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Assessment and taxation of forests on the basis of use-value emerged in the 1960s as a way of slowing the conversion of rural land to more intensive uses, such as industrialization, first- and second-home construction, and recreation development. Forest landowners were often forced to develop their land because its market value commonly exceeded values based upon current income-producing ability. Use-value laws were seen as a way of restoring the balance between a property's taxable value and its income-producing potential. Hickman (1982) reported that use-value laws were seen as achieving two closely related goals:
a. Owners of forest, farm, and other rural land who wanted to profitably keep their properties in their traditional uses could do so.
b. The State and its citizens would reap the benefits derived from the continued management of the rural land base.
Between 1950 and 1970, conversion of forestland was a serious problem in certain parts of the United States. Modest losses were experienced in the South, but the total acreage remained essentially unchanged. Losses of privately owned farmland were much more pervasive and substantial, however, declining 14 percent (Wall 1981). Such losses were of great concern for two reasons: (1) losses to development are essentially irreversible, and (2) a multitude of economic, social and environmental benefits are derived from rural uses. Examples of these benefits include: (1) greater assurance of sufficient food and fiber to meet future needs; (2) the economic activity generated by viable agricultural and forest industries; (3) increased outdoor recreation opportunities for urban and suburban residents; (4) protection, or perhaps even improvement, of air and water quality, and (5) a slowing of urban sprawl.
Use-value laws are of three basic types: (1) pure preferential assessment, (2) deferred taxation, and (3) restrictive agreements. Each provides for assessment and taxation of qualified properties based on current-use value as opposed to market value based on highest and best use. The differences between the three types stem from two things: (1) the restrictions placed on the ability of participating property owners to change land use, and (2) the provisions contained for recouping the tax concessions granted to participating property owners when they convert their properties to some ineligible use.
Under pure preferential assessment, land withdrawn from the program or converted to an ineligible use is subsequently taxed on the basis of fair market value, but no declassification penalty is imposed. Under deferred taxation, eligible land that is withdrawn from the program or converted to another use not only is taxed at highest and best use but is subject to a penalty based on the taxes saved during the period of classification. Finally, under restrictive agreements, the owners of eligible land contract with the State to restrict the use of their property for a specified number of years. In return, they are granted current-use assessment. During the period of the contract, changes in land use are usually permitted only if they are deemed to be in the "public interest." When development is allowed, a penalty based on the taxes saved during the period of classification is generally imposed.
Five Southern States have pure preferential assessment statutes, seven have deferred taxation statutes, and one, Georgia, has a restrictive agreement statute (Table 4).
Three of the southern statutes are mandatory and 10 are optional. In States with mandatory laws, all forest land that is eligible for use-value assessment must be assessed and taxed on the basis of its worth for forestry purposes.
All use-value laws essentially have the same structure. Their key provisions generally coincide with the law's chief administrative steps. The administration of a use-value property tax statute usually involves (1) setting the conditions for eligibility; (2) evaluating applications (if necessary) for enrollment; (3) assigning a dollar value to the enrolled property; (4) overseeing continued enrollment, withdrawal, and related penalties; (5) providing a review or appeal process concerning eligibility and assessment; and (6) collecting and distributing the taxes. See Hickman (1982, 1983), and the Gulf South Research Institute (1982) for more details.
The asset that is to be assessed and taxed differs among the statutes, and this difference has some bearing on the selection of a valuation method. In some States, both the land and timber thereon are considered taxable property under annual ad valorem taxation. In several other States, however, the use-value law is linked with an exemption statute, wherein standing timber is exempt from annual ad valorem property taxation but is usually taxed instead at the time of harvest through a yield tax or severance tax. Thus, care must be taken to ensure that the valuation methodology is appropriate for the asset to be valued. Standing timber is statutorily exempt from annual property taxation in Alabama (Code of Alabama. 40-7-25.1 to 40-8-1), Georgia (Code of Georgia Ann., 48-5-2, 48-5-7.4, and 48-5-269), Louisiana (Louisiana Rev. Stat., 47:2301 to 47:2309), Mississippi (Mississippi Code, 27-35-49 to 27-35-50), North Carolina (North Carolina Gen. Stat., 105-277.2 to 105-277.7, 105-289, and 105-360), and Tennessee (Tennessee Code Ann., 67-5-1001 to 67-5-1011). Virginia statutes do not exempt standing timber from property taxation, but they tax the value of the bare-land alone.
In most Southern States the chief State administrative agency or advisory committee publishes schedules of recommended current-use values, which may be broken down by region, forest type, and productivity class across the State. In these cases, the local (generally county) assessors select from the range of values provided in the tables, making adjustments, if applicable, using personal knowledge, judgment, experience, and other information that may be available. In other States, however, the tax department or an advisory committee develops procedures, usually detailed in an assessment guide, for county assessors to use in valuing individual properties. County assessors in these States use procedures and data provided by the chief administrative agency and apply them to develop assessed values for either individual properties or productivity classes in their counties.
