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Forest Sustainability Reporting in the United States
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Indicator 7.55: Regulation, investment, and taxation policies

An indicator for Criterion 7: Legal, Institutional, and Economic Framework for Forest Conservation and Sustainable Management

What is the indicator and why is it important?

The sustainability of forests and the many benefits they are capable of providing requires high levels of sustained investment in their management and protection. Investments are driven by a number of economy wide factors and government policies, including product or service costs and prices, capital costs, management efficiency, forest land productivity, and tax and incentive policies.

What does the indicator show?

The United States has a wide variety of investment and taxation policies that favor long-term forest resource investments, provide consistent market based incentives and signals, and provide some payments for investments in nonmarket values. These are provided at the national, State, and local level, affecting income taxes, property taxes, and the production of a variety of forest resource goods and services. The regulatory environment is addressed in other indicators, and ranges from strict regulations on public lands and mountainous West Coast States to moderate regulations in the Northeast to voluntary best management practices (BMPs) in States with mostly private forest lands in the South and East. Prescriptive regulations occur at the Federal level for Federal lands, and State level for State and private lands. These include requirements for specific BMPs and for notification, harvesting permits, and timber management plans in a few States.

Federal and State income tax policies for timber production are generally more favorable than for other sources of income, such as wages and salaries. For active investors, timber management expenses may be deducted as a cost of business, similar to agricultural operations. Timber income is currently taxed at a long-term capital gains rate that is less than the marginal tax rates for middle income or higher level individuals. Timber income receives an accelerated tax deduction for reforestation and planting, rather than waiting for the end of a harvest rotation to apply the deduction as a cost of business. This Federal tax treatment is carried over to the State income taxes.

Property tax treatment for forest land owners is also generally favorable for active forest land owners and managers, although this does vary substantially among States and even within States. Property tax rates without special tax treatment can be almost punitive, at up to $30 to $50 per acre per year. But most States offer current use of forest use valuation, which reduces these high rates to less than $10 per acre, at least for landowners who meet program criteria and guarantee to enroll for a fixed program length. Some States also tax timber as real property, but offset the increasing tax values by collecting a yield tax on the timber portion of the asset, and only the land is taxed at actual assessed values.

Many forest incentive programs also promote forest investments in timber, conservation, or other environmental activities. The periodic Federal farm bill has increasingly incorporated provisions for tree planting, crop retirement, and environmental land use programs in each of its authorizations and appropriations since the 1960s. Recent relevant Federal farm bill programs included the Conservation Reserve Program, Wildlife Habitat Incentive Program, Environmental Quality Incentive Program, and the Forest Stewardship Program. Funding for forestry in these programs has been somewhat limited, at least until the 2008 Farm Bill, which authorized more participation for forest and wildlife practices, although actual implementation is pending. Almost 20 States also provide State incentive payments to landowners who plant trees or perform qualifying forest management and planning activities.

Informational and educational programs promote participation in these programs, including program enrollment processes, forest practice requirements, and cost-share payment rates. Research and protection programs help ensure that these incentives and practices remain productive and secure, and extensive Federal and State planning and program development provide the foundations for program delivery.

Private market policy tools also address timber production, ecosystem goods and services production, and environmental protection for sustainable forest management. These specifically include market based programs such as forest certification for sustainable forest management, wetlands banks for wetland functions and values, cap-and-trade for carbon storage or Endangered Species Protection, conservation easements for fixed term or permanent protection from development, and even outright purchase of forest lands by nongovernmental organization or government organizations.

Table 55-1: Policy and Governance Classification

What has changed since 2003?

The American Jobs Creation Act of 2004 changed Federal reforestation tax incentives for private forest landowners somewhat. Landowners were allowed to increase the amount of they could deduct each year, and the excess could be amortized over an 8-year period. Landowners were also allowed to receive capital gains treatment for timber income from lump sum sales and for sales per unit of volume. Federal tax law still taxed vertically integrated forest products firms at rates greater than those for timber investment management organizations and real estate investment trusts, which has been attributed to leading partially to the sale of much land to timber investment management organizations (TIMOs) and real estate investment trusts (REITs).

State forest property taxes continue to fund State and local services, and have increased in many jurisdictions as the demand for services rises rapidly. Debates over tax levels and equity occur, and changes in State laws for timber and current use valuation occur periodically.

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Criterion 7 Indicators