Can Property Tax Reform Help Preserve Forestland in Pennsylvania

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Can Property Tax Reform Help Preserve Forestland
in Pennsylvania?

• Dr. Marc McDill
• Penn State School of Forest Resources
• Seventh Goddard Forum
• January 29-30, 2007

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History
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A Brief History of Special Forest Property Tax
Programs in Pennsylvania

• 1887 Rebate Program
• Ruled unconstitutional in 1906
• 1913 Yield Tax
• Ruled unconstitutional in 1939
• 1973 Clean and Green
• Made possible by 1968 amendment to the State
  Constitution
• Act 319 of 1973, amended by Act 156 of 1998

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Clean and Green
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1968 Amendment

• The General Assembly may, by law (i) Establish
  standards and qualifications for private forest
  reserves, agriculture reserves, and land actively
  devoted to agriculture use, and make special
  provision for the taxation thereof (Pa. Const.,
  Art. 8, Sec. 2 (b)(i))

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Basic Concept of Clean and Green
Development Pressure
Higher Land Values
Higher Taxes
Landowners are Forced to Develop
Open Space Disappears
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Basic Provisions of Clean and Green

• Minimum of 10 contiguous acres
• Land is assessed using a use value, rather than
  fair market value
• Land cannot be removed from the program without a
  change of use
• Change of use on part of the property triggers a
  roll-back on the entire property

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Participation in Clean and Green

• 2.7 million acres of forestland in 29 counties
  were enrolled in Clean and Green in 2004
• 55 counties have CG
• The amount of tax savings depends on
• The extent to which development pressure pushes
  up fair market values above use values
• The length of time since a re-assessment
• In many counties there is no benefit because the
  last reassessment was done long ago.
• In some counties, CG values were once less than
  FMV but are now higher.

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Issues with Clean and Green

• Fairness

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Fairness - Reassessment
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Fairness Valuation Issues

• Assessed values reflect regional variation in
  values, but not variation within a county.
• Similar properties in adjacent counties may have
  very different assessed values.

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Values Calculated for Six Forest Types

• Softwoods
• Miscellaneous Hardwoods
• Select Oaks (50 red)
• Other Oaks
• Northern Hardwoods
• Black Cherry (40)

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County-Wide Averages

• It would be impractical for county assessors to
  determine the area by forest type for each parcel
  in the county.
• FIA data were used to determine an average forest
  type profile for each county.
• Used by most counties to come up with a single,
  weighted average value for all forest land in the
  county.

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Values Calculated for Six Forest Types

• Softwoods
• Miscellaneous Hardwoods
• Select Oaks (50 red)
• Other Oaks
• Northern Hardwoods
• Black Cherry (40)

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Fairness Across Counties
Clinton Co. - 39
Cameron Co. - 188
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Issues with Clean and Green

• Profitability

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Profitability Does Money Grow on Pennsylvanias
Trees?

• Forested properties enrolled in Clean and Green
  pay between 1 and 5 in property taxes per acre
  per year.
• Income may be produced only once in 80 years.
• Because forestland often produces no income for
  many years, the cost of property taxes must be
  compounded each year until income is received.

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Impact of Property Taxes on Profitability

• When a tax of 1 per acre per year is compounded
  at 6 for 80 years, it takes 1,747 per acre in
  final harvest revenue to offset this cost.
• If an interest rate of 8 is used, the required
  revenue needed at the 80-year rotation to offset
  this cost rises to 5,887 per acre.

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Estimated Average Per Acre Gross Revenues From
Timber Harvests (80-yr Rotation)
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Estimated 2003 Pre-tax Bare-land Values for
Timberland in Pennsylvania (3)
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Estimated 2003 Pre-tax Bare-land Values for
Timberland in Pennsylvania (4)
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2003 Impact of Property Tax Under Clean Green
on Bare Land Values

• The property tax reduced bare land value by
• 4.20/ac in Delaware County
• 179.66/ac in McKean County
• The avg. reduction in the bare land value was
• 138.05/ac in the northwest,
• 38.28/ac in the northeast,
• 38.91/ac in the southeast, and
• 56.10/ac in the southwest.