Kentucky (Kentucky Rev. Stat., Sec. 132.450) is unique among Southern States in that it simply lists the factors to be considered in determining use value and leaves it up to the assessor to determine their relevance. The factors to be considered include: (1) the income potential of principal crops; (2) prices of comparable land acquired for agricultural purposes; (3) relative percentages of tillable land, pasture land, and woodland; (4) soil productivity; (5) risk of flooding; (6) land improvements relating to production of income; (7) accessibility to all-weather roads and markets; and (8) all other factors affecting the general agricultural or horticultural economy--interest rates, product prices, input costs, etc.
The value of forestland has traditionally been determined under one of three bases: (1) cost methods for restoring a forestry investment, (2) comparison of sales of similar forested properties, and (3) capitalization of expected timber income (Williams and Canham, 1972). The first of these--the use of historical, replacement, or restoration costs--is of limited value in determining the current-use value of forest land. First, past costs may be out of line with current costs because of appreciation or depreciation, present or prospective changes in use, or costs that were out of line to begin with. Second, immediate replacement or restoration is physically impossible because of the time element necessary to grow another stand. Timber cannot be directly replaced and it is impossible to replace an uneven-aged stand (Williams and Canham 1972). Only Florida's law lists the cost-replacement approach as one of the choices, along with the market and income capitalization approaches, that the assessor may choose in valuing forest land (Rules of the Florida Department of Revenue, Division of Ad Valorem Tax, Chapter 12D-51.01). However, the statute recommends the income-capitalization approach, stating that the cost replacement approach is not suited for measuring the ability of land to generate income from the growing of timber.
The second possible basis for valuing forest land is a market analysis of sales prices of similar forested properties. The advantage in using market value is that it integrates all the relevant factors comprising value. The market analysis approach is much more commonly used if highest and best use is the valuation criterion. With current use for growing timber as the criterion, however, the sales transactions in the analysis must be properties in which timber management is the highest and best use or for which the land is limited to timber management use. Problems arise in using this approach when an alternative use of a property, such as a motel site, significantly alters its value. Another difficulty in using this approach is that no two properties are exactly alike and it is difficult to find enough transactions involving similar properties.
While none of the statutes base use value solely on a comparison of sales of comparable properties, several use this methodology at least in part. The use-value statutes of Kentucky (Kentucky Rev. Stat., Sec. 132.450) and Tennessee (Tennessee Code Annotated, 67-5-1008) list the prices of comparable land acquired for agricultural or forestry purposes as one of the relevant factors to be considered in determining use value. Florida includes market sales analysis among the three different approaches that assessors may choose from in estimating use-value. The Georgia State Revenue Commissioner bases the annual recommended use-value schedule on a weighted combination of sales data and capitalized net income (Georgia Code Ann., 48-5-269). Sales data for comparable real property with and for the same existing use represent 35 percent of the weighted value. And in South Carolina, an index of the average value per acre of farm real estate land and buildings is used to construct a multiplier to adjust the base-year fair market value for land used to grow timber. The multiplier is determined using an income capitalization method (South Carolina Code, 12-43-220). Outside the South several States use stumpage prices as well as land sales data, as part of a hybrid approach, often in combination with income capitalization.
The final and most widely used basis for determining forest-use value is the capitalization of expected income from the land. In States where forestry is a major land use, expected income is synonymous with the expected future earnings from timber management. Under this approach, forest-use value is equal to the discounted net present value of the stream of anticipated future income accruing to the land from timber production.
Some States consider value from nontimber uses in their formulas for capitalizing expected income. Florida's statute allows for income from naval stores and range pasture usage to be considered along with timber income (Rules of the Florida Department of Revenue, Division of Ad Valorem Tax, Chapter 12D-51.01). In Texas, land on which timber harvesting is restricted to meet aesthetic, conservation, water protection, or plant or animal protection goals may qualify for appraisal as restricted-use timberland (Sec. 23.9801, Tax Code). Land in an aesthetic management zone, critical wildlife habitat zone, or streamside management zone is appraised at one-half of what it would have been appraised at under normal circumstances.
A variant of the income capitalization approach allows rental rates for land used for timber production to be used as a proxy for anticipated future timber income. Annual net cash rental is usually determined through an analysis of typical rental agreements collected over the years prior to the year for which the valuation is being determined. Comparable land must be used for forestry purposes and located in the vicinity, if practicable, of the property being valued. Among Southern States, only Oklahoma capitalizes timber income based on rents from land dedicated to that use.
