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Discussion and Conclusions

The first and second incentives alter the amount of Federal income tax due from a timber sale. A reduction in the tax rates for long-term capital gains would provide a substantial benefit to forest owners in all three timber types. Because it is a general provision that applies to all types of businesses and investments; however, the reduction would cause a large decrease in Federal tax receipts. Income averaging over 3 years would yield a more modest, targeted benefit to owners in all three timber types. The additional cash flow these incentives provide would enable nonindustrial forest owners to improve the level of management and stewardship. But the incentives would be available to all owners who sell timber, whether or not they manage their forest.

The third, fourth, and fifth incentives alter the tax treatment of reforestation expenses. All three incentives would benefit owners with reforestation expenses above the $10,000 amount that can be amortized under current law. The financial benefit provided by enhanced amortization provisions or a Green Account would be larger, and that provided by deduction of reforestation expenses in the year they occur smaller. Enhanced amortization provisions also would provide a small benefit to owners with reforestation expenses that can be fully amortized. These incentives are specifically tied to reforestation of harvested areas. For this reason, they have the potential to promote changes in owners’ management behavior and improve the overall level of management and stewardship on NIPFs.

The final incentive would extend provisions already present in the Federal tax code to an additional class of owners: those who manage their forest primarily for environmental or social purposes. The incentive would provide owners little or no economic benefit, but would encourage and enable owners in all timber types to make environmentally beneficial stewardship investments.

Ideally, components of a Federal tax policy to improve NIPF management would be politically acceptable, cause minimal reductions in tax receipts, require no fundamental changes to the tax code, specifically target private forests, benefit owners in all timber types, and be tied to forest management. Of the incentives analyzed, only enhanced amortization provisions for reforestation expenses might satisfy all of these criteria. But four additional incentives: (1) income averaging, (2) deduction of reforestation expenses in the year they occur, (3) Green Accounts, and (4) stewardship investment provisions meet enough of the criteria that they also merit consideration.