How barns and backlots get nibbled to nothing by tax codes – includes related article
Lester A. DeCoster
Family forests and swaybacked farm buildings are symbols of an economic system gone to seed. But here’s an idea you can bank on.
Many people seemed shocked to discover that millions of acres formerly worked for pastures and crops by rural American families have become forests owned by urban people. The news not reported is that the tax policies and economic pressures that converted family farmlands to forestlands are fragmenting forests into smaller and smaller pieces.
This spring, within the several pounds of reorganized wood fiber delivered daily to my door by the Washington Post, I found an article griping about the addresses of people receiving farm-program subsidy checks. The Post reported that people in Boca Raton, Honolulu, Chicago, even people in (gasp!) Washington, DC, were receiving checks for various farm programs. The article wound up with a brief thunderstorm of criticism about land programs that were here today, gone tomorrow.
Hello, Washington? Where have you been?
The death of family farms and the transfer of the land to people who work in offices and live in cities (or who are retired) is an old story that – like that of the 17-year locust – makes lots of noise for a little while, then goes back underground for a long sleep.
I remember an event, almost 40 years ago, that triggered the advance of forests back over the fields where two generations of my family had grown grass, corn, cucumbers, and beans. I was shoveling snow and heard a loud “crack!” as the roof timbers of my father’s barn yielded to the weight of the snow. The old building assumed the broken-back stance of family-farm barns all across America, its timbers decayed from years of unrepaired leaks and settlings.
It made no sense to maintain a barn (or fields) on land that could barely pay taxes, let alone support a family – so we hadn’t. After the barn broke, my father earned a salary working for others. I went to college to get a forestry degree and, ironically, a few years later supervised tree-planting crews filling old fields all over Maine with trees. Broken-back barns were like signs announcing “turn in here” to the planting crews as farm lands formerly worked by families became forest lands worked mostly by no one.
No one in my family makes a living from growing things anymore. All over America barns have broken, fields have filled with forests, and families have moved off the farms as our economic treatment of land has shifted. Now people who aren’t farmers own most of this land. Some of us are one generation removed from living-on-the-land farming; some are many generations removed. Some of us even have addresses around Washington, DC.
Over decades of changing land use, farm programs – and nature itself – have encouraged the converting of millions of acres of fields back to forests. But the economic pressures that broke the backs of family farms haven’t gone away; they are quietly pulling down family forests, year after year.
At risk are 230 million acres of forests, most held by more than 6 million individuals or families. That’s about half of all the privately owned forests in America (and more than 30 percent of all U.S. forests). These forests, like the old family barns, are wonderful accumulations of wood and biology, but the new owners can find few economic reasons to maintain them. Adding to the economic difficulties of maintaining a resource that often takes a full lifetime to mature is a complex tax system that, over the years, pulls these forests down into smaller sizes like gravity pulls down unmaintained barns. Preliminary findings of a recent forest-landowner survey (U.S. Forest Service 1994) show more than 12 million acres being nibbled out of the category of mid-size forests (100-499 acres) and being reduced to parcels of 50-99, 10-49, and 1-9 acres. That’s like watching the equivalent of five Yellowstone National Parks being subdivided.
Economists describe these forest fragmentations as merely economic efficiency adjustments. Tax authorites absolve the tax structure, saying taxes are designed for a level economic playing field. I say that those authorities are perpetrating the stuff I used to shovel in my father’s barn.
Bring your calculators and green eyeshades now and hike with me through the thicket of tax codes that forest owners must traverse if they wish to retain their forests. It’s called the tax “code” for good reason. It’s written in a code that even the experts have trouble understanding. And unless you have considerable land or wealth, or happen to own highly productive forests, it’s not worth the time or the money it takes to decipher the applicable tax rules. The tax code insists that family forests act like big businesses – something they cannot do.
Even existing tax incentives designed to encourage forestry investments are user-unfriendly enough to discourage use by non-experts. Most forest owners simply don’t invest in maintaining their forests because tax policies make it almost impossible to deduct these costs on their tax returns. Instead they extract some value every now and then by selling land fragments for development or cutting some timber.
Why is this a problem? Isn’t the economy simply moving resources into more economic sizes? Well, individual trees and small groves in urban backyards are indeed valuable, environmentally and economically. But these small fragments simply cannot do all the things larger forest areas can. Twenty 10-acre forest fragments can’t recreate the diversity of life and the environmental functions of one 200-acre block any more than five small structures can duplicate the functions of one large barn. And as the acreage in a forest decreases, it becomes more and more difficult economically to retain it as a forest.
