Federal income tax incentives for private in the United States

The effect of nine proposed incentives on federal tax receipts and financial returns to non-industrial forest owners in the southern United States, a primary timber-growing region.

J. L. Greene

John L. Greene is Principal Economist, United States Department of Agriculture (USDA) Forest Service. Southern Research Station, New Orleans. Louisiana.

A number of federal income tax incentives are under discussion in the United States as a means to encourage improved management of non-industrial private forests. An insight into the economic effects of the incentives would facilitate policy discussions and decision-making. The incentives fall into two groups: the first four - income averaging, the flat tax and the two types of capital gains exclusions - alter the amount of federal income tax due from a harvest; the five remaining incentives affect the tax treatment of reforestation expenses, which is the single greatest cost of forest management.

Results and discussion

A computer spreadsheet was developed to analyse the effect of the proposed incentives on cash flow to federal, state and local tax receipts; on the forest owners; and on land expectation value. This section presents the results of the spreadsheet analyses, based on a series of underlying assumptions (see Box). First, the tax and income results for forest owners are compared with those for non-owners with the same level of other income. The results for the nine proposed incentives are then compared with those for the current law.

Each of the incentives increased cash flow to the owners and decreased federal tax receipts, but by markedly different amounts. A marginal benefit-cost ratio (present value of the net cash flow increase to the owners: present value of the net decrease in federal tax receipts) is used to compare the results. The ratio measures the economic efficiency of the incentives, showing the increase in cash flow to the owners generated by each US$ 1.00 reduction in federal tax receipts.

Current law

The first column of figures in Tables 3 to 6 shows the results for the current tax law. Forest owners have opportunities that are not available to non-owners to realize income from the sale of timber in commercial thinnings and harvests. At the same time, owners pay more taxes than non-owners with the same level of other income: annual property taxes and when timber is sold, harvest taxes and federal and state income taxes.

Proposed tax incentives · Income-averaging over three years · A 17 percent flat tax, modelled after the Armey-Shelby proposal · Excluding 35 percent of long-term capital gains from taxable income · Excluding 5 percent of capital gains for each year of ownership, up to a 50 percent maximum · Amortizing up to $20000 of reforestation expenses over five years · Deducting reforestation expenses in the year they occur · Subtracting an allowance for reforestation expenses from harvest returns · Green Saving Account, in which forest owners can accumulate pre-tax dollars to pay upcoming management expenses · Green IRA (Investment/Reinvestment Account), in which owners can accumulate pretax dollars to pay future forest management expenses and to provide retirement income

Cash flow from the forest is strongly negative in the first year of the rotation, when the stand is reforested (Table 3). It is moderately positive from the second through the eighth year, as the owners amortize $10000 of their reforestation expense. Property taxes then cause the annual cash flow to turn moderately negative through the remainder of the rotation except for years with a timber sale, when it is strongly positive. Because property tax is a deductible expense, in most years the owners pay slightly lower federal and state income taxes than non-owners. In years with a timber sale, however, the owners pay sharply higher income taxes as well as harvest taxes (Table 3).

