Individual 51 48.6 54 58.1Joint 28 26.7 26 28.0Partnership 11 10.5 1 1.1Corporation 8 7.6 4 4.3Otherb 7 6.7 8 8.6

Value of gross taxable estate, Southern regionc

Less than $600,000 21 60.0 17 73.9$600,000 to $999,999 4 11.4 4 17.4$1,000,000 to $1,999,999 5 14.3 0 0.0$2,000,000 to $2,999,999 1 2.9 0 0.0$3,000,000 or more 4 11.4 2 8.7

Value of gross taxable estate, Northern and Western regionsc

Less than $600,000 26 40.6 40 67.8$600,000 to $999,999 16 25.0 8 13.6$1,000,000 to $1,999,999 9 14.1 7 11.7$2,000,000 to $2,999,999 6 9.4 1 1.7$3,000,000 or more 7 10.9 3 5.1

Total area transferred 1 to 99 acres 24 23.3 23 28.4100 to 499 acres 48 46.6 35 43.2500 acres or more 31 30.1 23 28.4

Forested area transferreda

0 acres 0 0.0 58 71.61 to 99 acres 38 36.9 16 19.8100 to 499 acres 38 36.9 7 8.6500 acres or more 27 26.2 0 0.0

Area converted to croplanda


Area converted to grazinga


Estate planning helped by a professional?

Yes 67 64.4 64 71.1No 34 32.7 26 28.9Don’t know 3 2.9 0 0.0

Did professional help reduce taxes due?a

Yes 41 61.2 48 75.0No 21 31.3 8 12.5Don’t know 5 7.5 8 12.5

aThe samples differ statistically at the α = 0.05 level of significance.bTest results are based on a small sample.cSuch as a Family Limited Partnership or a Limited Liability Company.


4,900forestestatesneededtosellatotalof2.4millionacresoftimbereachyeartopaypartoralloftheFederalestatetax.

In19percentofalltransfers,landwassoldtopayestatetax,with57percentofthesalesnecessarybecauseotherassetswerenotsufficienttopaythetax.Theforestsizeofownershipsthatneededtoselllandrangedfrom100to2,000acres,withameanof770acresandamedianof490acres.Theamountoflandsoldrangedfrom160to780acres,withameanof387acresandamedianof220acres.Further,in29percentofthecaseswherelandwassoldtopayestatetax,thelandwasdevelopedorconvertedtoanotheruse.Expandednationally,thesefindingsmeananestimated3,300forestestatesneededtosellatotalof1.3millionacresoflandeachyeartopaytheFederalestatetax,ofwhichontheorderof400,000acresweredevelopedorconvertedtootheruses(Greeneandothers2006).

Comparison with owners of other working lands—Thequestionnaireresponsesfromownersofotherworkinglands,largelyfarmersandranchers,weremoreremarkablefortheirsimilaritiestoforestownersthantheirdifferences.Thegroupsdifferedstatisticallyinjust6ofthe20characteristicssurveyed,withmostdifferencesstemmingfromthedifferentusesthetwogroupsmakeoftheirland:whetheritismostlyforestormostlycroporgrazingland,andwhetherspecialusevaluationwasappliedtobothlandandtimberortothelandonly.Also,alowerpercentageofforestownershadbeeninvolvedinthetransferofanestateduringthesurveyperiod,andforestownerswerelesslikelythanotherlandownerstobelievethedecedent’suseofanestateplanningprofessionalhadreducedtheamountofestatetaxdue(Greeneandothers2006).

effectiveness of Financial incentive Programs in Promoting Sustainable Practices

Thissectionalsoreportsfindingsfromanationalstudy.Buttheresultsforthesurveyofforestryofficials,summarizedfromJacobsonandothers(2009),arefortheSouthernStates.Andwhiletheresultsfortheforestownerfocusgroups,summarizedfromDanielsandothers(2010)arefortheentireUnitedStates,pointswheretheSouthdiffersfromotherregionsarenoted.

Survey of State forestry officials—Table11.9summarizestheresultsforFederalfinancialincentiveprogramsasrankedbytheStateforestryofficials.NoneoftheofficialsrespondedabouttheLandownerIncentiveProgram,whichforthatreasonwasexcludedfromtheanalysis.Sectionaofthetableshowstheofficials’meanrankingsforforestownerawarenessofeachprogramanditsoverallappealamongownersawareofit.Alloftheprogramswererankedinthemiddlerangesforbothawarenessandappeal,withappealgenerallyratedhigherthan

awareness.Therewerenostatisticallysignificantdifferencesbetweentheratingsforanyoftheprograms(Table11.9).