You see, forests are not just private economic units. They produce vital public environmental benefits that require large amounts of land over long periods of time. Ninety percent of what forests do relates to non-economic environmental functions that benefit the public. Forests create habitats for diverse life forms; clean and oxygenate the air; clean, filter, and cycle water; prevent soil erosion; store carbon that might otherwise unbalance climatic processes; add beauty to landscapes; and yield renewable raw materials for paper and forest products used daily.
The only economic benefits that private forest owners can capture are occasional sales of wood or the sale of the land itself for higher-value nonforest uses – development in most cases. Logic and fairness should indicate tax policies that recognize the public benefits that come from private investment in long-term forest maintenance, balancing our economic system’s pull toward short-term investing.
Tax officials (“taxers”) are fond of telling us taxpayers (“taxees”) that they have built a level playing field so we all contribute fairly to the great pools of money that water our thirsty government. They say everyone pays the same amount of tax for the same amount of income, no matter how you make that income.
Take a look with me out across this fiat field of dreams… uh, taxes. Call me a taxee, but I think I see some serious hills in the direction of the woods.
Let’s say I put some money in a bank that agrees to return my money plus $100 after one year. At the end of the year I go to the bank and reinvest the original amount. I take out the $100 earned, send $28 for taxes to our federal government for various services, and send another $8 to the Old Dominion of Virginia for letting me live there and drive on its roads. My wife and I go to dinner at Clyde’s, a local eatery, where we spend the $64 we have left after taxes. If Clyde can’t figure out how to avoid it, Clyde pays taxes on the $64 that we have so kindly carried there from our bank. All in all, the bank, the federal government, the Old Dominion, my wife and I, and Clyde’s are pleased.
Or. . .
I put some money into helping an old Maine farm revert back to forests. The kids and I brush out and mark the boundaries. I spend some time convincing a local timber pirate that I will hurt him badly if he keeps slipping over the line to steal trees. The state’s deer herd sets up a deli in my woods, eating seedlings I had hoped would grow in some clearings. We have some windstorms, ice storms, and insect outbreaks that necessitate hiring a consulting forester who hires a woods crew to clean up the mess and thin the tangles. After 30 years, I cut some trees and receive some money.
After deducting various services and trips back and forth to Maine, I have $100 left. Actually, I haven’t made any money if I consider all my costs over the 30 years and account for inflation. But because I’m busy and not an accountant or a lawyer, and haven’t kept the excruciatingly complex records required to make deductions for my tree-growing costs, I declare $100 in income, send $28 for taxes to our federal government and send another $8 to the Old Dominion of Virginia. My wife and I can’t reinvest our original money back into the forest because that money’s gone, and we don’t go to dinner at Clyde’s because we have to pay the annual $200 property tax bill from the town where our forest land is located. We take the $64 left from our $100 in taxable income, add $136 to it, and send it off to the town so that we can keep those trees growing for another year, moving toward the next big payoff – maybe another 30 years down the road. By then we’ll need the money for hip replacements, arthritis medications, and other such things required by ancient people.
All in all, the federal government, the Old Dominion, and the town are happy, but the bank misses our money and so does Clyde’s, and my wife and I feel like we have been legally mugged in slow motion.
Well, this may be a level playing field – for the taxer. The government gets its tax no matter what. But taxees like me are facing a considerable hill in the way of investing in forestry. The incentive is to convert forest and land to cash, then put that cash into a nice, safe, government-backed, interest-paying bank or some other short-term deal.
If economic motivations were uppermost in the minds of landowners, the “hills” in our tax system would long ago have pushed us into removing and not replacing most of America’s remaining private forests. That hasn’t happened (yet) because people who hold forests are motivated by more than money. Many of us are sentimental slobs who will love our forests until we can no longer afford them.
Part of the uphill slant our tax system creates for forestry investments is a bias against investing nonforest income. This is a problem because for years and years most forests don’t produce any income. If landowners are going to invest in taking better long-term care of their trees, they have to use income that doesn’t come from forests.
Try investing in your forests with income you earned, for example, from freelance writing, and you get into the wonderful world of active and passive losses.
“How many hours last year were you actively engaged in making your forest yield income when you put this nonforest money in?” asks the IRS.
“Well,” you honestly reply, “there isn’t much to do right now other than paying to get this area thinned. Maybe I spent 20 hours dealing with a thinning crew and a consulting forester.”