Assumptions for the analysis The owners were assumed to be a married couple who file joint tax returns and who have $40000 of other income annually, who make other deductions of $6550 and who have no dependent children. The forest was assumed to be a 100-acre (40 ha) loblolly pine plantation. Timber growth rates, responses to management practices and harvest volumes were simulated using the COMPUTE_MERCHLOB growth and yield model developed by Busby, Ward and Baldwin (1990). Management costs were taken from the Forest Farmer Manual (DuBois et al, 1995) and adjusted to reflect a small ownership. Saw timber and pulpwood stumpage prices are 1995 regional averages for the southern United States, as reported in Norris (1995). The figures used are given in Table 1. The personal exemptions and rate schedules used to calculate federal, state and local taxes are for the 1995 fiscal year (Table 2). State and local taxes are included in the analysis because they affect both cash flow to the owners and federal taxable income. The rates used are typical for a southern state (Greene, 1995). Federal adjusted gross income is assumed to be the starting figure for state income tax calculations, as is the ease in most states that levy an income tax (CCH Tax Law Editors, 1996). The $6550 amount used for other deductions is equal to the federal 1995 standard deduction for a married couple filing jointly. All interest rates in the analysis are real, or net of inflation. No increases are assumed for costs, returns or tax rates. Both the couple's personal discount rate and the interest rate earned by Green Saving and Green IRA accounts are assumed to be 4 percent and real. All dollar amounts presented and discussed are net present values at the beginning of the rotation. TABLE 1. Forest-related costs and returns, forest management plan, and timber yields used in the analysis
1. Forest-related costs and returns
Reforestation expense	$200 per acre ($494.20 per hectare)
Prescribed burn cost	$12 per acre ($29.65 per hectare)
Pulpwood stumpage price	$23.50 per cord ($6.48/m3)
Saw timber stumpage price	$268 per MBF (1000 board feet) ($113.56/m3)
Sale administration cost	10 percent of stumpage price
2. Forest management plan and timber yields
Year 1 - Reforest stand
Year 15 - Commercial thinning 1	4.10 cords/acre pulpwood (36.72 m3/ha)
Year 16 - Prescribed burn
Year 20 - Commercial thinning 2	5.03 cords/acre pulpwood (45.06 m3/ha) 0.06 MBF/acre saw timber (0.35 m3/ha)
Year 21 - Prescribed burn
Year 26 - Prescribed burn
Year 30 - Commercial thinning 3	9.58 cords/acre pulpwood (85.80 m3/ha) 0.84 MBF/acre saw timber (4.91 m3/ha)
Year 31 - Prescribed burn
Year 36 - Prescribed bum
Year 41 - Prescribed bum
Year 45 - Final harvest	19.43 cords/acre pulpwood (174.04 m3/ha) 12.21 MBF/acre saw timber (71.20 m3/ha)
TABLE 2. Personal exemptions and rate schedules used to calculate state, local, and federal taxes (1995 fiscal year
1. Federal income tax	Rates
(US dollars)
Personal exemption	2500 for annual gross income under 172050
Taxable income not over 39000	15% of taxable income
Over 39000 but not over 94250	5850.00 plus 28% of the amount over 39000
Over 94250 but not over 143600	21320.00 plus 31 % of the amount over 94250
Over 143600 but not over 256500	36618.50 plus 36% of the amount over 143600
Over 256500	77262.50 plus 39.6% of the amount over 256500
2. State and local taxes	Rates
(US dollars)
Property tax	1.70 per acre per year (4.20 per ha)
Harvest tax	2.5% of stumpage price
State income tax:
Personal exemption	1500
Taxable income not over 1000	1% of taxable income
Over 1000 but not over 3000	10.00 plus 2% of the amount over 1000
Over 3000 but not over 5000	50.00 plus 3% of the amount over 3000
Over 5000 but not over 7000	110.00 plus 4% of the amount over 5000
Over 7000 but not over 10000	190.00 plus 5% of the amount over 7000
Over 10000	340.00 plus 6% of the amount over 10000

The present value of the additional federal income tax paid by the owners under current law is $18097, and the value of the additional state and local taxes they pay is $11358 (Table 4). The present value of the cash flow that the forest provides the owners is $41515, equivalent to an annual income of $1661.

Land expectation value (the net present value of the perpetual income stream that the forest would yield under this management plan and tax structure) is $415.15 per acre ($1025.83 per hectare) (Table 4).

Incentives that alter the amount of tax due from a harvest

Income-averaging over three years. The form of income-averaging analysed would permit forest owners to treat income from a commercial thinning or timber harvest as if it were paid in three equal annual installments, beginning in the year the sale takes place. The tax schedule for long-term capital gains has two tiers: amounts up to $39000 minus the owners' taxable ordinary income are taxed at 15 percent, while any remainder is taxed at 28 percent. With income-averaging, this calculation is made in each of the years to which timber sale income is attributed, so that roughly three times as much income qualifies to be taxed at the 15 percent rate. The incentive alters the owners' adjusted gross income for each year over which income is averaged, affecting state income tax as well as the federal income tax.

TABLE 3. Net annual cash flows to the forest owners under current law and under incentives that alter the amount of tax due from a harvest