Two main variants of income capitalization are: (1) the bare-land value approach, and (2) the sustained-yield approach. Under the bare-land value approach, a stand is assumed to be established on cutover land, grown to maturity, harvested, and the process repeated interminably. Bare-land value, also known as land expectation value, is equal to the present net worth of an infinite series of periodic incomes. Forest land is regarded as the sole productive agent and timber as working capital. Under this approach, bare land is the basic asset to be valued, with standing timber exempted from taxation (Hickman 1989). Among the Southern States, only North Carolina and Virginia use the bare-land-value approach.
The sustained-yield approach involves capitalizing the net value of the mean annual growth increment, as if it occurred as an annual income, given an assumed rotation length. A fully regulated forest is assumed to exist in which an equal income is produced in the current and all subsequent years. Timber is regarded as fixed capital because it has to be in place to produce such an income pattern. The "factory" in which timber is produced consists of both land and trees (Hickman 1989; Williams and Canham 1972). Thus, when this approach is used to determine forest-use value, timber as well as the land is taxed. This approach is used by the other 10 Southern States that use income capitalization. Several States that exempt timber from taxation nonetheless use the sustained-yield method. Despite this policy inconsistency, there is no evidence that property taxes are any higher in these States as a result.
A number of statutes have provisions that provide a floor or ceiling on assessed value. In Georgia, for example, the current-use value of any conservation-use property may not increase or decrease by more than 4 percent from its value for the previous taxable year or increase or decrease during a covenant period by more than 25 percent from the first year of the covenant period (Georgia Code Ann., 48-5-269). Similarly, Mississippi does not allow the variation in use value, up or down, from a previous year to exceed 10 percent (Mississippi Code, 27-35-49 to 27-35-50). Alabama's statute provides that assessed value may not be less than that levied in the first tax year for which values are computed, and may not be greater than the assessed value in the first tax year plus amounts equal to 3 percent of such values multiplied by the number of tax years elapsed since the first tax year (Code of Alabama, 40-7-25).
The intent of use-value assessment of forest and other rural land is to provide property tax relief to participating landowners so that their land may continue to contribute socially desired benefits, which include food and fiber for future economic activity, open space at the urban fringe, and the slowing of urban sprawl. While States may adopt use-value assessment for any or all of these reasons, there are impacts that follow from this policy decision. As in Hickman (1983), the discussion here focuses on three main areas: (1) equity implications, (2) revenue implications, and (3) effectiveness.
Use valuation causes the taxes of participating property owners to decrease. Local government taxing bodies normally respond to the resulting decrease in the tax base by increasing tax (millage) rates. The taxes of nonparticipating owners rise and they collectively share a greater proportion of the total tax burden. The magnitude of the tax shift depends on the amount by which use value reduces the assessment of participating properties and the percentage of the total base which is in participating property. The amount of taxes shifted increases as participation rises. At a certain point, the number of participating properties outstrip the ability of the remaining nonparticipating owners to absorb the tax shift.
If local governments do not have the flexibility to increase tax rates due to legislation or political pressures, the decline in the value of the tax base due to use-value assessment can have important revenue implications. Local governments depend heavily on property taxes to fund schools and provide public services. Any portion of lost revenues not offset by an increase in the tax rate is a cost of the program.
The revenue and equity implications often receive the most scrutiny when use-value programs are implemented. Concerns are high where the enrollment rates continue to grow and the tax base continues to erode (Newman 2000). When Georgia first implemented its current-use valuation program in 1992, there was considerable concern over the erosion of the tax base. A few counties lost almost 20 percent of their taxable base (Whitt 1992). The problem was exacerbated because Georgia constitutionally removed standing timber from property taxation in 1990, and replaced it with a yield tax that taxed timber only when it was cut. In this case, the tax-shifting impacts were particularly large but the benefits also were substantial.
A search of the literature reveals a general agreement that use valuation provides substantial tax relief to participating owners. Most researchers, however, believe that this relief, by itself, does not retain forest and other rural land in traditional uses (Anderson 1993, Coughlin and others 1978, Gloudemans 1974, Ferguson and Spinelli 1998). It appears that use-value taxation may, at best, delay but not prevent development of rural land. The most-often cited reason is that property owners may be unable to resist the large capital gains associated with development. It also is believed that the present value of the tax savings may be capitalized into higher land prices by raising the reservation prices of a significant number of landowners (Gottfried and others 1999). While use valuation plays a role in changing the relative profitability of land uses, land-use change is thought to be driven by a broad range of other factors--population and migration changes, socioeconomic characteristics of landowners, and transitional factors.
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content: James E. Granskog and Terry K. Haines |
created: 21-NOV-2001 |