SectionbofTable11.9summarizestheofficials’meanrankingsfortheprogramsintermsoftheireffectivenessinencouragingsustainableforestryamongparticipatingowners.TheForestLegacyProgram(FLP)wasrankedhighestoverall,scoringwellinallattributesofsustainability.Rankednext-highestweretheConservationReserveProgram(CRP),ForestStewardshipProgram(FSP),andForestLandEnhancementProgram(FLEP).CRPscoredparticularlywellforprotectingsoilproductivityandwaterqualityandpreventingconversionofforestland.FSPscoredwellforprotectingwaterquality,encouragingforestmanagement,andprotectingwildlifeandfish,whileFLEPscoredquitewellforencouragingforestmanagement.

TheWetlandsReserveProgram(WRP)wasrankednext-highestoverall,receivingitsbestscoresforprotectingwaterquality.ThelowestrankingswenttotheWildlifeHabitatIncentivesProgram(WHIP),EnvironmentalQualityIncentivesProgram(EQIP),andSouthernPineBeetlePreventionProgram(SPBP),althoughWHIPscoredquitewellforprotectingwildlifeandfish,EQIPforprotectingwaterqualityandsoilproductivity,andSPBPforencouragingforestmanagement(Table11.9).

SectioncofTable11.9summarizestheofficials’meanrankingsfortheprogramsintermsoftheireffectivenessinhelpingownersmeettheirobjectivesofforestownership.Theofficialsgenerallyscoredtheprogramslesseffectiveinthisareathaninencouragingsustainableforestry.FLPagainwasrankedhighest,scoringparticularlywellforhelpingownersmeetobjectivesrelatedtosoilandwaterconservation,wildlife,andaesthetics.FSPandFLEPwererankednext-highest;FSPreceivedhighmarksforobjectivesrelatedtowildlifeandtimberproduction,whileFLEPscoredwellforobjectivesrelatedtotimberproductionandsoilandwaterconservation.

CRPandWHIPwererankednext-highest.CRPscoredwellforownerobjectivesrelatedtosoilandwaterconservationandwildlife,whileWHIPreceivedthehighestpossiblescoreforobjectivesrelatedtowildlife.Noneoftheremainingprogramsratedabovethemoderatelyineffectiverange,althoughEQIPreceivedsolidscoresforobjectivesrelatedtosoilandwaterconservation,WRPforobjectivesrelatedtowildlife,andSPBPforobjectivesrelatedtotimberproductionandsoilandwaterconservation(Table11.9).

ThefinalsectionofTable11.9summarizestheofficials’meanrankingsforprogrampracticesremaininginplaceandenrolledacresremaininginforestovertime.AlleightFederalprogramsscoredinthemoderatelytovery


Table 11.9—State forestry officials’ evaluations of Federal forestry incentive programs

likert rating of incentive programa

Attribute FSP cRP eQiP FleP FlP SPBP WRP WhiPowner awareness and appeal

Awareness 2.69A 2.62A 2.40A 2.58A 1.89A 2.00A 1.75A 2.14A

Appeal 3.31AB 3.38AB 2.50AB 3.50A 3.00AB 2.75AB 2.13B 2.86AB

effectiveness in encouraging sustainable forestryPrevents conversion 3.00ABC 3.70A 2.11C 3.36AB 3.89A 2.83ABC 3.00AB 2.50BC

Prevents parcelization 2.85ABC 3.27ABC 2.11C 3.18ABC 3.89A 2.67BC 3.38AB 2.50BC

Maintains forest type 3.00AB 3.40AB 2.40B 3.27AB 3.63A 2.60AB 3.25AB 2.71AB

Protects wildlife/fish 3.77A 3.31A 3.30A 3.36A 3.67A 2.17B 3.38A 3.86A

Protects water quality 3.92A 3.77A 3.70A 3.36AB 3.78A 2.57B 3.50A 3.29AB

Protects soil productivity 3.54AB 3.92A 3.50AB 3.45AB 3.78A 2.43C 3.25ABC 2.86BC

Encourages forest management 3.85A 3.46ABC 2.50CD 3.91A 3.56AB 3.57AB 2.25D 2.71BCD

Overall average 3.42AB 3.44AB 2.82CD 3.42AB 3.74A 2.70D 3.14BC 2.92 CD

effectiveness in helping owners meet their objectivesTimber production 3.54A 3.00AB 2.30BC 3.82A 3.13AB 3.57A 2.38AB 1.86C