Year in rotation	Current law	Income-averaging over 3 years	Armey-Shelby flat tax	Excluding 35% of long-term capital gains	Excluding 5% of capital gains per year owned
1	-18991.80	-54742.19	-20159.80	-18991.80	-18991.80
2	150.70	-35517.59	-159.80	150.70	150.70
3	150.70	150.70	-159.80	150.70	150.70
4	150.70	150.70	-159.80	150.70	150.70
5	150.70	150.70	-159.80	150.70	150.70
6	150.70	150.70	-159.80	150.70	150.70
7	150.70	150.70	-159.80	150.70	150.70
8	8.20	8.20	-159.80	8.20	8.20
9	-134.30	-134.30	-159.80	-134.30	-134.30
10	-134.30	-134.30	-159.80	-134.30	-134.30
11	-134.30	-134.30	-159.80	-134.30	-134.30
12	-134.30	-134.30	-159.80	-134.30	-134.30
13	-134.30	-134.30	-159.80	-134.30	-134.30
14	-134.30	-134.30	-159.80	-134.30	-134.30
15	7096.98	7927.80	8270.83	7533.16	7720.10
16	-1082.30	-1510.04	-1359.80	-1082.30	-1082.30
17	-134.30	-551.24	-159.80	-134.30	-134.30
18	-134.30	- 134.30	-159.80	-134.30	-134.30
19	-134.30	-134.30	-159.80	-134.30	-134.30
20	10067.63	11515.85	12145.33	10827.95	11153.80
21	-1082.30	-1818.74	-1359.80	-1082.30	-1082.30
22	-134.30	-859.94	-159.80	-134.30	-134.30
23	-134.30	-134.30	-159.80	-134.30	-134.30
24	-134.30	-134.30	-159.80	-134.30	-134.30
25	-134.30	-134.30	-159.80	-134.30	-134.30
26	-1082.30	-1082.30	-1359.80	-1082.30	-1082.30
27	-134.30	-134.30	-159.80	-134.30	-134.30
28	-134.30	-134.30	-159.80	-134.30	-134.30
29	-134.30	-134.30	-159.80	-134.30	-134.30
30	28428.15	36820.80	39237.08	32834.29	34722.63
31	-1082.30	-3752.04	-1359.80	-1082.30	-1082.30
32	-134.30	-2939.88	-159.80	-134.30	-134.30
33	-134.30	-134.30	-159.80	-134.30	-134.30
34	-134.30	-134.30	-159.80	-134.30	-134.30
35	-134.30	-134.30	-159.80	-134.30	-134.30
36	-1082.30	-1082.30	-1359.80	-1082.30	-1082.30
37	-134.30	-134.30	-159.80	-134.30	-134.30
38	-134.30	-134.30	-159.80	-134.30	-134.30
39	-134.30	-134.30	-159.80	-134.30	-134.30
40	-134.30	-134.30	-159.80	-134.30	-134.30
41	-1082.30	-1082.30	-1359.80	-1082.30	-1082.30
42	-134.30	-134.30	-159.80	-134.30	-134.30
43	-134.30	-134.30	-159.80	-134.30	-134.30
44	-134.30	-134.30	-159.80	-134.30	-134.30
45	223408.74	294834.13	326117.64	260907.07	276977.78

Through most of the rotation, cash flow under income-averaging is identical to that under current law (Table 3). It differs only in the three-year periods over which income from a timber sale is averaged. In the first year of each three, federal and state income taxes are lower than under current law, thereby increasing cash flow; in the second and third years, federal and state income taxes are higher than under current law, thereby decreasing cash flow. Total income taxes paid are less than under current law (Table 3) because a portion of the income attributed to the second and third years is taxed at the lower 15 percent rate for long-term capital gains.

The present value of the additional federal income tax paid by owners if they average harvest income over three years is 14 percent less, and the value of the additional state and local taxes they pay is 2 percent less than under current law (Table 4).

The present value of the additional cash flow received by owners is 6 percent more than under current law, equivalent to $108 per year in additional income. Land expectation value with income-averaging is $ 1092.30 per hectare, $66.46 per hectare more than under current law. The marginal benefit-cost ratio is 1.09 (Table 4).

Armey-Shelby flat tax. The Armey-Shelby tax proposal would place a flat 17 percent tax on wages, salaries and pensions above a personal allowance. There is no deduction for capital investments and no tax on capital gains or interest. The personal allowance for the assumed owners - a married couple filing jointly - is $22700.

Neither forest management expenses nor state and local taxes are deductible from federal taxable income. As a result, the owners must absorb the entire cost of reforestation and prescribed burns, and they have somewhat higher negative cash flows than under current law in years with no timber sale. Since federal adjusted gross income is the starting point for calculating state income tax, timber sale proceeds are not taxed at either the federal or state level. The only deduction from the positive cash flow resulting from a timber sale is the state harvest tax (Table 3).

The flat tax entirely eliminates the additional federal income tax the forest owners pay under current law, and it decreases the present value of the additional state and local taxes they pay by 41 percent. The incentive increases by 55 percent the present value of the additional cash flow that the owners receive, equivalent to $910 per year in additional income. Land expectation value is $1588.25 per hectare ($562.42 per hectare more than under current law). The marginal benefit-cost ratio is 1.26 (Table 4).

Excluding 35 percent of long-term capital gains. This incentive would reinstate an economically important provision that was available to forest owners and other long-term investors in the United States from 1944 until it was eliminated in the Tax Reform Act of 1986. The portion of long-term capital gains excluded varied over the period but stood at 60 percent in 1986. The 35 percent exclusion is calculated before the net taxable capital gain is entered on federal income tax forms. As a result, the exclusion reduces adjusted gross income for state as well as the federal income tax.

Except in years with a timber sale, cash flow under this incentive is identical to that under current law (Table 3). In years with a safe, 35 percent of the sale proceeds is shielded from taxation, substantially reducing federal and state income taxes and increasing cash flow to the owners.

