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Property Tax

Clifford A. Hickman and John L. Greene
USDA Forest Service

Introduction

 
Property tax is the most important source of revenue for most local units of government.  It applies to two broad categories of property: real and personal.  Real property includes land, improvements to the land, e.g., a building or road, and physical assets associated with the land, e.g., timber or minerals.  All other forms of property are personal property.  Personal property that has substance and intrinsic value, e.g., a car, is called “tangible personal property,” while personal property that represents a claim or right to value, e.g., a stock certificate, is called “intangible personal property.”

Property tax traditionally is an ad valorem (according to value) tax levied annually on the fair market value of property in its highest and best use.  It has long been recognized, however, that it is not appropriate to apply an annual ad valorem tax to forest land.

Fred R. Fairchild, Professor of Political Economy at Yale University described the early concerns over applying an ad valorem property tax to forest land.  In a 1908 National Conservation Commission report for President Theodore Roosevelt, Fairchild noted the problem of time lag – that forest owners were taxed on their land and timber annually while the forest produced income at intervals measured in decades (Dana and Fairfax 1980).  In Forest Taxation in the United States, a 1935 report for the Senate Select Committee on Reforestation, Fairchild described two additional problems:

·    Parcel bias – Evidence showed that lower-value properties such as forest land were typically over-assessed in relation to higher-value property, placing a greater tax burden on properties less able to sustain it, and

·    Time bias – That because they take many years to mature, trees weren’t taxed once, like agricultural crops, but many times.  Moreover, the amount of tax could increase from year to year as the trees increased in value due to growth.

These effects combined to encourage forest owners to reduce stocking levels, shorten rotation lengths, and convert marginal forest land to other uses (Dana and Fairfax 1980).

Beginning in the 1960s a new concern arose – the loss of forest and other rural land to development, particularly at the fringe of rapidly developing cities (Alig et al. 2002).

Property Tax Provisions for Forest Land

In response to these concerns, the individual states implemented a variety of special property tax provisions for forest land.  The principal types include (Hickman 1982):

·    Exemption laws – Which remove forest land and/or timber from the property tax rolls, either permanently or for a specified number of years.  Timber exemption laws can apply to all standing timber, or only to planted stands, immature stands, trees of a particular species or trees retained for a specific purpose, such as a windbreak.

·    Rebate laws – Under which landowners who engage in some approved activity, such as tree planting, may apply for an abatement of a portion of the tax levied on the value of their land, timber, or both.  The rebate may be given in the form of a direct cash payment or a reduction from the total amount of tax owed.

·    Yield tax laws – Which provide for a conceptual separation of land and timber values, with the land value normally remaining subject to an annual property tax, although sometimes in modified form, and the tax on the timber value deferred until the time of harvest, when it is collected as a percentage of the stumpage value of the products cut.

·    Modified rate laws – Under which forest land and timber are assessed like other forms of property, but a different, lower tax rate is used in computing the tax.

·    Modified assessment laws – Under which forest properties are valued differently from other forms of property.  If fair market value in highest and best use is retained as the basic valuation standard, forest assessments may be frozen or calculated using a reduced assessment ratio.  Alternatively, another valuation standard, such as current use value, may be used in place of fair market value in highest and best use.

Historically, exemption and rebate laws were the earliest form of special forest property tax laws to be enacted, with the first statutes appearing in the mid to late 1800s.  The popularity of this approach peaked in the early 1940s when 16 states had such laws, mostly exemptions.  Yield tax laws began to appear around 1910, but peaked in popularity in the early 1930s when 16 states had laws of this type.  Modified rate laws emerged in the mid 1920s but never became very popular, with no more than 5 states ever having such statutes.  Modified assessment laws first appeared in 1899, but it wasn’t until after 1960 that this approach became widely used.  In 1960 only 4 states had modified assessment laws that applied to forest land.  But because of the growing concern over the loss of forest and other rural lands to development the number of such laws grew rapidly (Hickman 1982), until 46 states had such laws at the time of this writing (National Timber Tax Website 2007).

Currently, the 50 states apply a total of 88 special property tax laws to forest land (National Timber Tax Website 2007; Table 1).  Altogether, 18 states apply a single type of property tax law to all forest land, while the remainder apply a combination of two or more types.  At three each, Alabama and Oregon apply the most types of property tax laws to forest land (Table 1).  In most states the special property tax laws are tailored specifically for forest land, although some states tax forest land as agricultural or undeveloped land.