Recreation 3.23A 2.67A 2.30A 3.00A 3.25A 2.17A 2.75A 3.29A

Wildlife 3.69A 3.31A 3.20AB 3.55A 3.50A 2.43B 3.38A 4.00A

Aesthetics 3.38AB 2.69AB 2.70AB 2.91AB 3.50A 2.43B 3.00AB 3.14AB

Soil/water conservation 3.38AB 3.92A 3.50AB 3.64A 3.75A 2.86B 3.25AB 2.86B

Invasive species control 2.62A 2.50A 3.10A 2.91A 3.00A 2.67A 2.00A 2.71A

Overall average 3.31AB 3.11ABC 2.85BC 3.30AB 3.36A 2.70C 2.80C 2.98ABC

over timePractices remain in place 3.38A 3.69A 3.50A 3.50A 3.89A 3.71A 3.63A 3.17A

Acres remain in forest 3.54A 3.46A 3.00A 3.50A 3.89A 3.71A 3.63A 3.00A

aTukey’s grouping across incentive programs for each respective program attribute. α = 0.05. Means with the same superscript letter (A, B, or C) are not significantly different.Forest Stewardship Program (FSP); Conservation Reserve Program (CRP); Environmental Quality Incentives Program (EQIP); Forest Land Enhancement Program (FLEP); Forest Legacy Program (FLP); Southern Pine Beetle Prevention Program (SPBP); Wetlands Reserve Program (WRP); Wildlife Habitat Incentives Program (WHIP).Likert Scale awareness ratings: 1 = very low, 2 = moderately low, 3 = moderately high, 4 = very high; Likert ratings for effectiveness: 1 = very ineffective, 2 = moderately ineffective, 3 = moderately effective, 4 = very effective.


effectiverangeforthesecharacteristics,withnostatisticallysignificantdifferencesbetweenthescores(Table11.9).

TheStateforestryofficialsalsorankedthesuccessofStateandprivatefinancialincentiveprograms.Thequestionnairesectionsrelatingtoprivateincentiveprogramswerestreamlined,however,torequestonlyratingsfortheireffectivenessinencouragingsustainableforestryandhelpingownersmeettheirobjectivesofforestownership;nodatawerecollectedforownerawarenessandappeal,orforpracticesremaininginplaceandacresremaininginforestovertime.Forownerawareness,StatepropertytaxandincentiveprogramsgenerallywereratedhigherthanFederalprograms;forownerappeal,theywereratedaboutthesame(table11.10).

Intermsofeffectivenessinencouragingsustainableforestry,Stateincentiveprogramswererankedhigheroverallthanpropertytaxes,althoughbothtypesofprogramsreceivedhighscoresforpreventingconversionofforestland.Amongtheprivateprograms,incentivesofferedbynongovernmentalorganizationswererankedhigheroverallthanthoseofferedbyindustryfirmsandStateforestryassociations,scoringhighestamongallStateandprivateprogramsformaintainingforesttypeandprotectingwildlifeandfish.Programsofferedbyfirmsandassociationsscoredhighestforencouragingforestmanagement(table11.10).

Therewerenostatisticallysignificantdifferencesamongtheprogramsintheofficials’meanrankingsforeffectivenessinhelpingfamilyforestownersmeettheirobjectivesofownership.Stateincentiveprogramsagainscoredhigheroverallthanpropertytaxes,however,andprogramsofferedbynongovernmentalorganizationsagainscoredhigheroverallthanthoseofferedbyindustryfirmsandStateforestryassociations.BothtypesofStateprogramsreceivedtheirhighestscoresforhelpingownersmeetobjectivesrelatedtotimberproductionandsoilandwaterconservation.Programsofferedbyfirmsandassociationsscoredbestforobjectivesrelatedtotimberproduction,whileprogramsofferedbynongovernmentalorganizationsreceivedtheirhighestmarksforobjectivesrelatedtosoilandwaterconservation(table11.10).

Propertytaxprogramswererankedmoderatelytoveryeffectiveforbothpracticesremaininginplaceandenrolledacresremaininginforestovertime.OtherStateincentiveswererankedmoderatelyeffectiveforpracticesremaininginplace,butmoderatelyineffectiveforacresremaininginforest.Thedifferences,however,werenotstatisticallysignificant(table11.10;Jacobsonandothers2009).