The present value of the additional federal income tax that the owners would pay under this incentive is 45 percent less, and the value of the additional state and local taxes they pay is 17 percent less than under current law. The present value of the additional cash flow that the forest provides is 24 percent more than under current law, equivalent to $404 per year in additional income. Land expectation value is $1275.30 per hectare, $249.46 per hectare more than under current law. The marginal benefit-cost ratio is 1.24 (Table 4).

Excluding 5 percent of capital gains per year of ownership, up to a 50 percent maximum. Increasing the capital gains exclusion for each year of ownership is intended to encourage holding investments for longer periods and to offset at least a part of the erosive effect of inflation on investment returns. Given the long time required to grow commercial timber products, this incentive would equate to excluding 50 percent of long-term capital gains from taxable income rather than 35 percent, as discussed above.

As with the 35 percent capital gains exclusion, cash flow under this incentive is identical to that under current law, except in years with a timber sale (Table 3). In years with a sale, 50 percent of the sale proceeds is shielded from taxation, thereby reducing federal and state income taxes further and increasing cash flow to the forest owners.

The present value of the additional federal income tax that the owners would pay under this incentive is 64 percent less, and the value of the additional state and local taxes they pay is 25 percent less than under current law. The present value of the additional cash flow they receive is 35 percent more than under current law, equivalent to $577 per year in additional income. Land expectation value is $1382.21 per hectare, $356.38 per hectare more than under current law and $ 106.91 per hectare more than under the 35 percent exclusion. As with the above incentive, the benefit-cost ratio for a 50 percent exclusion of long-term capital gains is 1.24 (Table 4).

Incentives that alter the tax treatment of reforestation expenses

Amortizing up to $20000 of reforestation expenses over five years. By increasing the amount of reforestation expenses that can be amortized to $20000, and by compressing the time frame to five years, this incentive would reduce the need for forest owners to capitalize the high initial costs associated with forest management and would shorten the recovery period. Under these provisions, the entire reforestation expense for the assumed forest holding could be amortized. The analysis assumes that the present reforestation tax credit - 10 percent of the first $10000 of expenses - remains in effect.

Cash flow with enhanced amortization provisions differs from that under current law in the first eight years of the rotation and in years with a timber sale (Table 5). Larger amounts are amortized in the first years of the rotation decreasing the negative cash flow from reforestation in the first year and increasing the positive cash flows in the second year and after. Amortization is completed in year six, two years earlier than under current law. Beginning in year seven, property tax payments cause annual cash flow to turn moderately negative. Because the entire reforestation expense is amortized, the owners have no basis in their timber and can claim no timber depletion allowance against income from sales. In years with a timber sale, federal and state income taxes are higher than under current law and cash flow to the owners somewhat lower (Table 5).

TABLE 4. Summary of results for incentives that alter the amount of tax due from a harvest, i = 4 percent

	Current law	Income-averaging over 3 years	Armey-Shelby flat tax	Excluding 35% of long-term capital gains	Excluding 5% of capital gains per year owned
(US dollars)
1. Federal income tax
Presents value of additional tax receipts provided by the forest land	18097	15619	0	9956	6467
Difference from current law1	-	-2478	-18097	-8141	11630
Equivalent annual value	724	625	0	398	259
Difference from current law1	-	-99	-724	-326	-465
2. State and local taxes
Present value of additional tax receipts provided by the forest land	11358	11146	6694	9404	8566
Difference from current law1	-	-212	-4664	-1954	2792
Equivalent annual value	454	446	268	376	343
Difference from current law1	-	-8	-187	-78	-112
3. Cash flow to owner
Present value of additional income receipts provided by the forest land	41515	44205	64276	51611	55937
Difference from current law	-	2690	22761	10096	14422
Equivalent annual value	1661	1768	2571	2064	2237
Difference from current law	-	108	910	404	577
4. Financial measures
Per acre land expectation value	415.15	442.05	642.76	516.11	559.37
Difference from current law	-	26.90	227.61	100.96	144.22
Per hectare land expectation value	1025.83	1092.30	1588.25	1275.30	1382.21
Difference from current law	-	66.46	562.42	249.46	356.38
Marginal benefit-cost ratio	-	1.09	1.26	1.24	1.24

The present value of the additional federal income tax that the owners pay under this incentive is 5 percent less, and the value of the additional state and local taxes they pay is 4 percent less than under current law (Table 6). The present value of the additional cash flow that the forest provides is 3 percent more than under current law, equivalent to $49 per year in additional income. Land expectation value is $1056.19 per hectare, $30.35 per hectare more than under current law. The marginal benefit-cost ratio is 1.50 (Table 6), the second highest among the incentives analysed.

Deducting reforestation expenses in the year they occur. Deducting reforestation expenses as they occur would eliminate the need to capitalize any of the high initial costs of forest management, putting them on a par with operating costs and carrying charges which can be deducted under current law, for example precommercial thinnings, prescribed burns, timber stand improvement, forest protection, consultant fees, labour costs, property taxes and interest.

