Property Tax: Biases and Reforms
|January 9, 2007||Posted by Staff under Progress Report, The Progress Report|
Tax Expert Urges Reforms
Property Tax Reform Priorities
by Mason Gaffney, Ph.D.
PART SIX (Parts 1 – 5 are still available)
The Role of Timber and Timberland
Mendocino County, lying on the north coast, is redwood countty. Redwood’s value on the stump (“stumpage”) this year is 53 cents per board foot (pbf) when mature. In Shasta County, timber stumpage is worth about half that, 28 cents pbf, and is heavily logged at that value – Shasta is our second biggest producer. If it is worth logging great volumes of Shasta timber to get 28 cents pbf, then there is a lot of surplus in Mendocino timber at 53 cents pbf. This surplus is what makes this land so valuable for growing timber. This surplus, unvexed by taxation, is what makes these lands so attractive to, and the play-things of corporate raiders, merger specialists, speculators, arbitrageurs, lawyers, and junk-bond salesman living thousands of miles away.
Redwood is a faster-growing species than most western timber (although much slower than Yellow Pine in the southeastern states). An acre of good (Site II) Mendocino land will yield a crop of 40,000 bf after 60 years of growth, worth about $20,000 on the stump at the 1995 prices. Discounting that to the present, using a real interest rate of five percent, means dividing it by about 16. Add ten percent for the present value of all harvests after 60 years, and you have very roughly $1,400/acre for the land value based purely on timber culture, considering no other values. Yet under TPZ its assessed tax value is $158, about 11 percent of its true value just for timber culture. This is accomplished by legislating the actual acre values (California Revenue and Tax Code, Section 434.5). The legislated formula mandates that “income-based” assessments be based on past prices, projected into the far future with no adjustments for inflation, but discounted at a high interest rate. It is clear for whose benefit this law was framed.
Meantime, urban demand is probing up north into southern Mendocino County from the Bay Area and Sonoma County, its southern neighbor. Mendocino has a long, scenic coastline with premium amenity values. A significant fraction of the TPZ land has a speculative value for resort, retirement, residential, urban and vacation uses, well above its timber value. None of this is reflected in tax assessments: TPZ protects against that, even though owners may convert out of TPZ at will. Land may be classed as TPZ regardless of past, present, or intended use.
The private area of Mendocino County is 1.9 million acres. Half of that is timberland, with 863,000 acres in TPZ. At an estimated $1.36/acre in taxes, this contributes $1.2 million to the County budget. The County gets $45 million from all property, of which the timberland fraction is 2.7 percent.
Add to that the yield tax of $3,9 million and you have timber and timberland together providing about $5 million of Mendocino County revenues. However, the County and its subdivisions (especially school districts) get over $100 million in intergovernmental subventions from Sacramento, paid by taxes on income, sales and businesses. By comparison, the $5 million from timber is a paltry share indeed to come from the most valuable resource in the County.
Timberland owners around the country have sold this bill of goods to legislators. In many states, less than half the private land is fully taxable, because of such laws. These are not all western or southern states, either, as one might surmise. In NH, for example, only 45 percent of the private land (and none of the Federal land) is fully taxable. The rest is sheltered by the State’s “Current Use” tax law, their version of our TPZ law.
Advocates for these laws argue that land taxes, accumulating with interest over long growth periods, would eat up all the profit from growing timber. Let us see. Taxes of $1.56 per acre per year, accumulating over 60 years at a real interest rate of five percent, come to $552 per acre in constant 1995 dollars. At that time the timber stumpage will be worth about $20,000 at 1995 prices, or 36 times the accumulated future value of the land taxes. (In addition, the investment will have served to shield the owners from the eroding effects of inflation, a benefit assumed away by using constant dollars. On top of that, it is a good bet the real value of timber will have risen after 60 years of population growth.)
Thus, land taxes would have to be 36 times what they are now to consume the whole value of timber harvests. The fact is, present taxes are a negligible token. Timberland is effectively sheltered from the full weight (light as it is) of the one percent property tax imposed on ordinary land. It pays, as we have seen, only about $1.2 million a year in Mendocino County.
The acre value of timberland is low compared with downtown values in San Francisco, where one little square foot in the hottest spot may fetch $2,000. That is $87 million per acre! However, there are very few such golden acres, compared to a million acres of timberland in Mendocino County, some 35 million acres in California, and 737 million acres in the U.s. That is 32 percent of the area of the 50 states. (The fraction of private and public land in forests is, by coincidence, the same: 32 percent.)
Owing to the success of timber people in spreading their gospel, almost all of their land is underassessed. Almost all state yield taxes, imposed in lieu of property taxes on standing timber, are too low to be revenue-neutral. Add to that, Congress since 1943 has made timber a “capital asset” for federal (and therefore state) income tax. Many costs of managing and carrying this capital asset are expensible – certainly interest and property taxes are. The net result is that timberland contributes very little to public revenues at any level.
Residents of timber counties are typically scattered and poorly organized. Timber companies are huge, rich, few and tightly organized. In Mendocino County, Georgia Pacific and Louisiana Pacific, absentee owners, together own the best 500,000 acres – 58 percent of the County’s timberland – and Georgia-Pacific owns Louisiana-Pacific. They control state forestry schools, paying professors as consultants. They support research in forest economics at think tanks like Resources for the Future in Washington, which has never criticized their tax preferences but trained its big guns on public agencies, the Forest Service and the Bureau of Land Management. “The industry” controls tax laws in 50 states, and sloughs tax burdens onto others. It will continue to do so until other taxpayers in the timber counties wake up and organize to control state timber tax laws.
End of Part Six. Part Seven will appear on Thursday, April 16.
This paper was originally presented at a property tax reform conference at the Jerome Levy Institute at Bard College, New York, November 3, 1995.
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