Focus group sessions with family forest owners—Thefocusgroupsessionsweredesignedtofosterdiscussionaboutfamilyforestowners’experiencewithfinancialincentiveprograms,whatobjectivesofforestownershiptheprogramshelpedthemtomeet,andwhatadditionalprogramapproacheswouldhelpthemmeetotherobjectives.Theactualresponsesweremuchwiderinscope,however,comprisingfourbroadlysharedthemes(Danielsandothers2010):

• Forestownershipismorestronglylinkedtoself-identityandlifestylethantoprofit.Despitemarkeddifferencesintimeofownership,therewasabroadlysharedcommitmenttolong-termstewardshipandappropriatemanagement.Landownershipseemedmuchmoretiedtoself-identityandlifestylethantofinancialreturn,andinmanygroupstherewereclearstatementsthatfinancialreturnwasnotamajordriverformanagementbehavior.Oftheeightfocusgroups,theonemadeupofforestownerorganizationmembersintheSouthwasthemostfocusedontimbermanagementtogeneratefinancialreturn,buteveninthisgrouptherewasastrongintergenerationalcomponentintheirmotivationsforlandownership.

•Astrongethicofconservation.Areadilyverbalizedcommitmenttoastrongconservationethicappearedtobeinterwovenwiththeself-identitythemeforforestownershipandmanagement.Ratherthansayingtheyintendedtosellofflandorliquidatestandingtimber,participantsemphasizedadesiretopassthelandtofuturegenerations,ortobuymorelandiftheyhadthemoney.

•Landownershaveheardaboutsustainableforestry,butgenerallyarenotclearastoitsmeaning.Manyfocusgroupparticipantssaidtheyknewaboutsustainableforestry,butwhenaskedtoarticulatewhatthetermmeanttothem,theresponsesbecamemorehesitantorvague.Inmanycases,theparticipantsofferedstatementsresonantofsustainedyieldconcepts—suchasharvestingataratenogreaterthangrowth—orreferredtotheprogramofaparticulargroup—forexample,stating,“ThatiswhatTreeFarmispromoting.”

•Landownershaveahighinterestinface-to-facetechnicalassistance.Participantsineveryfocusgroupsaidtheywoulddoamanagementpracticetheythoughtwasimportanteveniftherewasnoincentiveprogram,butneededsomeonetowalktheirlandwiththemandguidethemthroughthedecisionaboutwhattheyshoulddo.Theneedforon-the-groundhelpinunderstandingwhatwashappeningontheirlandwasstronglyexpressedineveryregion.


Table 11.10—State forestry officials’ evaluations of State tax and incentive programs, industry and State association programs, and nongovernmental organization (NGO) programs

Attribute

likert rating provision or programa

Property tax

provisions

Stateincentiveprograms

industry programs

NGoprograms

owner awareness and appealAwareness 3.00A 2.70A N/A N/AAppeal/effectiveness 3.25A 3.14A N/A N/A

effectiveness in encouraging sustainable management

Prevents conversion 3.08A 3.71A 3.00A 2.66A

Prevents parcelization 2.91A 3.28A 2.87A 3.00A

Maintains forest type 3.00A 3.28A 3.14A 3.33A

Protects wildlife/fish 2.81A 3.14A 2.50A 3.33A

Protects water quality 3.00A 3.42A 3.12A 3.33A

Protects soil productivity 2.83A 3.43A 2.87A 3.33A

Encourages forest management 2.91A 3.71A 3.25A 3.00A

Overall average 2.94B 3.43A 2.96B 3.14AB

effectiveness in helping owners meet their objectives

Timber production 3.08A 3.85A 3.86A 3.00A

Recreation 2.72A 3.00A 2.37A 3.33A

Wildlife 2.75A 3.28A 2.62A 3.33A

Aesthetics 2.82A 2.85A 2.50A 3.33A

Soil/water conservation 3.00A 3.57A 3.25A 3.66A

Invasive species control 2.30A 3.14A 2.43A 2.67A

Overall average 2.79A 3.28A 2.85A 3.22A

effectiveness over timePractices remain in place 3.66A 3.00A N/A N/AAcres remain in forest 3.66A 2.25A N/A N/A

N/A = not applicable.aTukey’s grouping across incentive programs for each respective program attribute. α = 0.05. Means with the same superscript letter (A or B) are not significantly different. Likert Scale awareness ratings: 1 = very low, 2 = moderately low, 3 = moderately high, 4 = very high; Likert ratings for effectiveness: 1 = very ineffective, 2 = moderately ineffective, 3 = moderately effective, 4 = very effective.


DiScuSSioN AND coNcluSioNS

Becauseofthesourcesusedforlistsoffamilyforestownerstoreceivesurveyquestionnaires,theresultsofthesomeofthestudiessummarizedinthischaptermaybemorerepresentativeofownerswhoareactiveandfinanciallymotivatedthanfamilyforestownersintheSouthingeneral.Forthisreason,thefindingsshouldbeconsideredconservative.

