An Analysis of Selected Property Tax Exemptions for Timber

Abstract

Recent work in forest tax theory has stimulated renewed discussion of local government taxes on forests. Several authors, for differing reasons, have found fault with the traditional Fairchild (1935) conclusion that the annual property tax on full market value is always biased against deferred yield forestry (Trestrail 1969, Klemperer 1974, Pasour and Holley 1976). Yet the conclusion among many researchers remains that such a tax is likely to be biased against certain types of forest land use (Bentick 1979, 1980; Klemperer 1978). The proper forest property tax modification, however, is still a topic of much debate. Some suggest that property taxes be levied only on forest land, while exempting timber (Zivnuska 1969, Cartwright and Dowdle 1979) as done in several states, including Tennessee, North Carolina, Iowa, and Alabama (Carlan 1978). Other approaches give partial timber exemptions or replace property taxes with a yield tax at harvest date. This article aims to describe the nature and magnitude of property tax biases against certain land uses. Assuming that tax policy should seek to avoid gross nonneutralities, which could distort market allocation of resources, this study evaluates potential adjustments in forest property taxes that would achieve greater neutrality. The approach will be to review theoretical land use impacts of a property tax on full value of (1) land and improvements for forest and nonforest uses, (2) forest land only, while taxing land and improvements for other uses, and (3) the value of forest land plus forest establishment costs.1 It is found that case (1) would be biased against land uses with long payoff periods or high ratios of improvements to land value, and case (2)