Cash flow with the deduction of reforestation expenses differs from that under current law in the first eight years of the rotation and in years with a timber sale (Table 5). The entire reforestation expense is deducted in the first year, thereby moderating the large negative cash flow. Property taxes cause the annual cash flow to turn moderately negative beginning in the second year, seven years earlier than under current law. As above, no basis remains in the timber and the owners can claim no depletion allowance against timber income. In years with a timber sale, federal and state income taxes are higher than under current law and cash flow to the owners slightly lower (Table 5).

The present value of the additional federal income tax that the owners pay under this incentive is less than 0.5 percent lower, and the value of the additional state and local taxes they pay is 5 percent less than under current law (Table 6). The present value of the additional cash flow that the owners receive is 2 percent more than under current law, equivalent to $25 per year in additional income. Land expectation value is $1041.31 per hectare, $15.47 per hectare more than under current law. From these figures, deducting reforestation expenses has the least effect of any incentive analysed on federal tax receipts or cash flow to the forest owners. Yet at 10.64 (Table 6), the marginal benefit-cost ratio is by far the highest.

Subtracting reforestation expenses from harvest returns. Many nations outside the United States permit forest owners to charge the reforestation expenses for one rotation against the final harvest returns from the preceding rotation (see Corrick, 1988). Forest economists in the United States disagree with this treatment, arguing that each rotation is a separate investment and that the cost of establishing timber should be carried forward at the owners' required rate of return and charged against the returns from harvesting that timber. Permitting owners to subtract an allowance for upcoming reforestation expenses from final harvest returns, however, would reduce their taxable income from the harvest while still permitting treatment of the new rotation as a separate investment.

The cash flow with this incentive is identical to that under the deduction incentive discussed above, except in the first and last years of the rotation (Table 5). In the first year, use of the reforestation allowance from the preceding rotation eliminates the large negative cash flow associated with stand establishment. In the last year, establishment of a reforestation allowance for the upcoming rotation reduces the owners' taxable income from the harvest (Table 5).

The present value of the additional federal income tax that the owners pay under this incentive is 15 percent less, and the value of the additional state and local taxes they pay is 5 percent less than under current law (Table 6). The present value of the additional cash flow that they receive is 8 percent more than under current law, equivalent to $130 per year in additional income. Land expectation value is $1106.21 per hectare), $80.38 per hectare more than under current law. The benefit-cost ratio is 1.21 (Table 6).

Green Saving Account. Under the Green Saving Account, forest owners can deposit up to $2000 per year into a special account to cover upcoming forest management expenses. Deposits are deducted from the owners' taxable income, and interest accumulates tax-free. Withdrawals can be made only to pay for qualifying forest management practices. Funds not used within five years are lost, so there is no incentive to build a balance higher than that needed to cover anticipated management expenses.

The primary economic advantage of a Green Saving Account would be to cover reforestation expenses that cannot be amortized, thereby eliminating the need to capitalize them. For this reason, the analysis assumes the owners have made $2000 deposits into the account for four years before the beginning of the rotation and that they make similar deposits in the last four years before the end of the rotation. Payments can be made into the account to cover intermediate management expenses such as prescribed burning or timber stand improvement, but these expenses will not result in a tax saving since they can also be deducted from income.

Cash flow with a Green Saving Account differs from that under current law in the first year of the rotation and in years with a timber sale (Table 5). In the first year, funds from the account are used to cover reforestation expenses that cannot be amortized, thereby reducing the large negative cash flow. The entire reforestation expense is either paid from the account or amortized. In years with a timber sale, the owners can claim no depletion allowance against timber income. Federal and state income taxes are higher than under current law and cash flow to the owners is lower (see Table 5).

The present value of the additional federal income tax that the owners pay if they use a Green Saving Account is 7 percent) less and the value: of the additional state and local taxes that they pay is 4 percent less than under current law (Table 6). The present value of the additional cash flow that the forest provides is 4 percent more than under current law, equivalent to $66 per year in additional income. Land expectation value is $1066.54 per hectare), $40.71 per hectare more than under current law. The marginal benefit-cost ratio is 1.38 (Table 6).

Green IRA

The Green IRA is modelled after an individual retirement account. Forest owners can deposit up to $2000 per year into the account; deposits are deducted from their taxable income and interest accumulates tax-free. Withdrawals to pay for qualifying forest management practices are not taxed but withdrawals for retirement income are taxed as ordinary income.