Family forest owner awareness and use of Federal income tax provisions—Ownerawarenessoftheprovisionsavailabletotaxpayersingeneralrangedwidely,fromnearly80percentfortreatmentofqualifyingincomeasalong-termcapitalgainandannualdeductionofmanagementcoststobetween50and60percentfordepreciation,thesection179deduction,andlossdeductions.Incomparison,awarenessoftheprovisionsintendedforownersofforestsandotherworkinglands—thereforestationincentivesandspecialtreatmentofqualifyingcost-sharepayments—wassubstantiallylower,atroughly50percentorless.

Threedemographiccharacteristicswereassociatedwithownerknowledgeofeachofthebeneficialtaxprovisions:membershipinaforestownerorganization,havingawrittenforestmanagementplan,andahighlevelofhouseholdincome.Noneofthedemographiccharacteristicswereassociatedacross-the-boardwithowneruseofbeneficialtaxprovisions.

Thestudyfindingsconfirmtheneedforadditionaleffortstoimprovefamilyforestownerawarenessofbeneficialtaxprovisions,particularlytheprovisionsdesignedspecificallyforthem.Historically,thetaxhandbooks,shortcourses,popularizedarticles,andextensionworkshopsavailabletoownershavefocusedontaxaspectsoftimberproduction.Thisapproachhasbeenbeneficialandcertainlyneedstobecontinued.Itseemslikely,however,thatapproachesaimedatinformingownersofthetaximplicationsofotherforestuses—nontimberforestproducts,recreation,andstewardship,forexample—wouldappealtotheinterestsofadditionalowners(Greeneandothers2004).

State property taxes—MostofthepropertytaxadministratorssurveyedbelievedtheirState’sprogramwaseffectiveatachievingitsprimarygoal—reducingpropertytax—andapproximatelyhalfbelieveditwaseffectiveatretainingforestlandinareashighlysusceptibletodevelopment.Thefindingsfromthesurveyindicate,however,thatonlyafractionoffamilyforestlandintheUnitedStatesisenrolledinapreferentialpropertytaxprogram.Propertytaxeswereofgreaterconcerntotheforestownersthananyothertypeoftax,becausetheyoccuronanannualbasis,areduewhetherornotthepropertyproducedincomeduringtheyear,andareperceivedasbeinghighinrelationtothevalueoftheland.Acommonthemefromthefocusgroups

wasthatpropertytaxesmaybeforcingsomeownerstoselltimberorlandwhentheywouldrathernot.Thesedecisionsoftenarecompoundedbyotherfactors,suchasthelossofajobortherigorsoflivingonafixedincome.Anumberofownershadstoriesofrelatives,friends,orfriendsoffriendswhohadbeenforcedtoselltimberorland,andsomefearedtheywouldbeforcedintothesamepositioninthefuture.Aswell,severalownersenrolledinapreferentialpropertytaxprogramstatedthattheprogramhadenabledthemtoholdontotheirland.

Thestudyfindingssuggestthatpropertytaxpoliciesshouldbesimple,flexibleenoughtoaddressthevariousthreatstomaintainingforestlandthatexistacrossaState,andappropriatetothechallengesthattheownerscurrentlyface.ThepreferentialpropertytaxprogramsinmanyStateswereputinplacedecadesago,whenforestownersfacedadifferentsetofchallenges.Itneedstobedeterminedwhethertheseprogramsadequatelyaddressthecurrentsituation.Iftheprimaryobjectiveofapropertytaxprogramistokeepforestsasforests,itshouldfocusprimarilyondiscouragingconversiontootheruses;promotingtimberproductionorpublicaccessshouldbesecondary.

TheNewHampshireForestLandtaxprogramisoneexampleofaflexiblepreferentialpropertytaxprogramthatmeetstheneedsofdifferenttypesofowners.Thebasicprogramprovidesapropertytaxreductionforkeepinglandundeveloped.Forestownerswhodesiretomanagetheirlandaccordingtoaplandevelopedbyalicensedforesterareeligibleforanadditionalreductionintax.Ownerswhoarewillingtopermitnon-motorizedrecreationbythepublicontheirpropertymaybeeligibleforafurther“recreationaladjustment”intheassessmentandtaxationoftheirland(Butlerandothers2010).

Combined impact of Federal and State taxes—Researchhasconsistentlyshownthatmostfamilyforestownersdonottaketaxesintoconsiderationwhenmakingmanagementdecisionsfortheirland.Nonetheless,FederalandStatetaxesaffectthelevelofstewardshipownerscanpracticeandwhethertheyareabletocontinueholdingtheirland.