“Passive activity,” says the IRS. “Your investment can be deducted (maybe, we think, but the rules may change) in the year 2025, when you have some forest income. By then the Pentium chip on your computer will be able to calculate the capitalization and inflation factors of waiting 30 years for a return on investment.”
I have some solutions. I propose we change the tax rules to allow Green IRAs (I call them GIRAs), a version of Individual Retirement Accounts in which taxpayers could accumulate pre-tax dollars from any income source in interest-bearing accounts. That money would then be invested in specific forest-maintaining activities, such as hiring a forestry consultant or a biologist to advise on a forest, thinning thickets, controlling erosion on road banks, etc. That way the public would wait for its tax dollars along with the landowners who are waiting for returns on their investments. If a landowner in the 28 percent tax bracket puts $2,000 into a Green IRA, it would delay for now the public’s $560 in taxes. John Q. Public must wait for a percentage of the return just as the landowner must wait for a return on his or her $1,440 ($2,000 minus $560) investment.
Why should the public give landowners a special deal and wait to collect taxes on their forestry investments? Actually, this is not a special deal. The public waits for taxes on investments all the time. I can move money around in various investment accounts for years while the public waits for the taxes. If I was a large enough landowner to have a consistent flow of forest income, I could move that money around on the land and again the public would wait for taxes. The special deal is that there are tax-policy biases against the mid-size and small forest owners who have to invest nonforest income in lumps, then wait years for returns to maintain their forests. With these people, the public has been unwilling to share in the waiting.
It would be a nice deal to year after year get the public benefits of the 230 million acres of these small to mid-size family forests without having to wait for taxes, but the sad secret is that most of these forests are not being maintained because the tax landscape presents some special hills to investing in maintenance.
Just a little more whining, and then we’ll get back to the woods. Many wrinkles in the tax code discriminate against family forests. These forests aren’t a business, yet the tax code insists they act like one if they want to exist economically. The cruelest wrinkle: an estate-tax system that can force the sale of family forests to pay alarmingly high taxes. Like lion traps – holes dug in the ground and covered with a thin layer of twigs and dirt – estate-tax rules catch and punish the unwary.
To truly function as a forest, the trees, plants, and animals on a piece of land must grow and change over many years. Functioning forests disappear when they are carved into smaller pieces. The present estate-tax rules are descended from the earliest days of America, when our founders feared the land would be captured by a wealthy few and kept within only those families. Tax traps were set to extract high taxes when great wealth and landed estates were inherited.
The problem now is that land has so risen in value that people of ordinary means are getting caught in the traps. A valuable piece of land being passed on can be a tax bonanza if the now-dead owner has not invested in complex legal arrangements to pass it on with land-use restrictions. Even if the land being passed on is forest land and the heirs would like to keep it as such, estate-tax laws allow tax authorities to set the inherited value at the highest value of potential use (generally development) and tax the heirs at breathtaking percentages for those values. The heirs are often forced to sell the land for highest-value use to raise the cash to pay the taxes.
So death and taxes are sure. What else is new? If we want forests to continue on large areas of land, we can’t tax them into oblivion just because the owner didn’t hire enough lawyers before dying. The heirs should be allowed to make a post-mortem commitment to keep the inherited land in forests and be taxed at that value rather than being mugged by taxers for their relatives’ lack of pre-death planning.
I’ll spare you a discussion of local property taxes for now – that’s another column. Let’s just say that paying an annual – and constantly rising – tax on land that yields income only once every 15 to 30 years is an economic drain.
This has been pretty heavy going, but I feel confident that changes could be made to improve things. AMERICAN FORESTS is involved in recommending some of those changes. The new Republican majority in Congress has pledged a fairer tax system. Whether you own forest land or simply breathe the clean, cool air forests provide, I hope you are concerned enough about the tax hills and holes that fragment family forests that you will call your congressional leaders and ask what they are doing about this problem. Watch out for responses containing the words “level playing field.” Remember that while solutions may involve dry, dead laws, the ultimate goal is to perpetuate vital, living forests.
The next time we meet, the leaves will be changing color in the cool climates. It may look like things are dying, but there is a renewal process going on. I’ll describe the summer movement of nutrients and water from the ground into leaves in the treetops, and then the fall movement back to the ground again as the leaves drift down. I’ll also tell you things you can do to aid this process on your piece of the planet.
COPYRIGHT 1995 American Forests
COPYRIGHT 2004 Gale Group