As with the Green Saving Account, the analysis assumes that the owners have made $ 2000 deposits into their Green IRA for four years before the beginning of the rotation, so the account has a balance sufficient to cover all reforestation expenses that cannot be amortized. The analysis also assumes that, in the final year of the rotation, most funds in the account are rolled over into a retirement annuity, with federal and state income taxes withheld at the owners' typical rate. An amount equal to four annual deposits and the interest on them is left in the account to carry into the next rotation. This assumption returns the account to its original condition and permits calculation of a valid land expectation value.

Cash flow with a Green IRA differs from that under current law in each year of the rotation (Table 5). Two of the reasons are the same as with a Green Saving Account and have the same effect on cash flow: funds from the account are used to pay reforestation expenses {hat cannot be amortized, and the entire reforestation expense is either paid from the account or amortized. In years with a timber sale, the owners can claim no depletion allowance against timber income. In addition, however, the owners make a $2000 deposit to the account every year, decreasing cash flow by the amount of the deposit, less a small reduction in federal and state income tax. By the end of the rotation, the account accumulates a sizeable retirement fund but at the cost of a reduced annual cash flow (Table 5).

The present value of the additional federal income tax that the owners pay if they use a Green IRA is 7 percent less, and the value of the additional state and local taxes they pay is 4 percent less than under current law (Table 6). The present value of the additional cash flow that the owners receive is 4 percent more than under current law, equivalent to $71 per year in additional income. Land expectation value is $1069.60 per hectare), $43.76 per hectare more than under current law. The marginal benefit-cost ratio is 1.34 (Table 6). The small difference in financial measures between the Green IRA and Green Saving Account is a result of the Green IRA's retirement fund feature; if the retirement fund is eliminated from the analysis, the financial measures for the two types of green account are identical.

Implications for improved management of non-industrial private forests

Incentives in the first group analysed - income-averaging, the flat tax and the two types of capital gains exclusions - would make forest ownership and timber production more attractive financially, but they would provide owners with a tax advantage regardless of whether or not they actively managed their forests.

In contrast, the incentives in the second group appear to be particularly suited to improving management of non-industrial private forests and shifting forest land from an unmanaged to a managed condition. Owners would need to regenerate harvested areas in order to realize the benefits provided by enhanced amortization provisions or tax-advantaged treatment of reforestation expenses. Financial institutions that administer Green Saving Accounts or Green IRAs would be likely to require owners to engage forestry professionals and develop and follow written management plans as a matter of fiscal responsibility (Irland, DeCoster and Greene, 1995).

TABLE 5. Net annual cash flows to the forest owners under current law and under incentives that alter the amount of tax due from a harvest

Year in rotation	Current law	Amortizing $20000	Deducting reforestation expenses	Subtracting reforestation expenses	Green Saving Account	Green IRA
(US dollars)
1	-18991.80	-18724.80	-15934.30	-134.30	-9914.01	-10571.80
2	150.70	684.70	-134.30	-134.30	150.70	-1429.30
3	150.70	684.70	-134.30	-134.30	150.70	-1429.30
4	150.70	684.70	-134.30	-134.30	150.70	-1429.30
5	150.70	684.70	-134.30	-134.30	150.70	-1429.30
6	150.70	275.20	-134.30	-134.30	150.70	-1429.30
7	150.70	-134.30	-134.30	-134.30	150.70	-1429.30
8	8.20	-134.30	-134.30	-134.30	8.20	-1571.80
9	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
10	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
11	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
12	- 134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
13	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
14	- 134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
15	7096.98	6600.24	6600.24	6600.24	6600.24	5002.24
16	-1082.30	-1082.30	-1082.30	-1082.30	-1082.30	-2662.30
17	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
18	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
19	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
20	10067.63	9584.55	9584.55	9584.55	9584.55	8097.96
21	-1082.30	-1082.30	-1082.30	-1082.30	-1082.30	-2662.30
22	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
23	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
24	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
25	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
26	-1082.30	-1082.30	-1082.30	-1082.30	-1082.30	-2662.30
27	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
28	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
29	- 134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
30	28428.15	27920.25	27920.25	27920.25	27920.25	26566.65
31	-1082.30	-1082.30	-1082.30	-1082.30	-1082.30	-2662.30
32	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
33	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
34	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
35	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
36	-1082.30	-1082.30	-1082.30	-1082.30	-1082.30	-2662.30
37	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
38	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
39	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
40	-134.30	-134.30	-134.30	-134.30	-134.30	-1714.30
41	-1082.30	-1082.30	-1082.30	-1082.30	-1082.30	-2662.30
42	-134.30	-134.30	-134.30	-134.30	-1714.30	-1714.30
43	- 134.30	-134.30	-134.30	-134.30	-1714.30	-1714.30
44	-134.30	-134.30	-134.30	-134.30	-1714.30	-1714.30
45	223408.74	222081.01	222081.01	209065.63	220727.41	220727.41

Andrulot, Blackwell and Burns (1972) reported the growth and yield of three unmanaged loblolly pine stands for the same site index as assumed for this analysis. As for this analysis, the economically optimal rotation length was 45 years. Table 7 summarizes their findings and develops cash flows and financial measures for the three-stand average. By comparing Tables 6 and 7, it can be seen that an incentive that caused forest land to shift from an unmanaged to a managed condition would generate increased tax receipts to all levels of government and increased returns to the owners.