FederalandStatetaxeswerefoundtoreducethepre-taxlandexpectationvalueoffamily-ownedforestlandintheSouthbyamountsrangingfromjustover25percenttonearly50percent.Muchofthereduction,butonlyasmallpartofthevariation,isattributabletoFederalincometax.AllfamilyforestownersintheUnitedStatesfacethesameFederalcapitalgaintaxratesontheirnetreturnsfromtimberharvests.Theeconomiceffectofthetaxvarieswiththefrequencyandvalueofharvestreturnsandtheamountofcapitalizedreforestationexpenses,butwithinadefinedareathevariationfallswithinafairlynarrowrange.IntheCoastalPlainStates,forexample,Federalincometaxdecreasedthe


pre-taxexpectationvalueby19to24percent,andintheAppalachian-Cumberlandhighlandsby15to18percent(table11.7).

Incontrast,thecumulativeburdenofStateandlocaltaxesvariedwidelyacrosstheSouth,from4percentofpre-taxlandexpectationvalueinTennesseeto23percentinLouisiana.SomeofthevariationcanbeexplainedbythenumberofdifferenttaxesaStateimposes:Tennesseeessentiallyleviesonlyapropertytax,whileLouisianaleviesharvestandincometaxesaswellasapropertytax.Thenumberoftaxeslevieddidnot,however,explainallofthevariation.LikeTennessee,Texasleviesonlyapropertytax,whilelikeLouisiana,Mississippi,leviesproperty,income,andharvesttaxes.YetforTexasandMississippi,thecumulativeeffectofStateandlocaltaxeswasnearthemedianfortheregion,andrelativetopre-taxlandexpectationvalue,nearlyidentical(table11.7).

MostvariationinthecumulativeeffectsstemmedfromState-to-Statevariabilityinpropertytaxrates.PropertytaxesoccurannuallyandcarrythegreatesteconomicburdenofanyStateandlocaltax.Atthesametime,propertytaxisthetaxthatfamilyforestownerscandothemostabout;forexample,theycanensurethattheirforestlandmeetstherequirementstobeassessedortaxedatitscurrentuse.SomeStatesrequireawrittenmanagementplantoqualifyforthisbenefit,whichencouragesforeststewardshipwhileprovidingtaxrelief.Ownersalsocanseekothersourcesofincomefromtheirforestland—through,forexample,ahuntinglease,feerecreation,ornontimberforestproducts—tooffsettheannualtaxlevy.

TheFederalincometaxandStatepropertytaxescarrycostsinadditiontotheireconomicimpact.TheFederaltaxlawchangescontinually.Althoughsomechangesaredesignedtobenefitownersofforestsandotherworkinglands,theyhavetheeffectofincreasingthecomplexityofthelawandthecostofcomplyingwithit.Aswell,State-to-StatevariationinpropertytaxesproducesrelativedisadvantagestoholdingforestlandandmayhavetheunintendedconsequenceofcontributingtodifferentialratesofdevelopmentamongStates,particularlyattheurban-ruralinterfaceorinareasundergoinggentrification(Cushing2006).

Effect of the Federal estate tax—Anestimated77,200forestestates,with79.1millionacresoffamily-ownedforestland,weretransferredeachyearatthedeathoftheirowners.Themedianforestareatransferredwas156acres.Onlyathirdofforestestatesqualifiedforandone-quarterappliedforspecialusevaluationtoreducetheFederalestatetaxdue.Inthree-fourthsofthetransferswhereitwasused,specialusevaluationwasappliedtoboththelandandtimber.Althoughthismayhavebeennecessarytomeettherequirementsfortheprovision,itprecludedtheharvesting

oftimberfor10years.Thereductioninthegrossvalueofforestestatesfromapplyingspecialusevaluationaveraged$325,000,wellunderthe$750,000maximumbenefitineffectduringthestudyperiod.

OwnersoffamilyforestsandotherrurallandsweremanytimesmorelikelythanothertaxpayerstoincurtheFederalestatetax.Inabouttwo-fifthsofthetransferswhereFederalestatetaxwasdue,timberorlandwassoldtopaypartorallofthetax.Somethree-fourthsofthetimbersalesandnearlythree-fifthsofthelandsalesoccurredbecauseotherestateassetswerenotsufficienttopaythetax.Theneedtoselltimberorlandtopaytheestatetaxwasnotlimitedtosmallholdingsandtheareasaffectedwerenotinconsequential.Themeanforestsizeofownershipsthatneededtoselltimberwas3,035acresandthemeanareaharvestedwas498acres;themeanforestsizeofownershipsthatneededtoselllandwas770acresandthemeanareasoldwas387acres.