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Property Taxes and Profitability

• Most forestland properties in the state do not
  even earn a 4 real internal rate of return
  before taxes.
• Property taxes reduce profitability even more
  because of the deferred income problem.
• If it is not profitable to grow trees, owners
  have one less reason to hold onto forestland.

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The Yield TaxAn Alternative to Property Taxes?

• An equivalent amount of revenue could be raised
  by a 10 to 12 yield tax.
• A yield tax has the advantage that it is paid at
  the same time when there is revenue.
• This can be a significant benefit especially
  for small landowners.
• It would be complex to implement initially, but
  in the long run it might work better.

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Issues with Clean and Green

• Does it preserve forestland?

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Surveys of Assessors and Commissioners

• Does CG preserve forestland?

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Assessor Survey- Impact on Development

• Subdivision of CG properties occurring to some
  or great extent 68

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Assessor Survey- Impact on Development

• The CG in the county is at most a temporary
  holding period until the time and price being
  offered by developers is appropriate for the
  seller. The pressure to sell is irresistible in
  the county. The only permanent way to preserve
  the farmlands in the county is through the farm
  land preservation program being utilized by the
  county and individual municipalities.

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Assessor Survey- Impact on Development

• Several farmers have indicated that the county
  Act 319 program allowed the taxes saved to go
  directly to their bottom line and have therefore
  allowed them to continue farming the subject tax
  parcels.

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Issues with Clean and Green

• Unintended beneficiaries

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Assessor Survey- Unintended Beneficiaries

• Subdivision of CG properties occurring to some
  or great extent 68
• 84 say there are unintended beneficiaries
• Mini-estate problem homes are built on lots
  just exceeding the 10-acre minimum to qualify for
  Clean and Green
• Program may actually be contributing to sprawl

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Unintended Beneficiaries

• An 8 acre tract sells at 160,000, does not
  qualify under the minimum acreage, assessed at
  7,200. A 10 acre tract sells for 200,000 does
  qualify, assessed at 180. Both tracts
  adjoining, where is the equity of the tax
  burden?

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Clean and Green

• What do landowners say?

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Landowner Survey

• Only 10 have a management plan
• 54 have harvested timber
• Main reasons for owning land
• preserving natural beauty
• living in a rural area
• personal residence

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Total Income from Forest Land Over the Last 10
Years
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Reasons for Enrolling in Clean and Green
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Impact of Eliminating Clean Green on
Landowners Actions
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Issues with Clean and Green

• Fairness/equity
• Deferred income/profitability
• Unintended beneficiaries
• Does it achieve program objectives?

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General Options for CG

• Dont change anything
• Modify the current program
• Without legislation
• With legislation
• Create a new program

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Changes Without Legislation

• Adjust assessed values using the common level
  ratio
• Assessment petition

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Changes With Legislation

• Minimum acreage increase
• Stiffen eligibility requirements
• Implies more administrative time
• Require management plan
• BOF time, or have consultants do it?
• Penalty changes

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Eligibility and Penalty Options Pros and Cons

• Stiffening eligibility requirements implies more
  administrative time and fewer landowners will
  benefit
• Low penalties result in high enrollment, more
  lost revenues, less impact
• If preferential tax is to work, there needs to be
  long-term contract agreement with severe
  penalties for violations
• But if penalties are too high, landowners wont
  sign up unless the benefits are significant

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An Alternative Program?

• Yield tax about 6-9
• Plus a Flat tax 50 cents-1/acre?
• Reduction in flat tax for good management,
  e.g.,
• Management plan
• Conservation easement
• Certification

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General Conclusions

• Tax benefits will seldom offset development
  values where development values are significant.
• Property tax reform can make a difference on the
  margin.