TABLE 6. Summary of results for incentives that alter the tax treatment of reforestation expenses, i=4 percent

	Current law	Amortizing $20000 over 5 years	Deducting reforestation expenses	Subtracting reforestation expenses	Green Saving Account	Green IRA
(US dollars)
1. Federal income tax
Presents value of additional tax receipts provided by the forest land	18097	17277	18038	15412	16899	16776
Difference from current law1	-	-820	-59	-2685	-1198	-1321
Equivalent annual value	724	691	722	616	676	671
Difference from current law1	-	-33	-2	-107	-48	-53
2. State and local taxes
Present value of additional tax receipts provided by the forest land	11358	10950	10791	10791	10908	10908
Difference from current law1	-	-408	-567	-567	-450	-450
Equivalent annual value	454	438	432	432	436	436
Difference from current law1	-	-16	-23	-23	-18	-18
3. Cash flow to owner
Present value of additional income receipts provided by the forest land	41515	42743	42141	44768	43162	43286
Difference from current law	-	1228	626	3253	1647	1771
Equivalent annual value	1661	1710	1686	1791	1726	1731
Difference from current law	-	49	25	130	66	71
4. Financial measures
Per acre land expectation value	415,15	427,43	421,41	447,68	431,62	432,86
Difference from current law	-	12,28	6,26	32,53	16,47	17,71
Per hectare land expectation value	1025,83	1056,19	1041,31	1106,21	1066,54	1069,60
Difference from current law	-	30,35	15,47	80,38	40,71	43,76
Marginal benefit-cost ratio	-	1,50	10,64	1,21	1.38	1,34

¹ A negative value indicates a tax savings to the forest owners or a decrease in receipts to the taxing authority.

If they induced owners to begin managing their forest land:

· amortizing $ 20000 of reforestation expenses over five years would increase the present value of tax receipts to the federal government by $3488, tax receipts to state and local governments by $2004 and cash flow to the owners by $ 7978 (Tables 6 and 7);

· deducting reforestation expenses in the year they occur would increase the present value of federal tax receipts by $4249, tax receipts to state and local governments by $1845 and cash flow to the owners by $7376 (Tables 6 and 7);

· subtracting an allowance for reforestation expenses from harvest returns would boost the present value of federal tax receipts by $1623, tax receipts to state and local governments by $1845 and cash flow to the owners by $10003 (Tables 6 and 7);

· a Green Saving Account would increase the present value of federal tax receipts by $3110, tax receipts to state and local governments by $1962 and cash flow to the owners by $8397 (Tables 6 and 7);

· a Green IRA would boost the present value of federal tax receipts by $2987, tax receipts to state and local governments by $1962 and cash flow to the owners by $8521 (Tables 6 and 7).

TABLE 7. Growth and yield, effects on cash flows and financial measures for unmanaged loblolly pine stands

	Stand 1	Stand 2	Stand 3	3-stand average
1. Growth and yield
Year 1. Stand seeds in naturally
Year 45. Final harvest: Pulpwood	24.28	29.33	12.80	22.14
Saw timber	9.71	5.68	13.41	9.60
				(US dollars)
2. Federal income tax
Present value of additional tax receipts provided by the forest land				13789
Equivalent annual value				552
3. State and local taxes
Present value of additional tax receipts provided by the forest land				8946
Equivalent annual value				358
4. Cash flow to owner
Present value of additional income provided by the forest land				34765
Equivalent annual value				1391
5. Financial measures
Per acre land expectation value				347.65
Per hectare land expectation value				859.04
Marginal benefit-cost ratio				<1.00

Conclusions

Drawing conclusions from this analysis requires a caveat: to a very real extent, the results are as much a product of the assumptions used as of the incentives themselves. Assuming a higher level of other income, for example, would have reduced or eliminated the deduction that the forest owners could make for deposits to their Green Saving Account or Green IRA, lowering the incentives' marginal benefit-cost ratio. Assuming a different state tax structure would have resulted in a different division of income tax reductions between the federal and state governments, thus changing the marginal benefit-cost ratios for all the incentives, etc. A conscious effort was made to develop reasonable assumptions, to specify them and to hold constant all factors other than the incentive being analysed. But, as with any economic analysis, the assumptions used influenced the outcomes.

