One of the outcomes of the debate over the economy, the federal budget and the national debt in the 112th Congress was a renewed emphasis on reform of the tax code. While Congress has not yet produced specific legislation, momentum for tax reform grew during the presidential campaign. Although both candidates articulated very different ideas about how the tax code should be structured to strengthen the U.S. economy, create jobs and reduce the deficit, they agreed on the need for structural tax reform. Most in Washington believe that some kind of tax reform will happen. What’s less certain is when and how that will occur.
The Forest Landowners Association has been a national leader in the effort to to repeal the Estate Tax. Removing this burden from families owning forestland is critical to passing both our forest resources and a strong stewardship ethic from one generation to the next. Repeal of the Estate Tax will also help preserve economic and environmental benefits from private forests that significantly improve our quality of life. Most anticipate that any tax reform effort will include action to either repeal or revise the Estate Tax.
Yet, just as addressing the Estate Tax is critical to preserving private forests for future generations, so too is the preservation of beneficial provisions of the tax code that are vulnerable to an indiscriminate approach to tax reform. The three most important of these provisions, commonly referred to as the “timber tax” provisions, have received little scrutiny over the past couple of decades in large part because they make sense and are tailored to the economic realities of growing and harvesting timber. Yet, because the Joint Committee on Taxation categorized them as “tax expenditures” or provisions deemed to reduce federal revenues, Congress may be tempted to fold them into broader efforts to eliminate “loopholes” in the tax code. As Congress begins to lay out the broad parameters of tax reform, forest owners must work together to ensure key
policymakers in Washington understand the importance of the timber tax provisions to the health of U.S. working forests and preserve them as part of any overall tax framework. These Principles were developed to be used as a compass for FLA when working on the wide array of legislative and regulatory issues that challenge the management of private forests. Positions on specific issues will be developed as needed and generally fall into the three broad categories:
The Timber Tax Provisions
Congress has long recognized the unique challenges of managing private forests for economic return and has provided three carefully tailored provisions in the Internal Revenue Code to address these challenges.
Since 1943, the Internal Revenue Code has treated proceeds from timber harvest and the sale of standing trees as capital gains. This recognizes the large up-front investments in timber coupled with long holding periods before the realization of gains. Unlike most other capital assets, forestlands are subject to significant physical risk including drought, disease, fire and insect infestation that cannot be insured at an affordable rate. The characterization of timber as a capital asset is similar to the treatment of other longterm investments, such as real estate, stocks and bonds. One of the reasons Congress added this provision to the tax code was to equalize the treatment of selling timberland prior to harvest and harvesting and replanting trees without the sale