TAX CONSIDERATIONS

Economic Analysis and Legal Guidelines to Effectively Incorporate Tax Considerations into Forest Management, Investment, and Policy Decisions¹

Taxation is a principal economic factor that can encourage or inhibit private investments in forest management. In financial analyses, taxes rank with harvest returns and rotation length as a key determinant of the viability of forest management investments. To units of government, taxes represent both an essential source of funding and a powerful tool in pursuing societal goals. Taxes also constitute an important part of the operating environment for owners and managers of private forestland, and a critical factor in determining the level of stewardship practiced and the types of forest outputs produced.

State and federal tax laws affecting forest management are complex and constantly changing. The manifold requirements of the laws are daunting and burdensome to taxpayers, and require specialists to assess compliance. Questions important to forest management remain unsettled due to the time required to implement revisions, or because of interpretive differences between regulatory agencies and the courts. At the same time, the law includes a number of provisions designed to make effective integration of tax considerations both problematic and essential, for forestland owners, managers and investors, and natural resource policymakers.

Because of the dynamic nature of tax law, economic analyses of forest management options are made on a pre-tax basis. This approach ensures that revisions to the tax law do not immediately render the study findings obsolete, and enables the researcher to focus on the biological or administrative aspects of the decision. But it may incorrectly rank options that are treated differently in the tax law, and it provides no insight or guidelines to members of the forestry community who wish to include tax considerations in their management, investment, or policy decisions.

The scope of tax problems and the applicability of research results are nationwide. By their nature, they cannot easily or logically be forced into regional constraints.

Research will be conducted on those aspects of taxation that encourage or inhibit private investment in forest resource management, through the established procedure of identification, delineation, and in-depth descriptive analysis of state and federal tax laws and administrative practices. Proposed and newly-enacted revisions to tax laws will be assessed according to how closely they conform to tax theory and to the generally accepted attributes of a "good" tax: (1) equity, (2) neutrality, (3) convenience, (4) certainty, and (5) economy.

In addition, economic models will be used to estimate the impact of tax changes on forestland owners and investors. Analyses will be done for single-and multiple-stand holdings, and for fully-regulated forests. Models also will be used to investigate how federal and state tax systems interact with one another, and with other regulations affecting private forest management. The research will be organized into three major components: federal taxes, state taxes, and the effect of tax systems.

¹All four problem areas of our research work unit are in the process of undergoing revision. Updated problem statements will be posted when the process is complete.

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