Modified assessment laws are by far the most common type of special property tax law, used by 46 states (Table 1).  The majority assess forest land at its value in its current use.  Next most common are yield tax and exemption laws.  Thirteen states have yield tax laws; they are most common in the North and West, and least common in the South.  Eleven states have exemption laws; they are most common in the West and least common in the North (Table 1).  Only 3 states, all in the North, have modified rate laws.  And just 2 states – Minnesota and Oregon – have rebate laws (Table 1).

Research on Forest Property Taxes

Research has shown that special property tax provisions for forest land have little influence on the management behavior of forest owners (Stoddard 1961, Ellefson et al. 1995, Brockett and Gerhard 1999, Kluender et al. 1999), and are only modestly successful in accomplishing their stated objectives (Hibbard et al. 2003).

A study published in 2007 (Kilgore et al. 2007) confirms these results.  In terms of knowledge and use, it found that special property tax provisions for forest land are the best known and most widely used of all types of financial incentives available to forest owners.  As well, incentive program administrators with state forestry agencies nationwide rate the programs above average with respect to forest owner awareness of them and appeal to owners aware of them.  In terms of influencing forest owner behavior, however, the study found that special property tax provisions are only somewhat successful in encouraging sustainable forest management and enabling owners to meet their objectives of ownership (Kilgore et al. 2007).

Conclusion

In response to these historic issues and modern highest and best use large land value increases, many partial exemption laws and modified assessment or use valuations are used to prevent premature liquidation of large timber assets or conversion of forest land.  The research evidence does not indicate that such programs are extremely successful, but they still seem to be the better than allowing excessive forest property taxes due to either unchecked rapid land price appreciation or high forest taxation valuation compared to other uses that generate more income.

Literature Cited

 
Alig, R., J. Mills, and B. Butler.  2002.  Private timberlands: growing demands, shrinking land base.  Journal of Forestry.   100 (2): 32–37.

 Brockett, C.D., and L. Gerhard.  1999.  NIPF tax incentives: Do they make a difference?  Journal of Forestry.  97(4): 16–21.

 Dana, S.T., and S.K. Fairfax.  1980.  Forest Range and Policy: Its Development in the United States, Second Edition.  McGraw-Hill Book Company, New York, New York.  458 pages.

Ellefson, P.V., A.S. Cheng, and R.J. Moulton.  1995.  Regulation of private forestry practices by state governments.  University of Minnesota Agricultural Experiment Station, Station Bulletin 605-1995.  225 pages.

Hibbard, C.M., M.A. Kilgore, and P.V. Ellefson.  2003.  Property taxation of private forests in the United States: A national review.  Journal of Forestry.  101(3): 44–49.

 Hickman, C.A.  1982.  Emerging patterns of forest property and yield taxes.  Pages 52-65 in Proceedings: Forest Taxation Symposium II.  Publication FOIST-4-82.  Virginia Polytechnic Institute and State University, College of Agriculture and Life Sciences, School of Forestry and Wildlife Resources, Blacksburg, Virginia.

Kilgore, M.A., J.L. Greene, S.E. Daniels, T.J. Straka, and M.G. Jacobson.  2007.  The influence of financial incentive programs in promoting sustainable forestry on the nation’s family forests.  Journal of Forestry.  105(4): 184–191.

Kluender, R.A., T.L. Walkingstick, and J.C. Pickett.  1999.  The use of forestry incentives by noninindustrial forest landowner groups: Is it time for a reassessment of where we spend our tax dollars?  Natural Resources Journal.  39: 799–818.

National Timber Tax Website.  2007.  State taxes: property taxes.  http://www.timbertax.org/statetaxes/property.asp.  [Date accessed : May 24, 2007].

Stoddard, C.H.  1961.  The Small Private Forest in the United States.  Resources for the Future, Inc., Washington, D.C.  171 pages.

Clifford Hickman was an Analyst, USDA Forest Service, Policy Analysis Staff, Washington, D,C. (retired); John Green is a Research Scientist, USDA Forest Service, Southern Research Station, New Orleans.

Table 1.  Special property tax laws for forest land, by state and region.

Source: National Timber Tax Website 2007

Posted 24 September 2007

Revised 30 September 2007