Theresponsesfromforestownersandotherownersofworkinglandsweremoreremarkablefortheirsimilaritiesthantheirdifferences.Thegroupsdifferedstatisticallyinjust6ofthe20characteristicssurveyed,withmostofthedifferencesstemmingfromthedifferentusesmembersofthetwogroupsmakeoftheirland.

TheresultsofthisstudyprovideinsightintothemagnitudeoftheeffectoftheFederalestatetaxonfamily-ownedforestsandotherrurallands.Aswell,theysuggestavenuesfordevelopmentofanestatetaxreliefpolicythatwouldbenefitbothforestandotherownersofworkinglands.Someelementsofsuchapolicymightinclude:

•Atargetedincreaseintheeffectiveexemptionamountforestatesthatconsistlargelyofworkinglands,suchasfarms,ranches,orforestland

•Revisionoftherequirementsforspecialusevaluationtopermittimberharvestsmadeinaccordancewithamanagementplandevelopedinconsultationwithaqualifiedprofessionalforester

•Recognitionofabusinessentityforfamilyfarmsandforests,tohelpensurethattheyqualifyforbusiness-orientedprovisionsinthetaxcodeandtofacilitatethetransferofworkinglandsfromonegenerationtoanother(Greeneandothers2006).

Effectiveness of financial incentive programs in promoting sustainable practices—TheresultsofthesurveyofStateforestryofficialsindicatetherearecleardifferencesamongtheincentiveprogramsavailabletofamilyforestowners.TheForestStewardshipProgram,ForestLandEnhancementProgram,andForestLegacyProgram—alladministeredbytheForestService—wereamongthetopratedFederalprogramsbyallmeasures,bothoverallandforindividualattributes.Allthreeprogramsstressmultipleobjectives,but


theirclienteleislimitedtoforestowners.TheotherFederalincentiveprogramshaveforestryemphases,buttheirclienteleincludesfarmersandranchersaswellasforestowners.

Regardlessoftheirorientationoradministrativeagency,however,alloftheFederalprogramsscoredinorneartheveryeffectiverangeforpracticesremaininginplaceandacresremaininginforestovertime(table11.9).Thisfindingspeakstotheparticipatingowners’long-termcommitmenttothesupportedpracticesaswellasthelong-termeffectivenessoftheprogramsthemselves.

ProgramssponsoredbyStates,industryfirmsandStateforestryassociations,andnongovernmentalorganizationsgenerallyweremorenarrowlytargetedthanFederalprograms,andscoredhigherforspecificattributes.Suchtargetedprogramshavethepotentialtooutperformgeneralconservationprogramsforregionalconcerns,emergingissues(forexample,invasivespeciescontrol)orwhereprogramfundingisconstrained.

Thefindingsfromthesurveyofforestryofficialsmustbeinterpretedwithrespecttoacresenrolledinincentiveprograms,ratherthanbyallacresheldbyfamilyforestowners.Theresultsoftheforestownerfocusgroupsclearlyshowedthatpublicandprivatefinancialincentiveprogramsplayonlyalimitedroleinpromotingsustainablepracticesonfamily-ownedforestland.Onereasonisthatfundingoftheprogramslimitsthenumberofacresthatmaybeenrolled.Anotheristhatmanyforestownersremainunawarethattheprogramsexist.OwnerawarenessofFederalfinancialincentiveprograms,forexample,peakedinthemoderatelyineffectiverange(table11.9;Jacobsonandothers2009).

Southernforestownerssharefourstronglyheldsentimentswithfamilyforestownersnationwide:

•Theirreasonsforowningforestlandaremorestronglylinkedtoself-identitythantoprofit;

•Theyhaveastrongethicofconservationtowardtheirland;•Theconceptofsustainableforestryresonateswiththem,althoughtheyarenotentirelyclearastoitsmeaning;and

•Theyaremoreinterestedinface-to-facetechnicalassistancethanincentiveprogramsorbeneficialtaxprovisions.

ForestownerorganizationmembersintheSouthweremorefocusedonmanagingtimberforprofitthanownersinotherregions,butstilloperatedwithinthesebroadsharedthemes(Danielsandothers2010).

Sincetheresearchdescribedinthischapterwascompleted,fundingandlegislativechangeshaveoccurredinthefinancialincentiveprogramsavailableforfamilyforestowners.TheForestLandEnhancementProgram,amongthe

top-ratedprograms,receivednofundingbeyonditsinitialallocation.ForestServicedistributionstoStatesendedin2006andtheprogramwasnotreauthorizedinthe2008FarmBill(P.L.110-246).Aswell,theFarmBillmodifiedprovisionsoftheEnvironmentalQualityIncentivesProgramandotherprogramsadministeredbytheFarmServiceAgencyandNaturalResourcesConservationServicetoincludemanagementandconservationpracticesonfamily-ownedforestlandaseligibleforassistance.Italsoaddedprotectionofforestsfromthreatssuchasinvasivespecies,insects,anddiseaseasanationalpriorityforFederalassistanceandestablishedtheEmergencyForestRestorationProgramtoaddressthenewpriority(Gorte2008,Greeneandothers2010).