With one exception, the incentives that alter the amount of tax due from a harvest created large increases in cash flow to the forest owners, but at the cost of large decreases in tax receipts to all levels of government. The most extreme case was the flat tax, which increased cash flow to the owners by 55 percent but completely eliminated the additional federal tax receipts provided by the forest and decreased state and local tax receipts by over 40 percent. The exception to the pattern was income-averaging, which had substantially smaller effects on both cash flow and tax receipts but had the lowest marginal benefit-cost ratio of any incentive analysed. Marginal benefit-cost ratios for incentives in this group ranged from 1.09 for income-averaging to 1.24 for the two types of capital gains exclusion and 1.26 for the flat tax.

Incentives in the second group - those that alter the tax treatment of reforestation expenses - were characterized by modest changes in tax receipts and cash flow to the owners. Deducting reforestation expenses as they occur caused the least change, decreasing federal tax receipts from managed forest land by less than 0.5 percent, state and local tax receipts by 5 percent and increasing cash flow to the owners by 2 percent. Subtracting an allowance for reforestation expenses from harvest returns caused the most change, decreasing federal tax receipts from managed forest land by 15 percent and state and local tax receipts by 5 percent while increasing cash flow to the owners by 8 percent. The marginal benefit-cost ratios for incentives in this group varied from 1.21 for subtracting an allowance for reforestation expenses to between 1.34 and 1.50 for the two types of green account and amortizing $ 20000 of reforestation expenses over five years and 10.64 for deducting reforestation expenses in the year they occur.

Simply ranking the incentives in order of their marginal benefit-cost ratios would not be likely to conform with their political acceptability. For many, the flat tax stands as a symbol for a simpler tax code and a smaller federal bureaucracy, despite the fact that the incentive would cause large decreases in tax receipts. A partial exclusion for long-term capital gains remains popular with forest owners and other investors, despite a relatively low benefit-cost ratio, because it would represent recovery of a special tax status for capital investments that was recently lost and because of the strong positive effect it would have on their cash flow. In contrast, deducting reforestation expenses would require a fundamental change in the tax treatment of capital costs, while the Green Saving Account and Green IRA represent a new concept with no track record in the real world.

Clearly, however, incentives that alter the tax treatment of reforestation expenses merit closer scrutiny. Of the nine incentives analysed, four of the most favourable marginal benefit-cost ratios belong to incentives in this group. Permitting the deduction of reforestation expenses - the incentive with the greatest economic efficiency would generate an estimated $10.64 in cash flow to forest owners for every $1.00 of federal tax revenue foregone. Moreover, incentives in this group cause the least reduction in state and local tax receipts and would require the least adjustment in state and local tax structures to replace lost funds.

Finally, the incentives in this group appear to have the most potential to improve management of non-industrial private forests arid to cause forest land to shift from an unmanaged to a managed condition. Enhanced amortization provisions and tax-advantaged treatment of reforestation expenses are tied to reforestation of harvested areas. The Green Saving Account and Green IRA have the potential to adapt tax incentives already familiar to United States taxpayers to foster improved forest management. Owners who used either type of green account would be strongly motivated to make contacts with forestry professionals, and to develop and follow written management plans.

Bibliography

Andrulot, E. R., Blackwell, L. P. & Burns, P. Y. 1972. Effects of thinning on yield of loblolly pine in Central Louisiana. Bulletin No. 6. Division of Research College of Life Sciences, Louisiana Tech. University Ruston, La., USA. 145 pp.

Busby, R.L., Ward, K. B. & Baldwin, Jr, V. C. 1990. COMPUTE_MERCHLOB: a growth and yield prediction system with a merchandising optimizer for planted loblolly pine in the West Gulf region. Research Paper SO-255. USDA Forest Service, Southern Forest Experiment Station. New Orleans, La. Washington, DC, USDA Forest Service. 22 pp.

CCH Tax Law Editors. 1996. State personal income taxes. State Tax Rev., 57(4): 6.

Corrick, S. R. 1988. Tax treatment of timber income and expenditures in other nations with strong timber economies. In Forest taxation: adapting in an era of change, p. 138-160. Madison Wis. USA. Forest Products Research Society.

DuBois, M. R., McNabb, K., Straka, T. J. & Watson, W. F. 1995. Costs and cost trends for forestry practices in the South. Forest Farmer Manual, 30th ed. 54(3): 10-17.

Greene, J. L.1995. Stale lax systems and their effects on non-industrial private forest owners. In Proc. SAF 1994 National Convention, p. 414-419. Bethesda, Md, USA, Society of American Foresters.

Irland, L.C., DeCoster, L. A. & Greene, J. L. 1995. Green IRAs (GIRAs) for forest management: an initial assessment. In Maintaining the public benefits of private forests through targeted tax options, p. 35-59. Washington, DC, Forest Policy Center.

Norris, F. W. 1995. Timber Mart-South: 1995 yearly summary, 20(4): 1-4.