Last week House Ways & Means Committee Chairman Rep. Dave Camp introduced his long-awaited draft tax reform proposal. Even though most pundits agree that tax reform is unlikely to move forward in this Congress, forest owners would be wise to act now to prevent a potentially catastrophic change to timber policy in the tax code in the future.
Regardless of its reception in Congress, the Camp proposal fundamentally changes the tax policy playing field by proposing to repeal a long list of so-called tax expenditures - those sections of the tax code that analysts claim reduce federal tax revenue. This list becomes a menu for policy makers looking for revenue to offset future changes to the tax code or for other purposes.
Of concern to forest owners and allies in the Camp proposal is the potential elimination of the three existing "timber tax provisions" encompassing the long-term capital gain treatment of the sale of timber, the ability to annually deduct timber growing expenses and the treatment of reforestation expenses. Of additional concern is Chairman Camp's proposal to overturn existing rules that allow the sale of timber to qualify as income for a real estate investment trust (REIT), an investment structure chosen by many current forest investors.
Congress added these provisions to the tax code to make the modern practice of forestry economically viable and to realize important environmental benefits. Eliminating them would stand the modern business model for forestry on its ear and threaten the ability of forest owners of all shapes and sizes - some 22 million in total - to continue the business of forestry as we know it.
Forest owners rely on the timber tax provisions in particular to reconcile the long growing cycles for trees with the substantial up-front and ongoing costs of tree planting and forest management, including forest health protections and the payment of taxes and interest. These provisions also enable forest owners to invest in research and environmental protections and to take measures that reduce forest exposure to high risk natural disturbances like fire, pests and disease that are largely uninsurable.
The potential costs of repealing the timber tax provisions are staggering. Experts estimate that eliminating the provisions could cause a 15% annual decline in domestic forestry and timber sales totaling over $34 billion and the loss of 140,000 jobs. This economic loss would decimate landowner investment in forest health and productivity causing a corresponding decline in environmental benefits, like clean water, wildlife habitat, removing carbon from the air and outdoor recreation. It would also hasten the conversion of forest land to other uses that are more profitable.
Fortunately, through the good work of forest owners and allies, many in Congress already know the importance of timber provisions in the tax code. In 2013 members of both parties in the House of Representatives joined in a letter to the House Ways and Means Committee in support of the timber tax provisions. More recently conservation, wildlife and forestry groups wrote Senator Ron Wyden, the new Chairman of the Senate Finance Committee, urging his support of the provisions.
This is a good start, but we have work to do. Forest owners and allies across the country must now unite to build a strong and growing chorus of support for retaining the treatment of timber in the tax code. Congress needs to know the economic and political consequence of pursuing the Camp provisions. A concerted effort in the months ahead will help us remove timber from the tax revenue menu and position us well for when tax reform returns in earnest to the nation's capital following the November elections.
NAFO is an organization of private forest owners committed to advancing federal policies that promote the economic and environmental benefits of privately-owned forests at the national level.NAFO membership encompasses more than 80 million acres of private forestland in 47 states. Working forests in the U.S. support 2.4 million jobs. To see the full economic impact of America’s working forests, please click here >>.