TheeffectofthesechangeshaslargelybeentoshiftincentiveprogramsforfamilyforestownersfromtheForestServicetosisteragencieswithintheDepartmentofAgriculturewhosetraditionalfocushasbeenfarmersandranchers.ThechallengefortheForestServicewillbetofindnewwaystodeliverdirectassistancetolandownersandtocoordinateprogramdeliverywithotherFederalandStateagencies.

kilgore and others (2007) proposed nine recommendations for financial incentive programs:

• Increase funding and availability of one-on-one technical assistance from both extension foresters and State service foresters;

• Approach the concept of forest sustainability through technical assistance that addresses owners’ long-term stewardship and family legacy objectives rather than through certification;

• Make a written forest management plan a requirement to participate in all incentive programs;

• Design incentive programs to put forest owners in direct contact with a forester or other natural resource professional;

• Design some incentive programs with sufficient flexibility to address regional differences in forest characteristics, forest health concerns, or forest owner objectives;

• Link incentives directly to stewardship practices instead of general forest management practices;

• Fund cost-share applications according to their expected environmental benefit instead of first-come-first-served;

• Maintain adequate funding and stable program requirements for financial incentives over the long term; and

• Make the requirements for owners to participate in financial incentive programs more uniform, and coordinate program administration and delivery more closely.


kNoWleDGe AND iNFoRmATioN GAPS

Additionalresearchisneededtoupdateandvalidatethefindingsofeachofthestudiesdiscussedaboveforcurrentlegislation,andtoobtainlargerandbroadersamplesoffamilyforestowners.Additionalworkalsoisneededtoassessthepolicyimplicationsthatarisefromthestudies,including:

• Identifyandevaluateprogramapproachesforimprovingfamilyforestownerawarenessanduseofbeneficialincometaxprovisions,includingassistingownerstodevelopwrittenforestmanagementplans,encouragingthemtoparticipateinforestownerorganizations,andbetterinformingthemofthetaxaspectsofnontimberforestuses.

• Identifyandevaluateapproachestodevelopanestatetaxreliefpolicyforownersofforestsandotherworkinglands,includingatargetedincreaseintheexemptionamountforestatesthatconsistlargelyofworkingland,revisingtherequirementsforspecialusevaluationtopermittimberharvestsmadeinaccordancewithanapprovedmanagementplan,anddevelopingabusinessentitytailoredforownersoffamilyfarmsandforests.

•Monitorthedevelopmentofpropertytaxprovisionsintendedtoreduceurbansprawlandencourageprovisionofecosystemservicesfromruralland,andexaminetheleveloftheirsuccess.

•Determinewhetherpropertytaxesonfamilyforestlandattheurban-ruralinterfaceremainstableovertimeorriseinresponsetodevelopmentpressures.

•DeterminewhetherpropertytaxdifferentialsinneighboringStatescontinueordiminishovertime.

Littleisknownabouttheeffectofthechangestofinancialincentiveprogramsmadebythe2008FarmBill,whichshiftedmajorresponsibilityforprogramadministrationfromtheForestServicetosisteragenciesintheDepartmentofAgriculture.ResearchisneededtodeterminetheeffectsofthisshiftonStateforestryagencypartners,familyforestowners,andthenumberoffamilyforestacrestreated.

Andfinally,theperiod2002–2012hasprovidedaveritablelaboratoryontheeffectsofcontinuallychangingtaxprovisions.Researchisneededtodeterminetheeffectofsuchtaxuncertaintyonthemanagementdecisionsoffamilyforestowners.

AckNoWleDGmeNTS

OurthankstoRobertJ.DeeandHeatherIrwin,DepartmentofForestryandNaturalResources,ClemsonUniversity;DavidH.Newman,DepartmentofForestandNaturalResourceManagement,StateUniversityofNewYork;TedBeauvais,CooperativeForestry,U.S.ForestService;StevenH.Bullard,TempleCollegeofForestryandAgriculture,

StephenF.AustinStateUniversity;StephenE.Daniels,DepartmentofSociology,SocialWork,andAnthropology,UtahStateUniversity;MichaelG.Jacobson,SchoolofForestResources,PennsylvaniaStateUniversity;andMichaelL.Kilgore,DepartmentofForestResources,UniversityofMinnesota.

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