OP ED from THE HILL by Thomas J. Straka – professor emeritus of forestry and environmental conservation at Clemson University in South Carolina.
This is the season when wildfires and hurricanes often dominate the news. These natural disasters destroy the forests in their path. There is a perception that the devastated forests are publicly owned. But that is often not the case.
Nationally, 58 percent of forests are privately owned; even in wildfire-ravaged California it’s nearly 40 percent. The financial burden of reforesting after a natural disaster is compounded at tax time when private forest owners find their ability to claim a casualty loss for destroyed timber is limited, sometimes to zero dollars.
Private forest owners include large and small timber companies that produce products like lumber. These are important to maintaining timber markets, so forest owners have a place to sell timber when it is mature. However, the largest private forest ownership group is family forest owners. Some own large forests, but the average tract size, considering just tracts larger than nine acres, is only 67 acres. There are a lot of family forest owners, about 11.5 million of them if you consider all tract sizes.
Family forest owners control 36 percent of total forestland and just over 60 percent of private land in the country; when you consider 88 percent of timber harvests come off of private land, they are crucial to the national timber supply. Since the early 20th century the federal government has used a cooperative approach to encourage proper management on private forests. The Weeks Act of 1911 allowed for federal cooperation with states in wildfire control and the Clarke-McNary Act of 1924 extended that to more general support of reforestation activities on private forest land. One way to encourage reforestation was to develop tax policies that did not penalize forest owners who invested in forest management practices.
Federal tax laws still include provisions that encourage reforestation on private forests, but one large penalty that impacts private forest owners, especially family forest owners, is the tax treatment of casualty losses following a natural disaster. In general, the deductible loss is limited to the basis or book value of the timber (any reforestation costs not yet deducted), less any timber salvage income.
Family forest owners usually deduct reforestation costs, management fees, taxes and other costs early in the timber rotation or annually and generally have a timber basis of zero dollars. This means if the timber is destroyed by wildfire, storms or another disaster, the landowner would be allowed no deduction. This is especially onerous for forestry investments, which take perhaps 30 years until final harvest in the South and easily twice that in the West.
Forestry investments, like all investments, incur an opportunity cost for the invested capital. You must own land to grow trees and the investment in land is capital not invested elsewhere, or an opportunity cost. Private forest owners have significant incurred land opportunity cost over a timber rotation that shows up nowhere in the current casualty loss calculation. Say a forest owner is growing trees on $3,000 per acre land and the going interest rate is 5 percent. Each year the owner incurs $150 of foregone return ($3,000 x 5 percent) that compounds over a 30-year timber rotation to nearly $10,000. The owner hopes to recoup that land opportunity cost at harvest, and with a casualty loss that is not deductible, will recoup nothing after a natural disaster. Something needs to encourage reforestation after a disaster and the current tax law does not do that.
That something is being pondered by Congress right now in the Forest Recovery Act. The act considers private forest owners usually don’t benefit from disaster relief funding and, unlike agricultural crop producers, don’t get an annual income. It simply allows private forest owners a casualty loss for the fair market value of destroyed timber, less any salvage value obtained. The law would only apply to timber stands managed for planned harvests and requires the reforestation of the tract.
Sustainable forest management is central to protecting our environment, while ensuring the nation’s stable timber supply. The thing that makes timber different is the long time period involved between cost (tree planting) and return (timber harvest in many years), with that annual land opportunity cost, and the difference can easily discourage a landowner from reinvesting in a sustainable forest. Wildfires and hurricanes can overwhelm forest owners, and, without cooperation supported by the federal government, ruined forests may end up in new land use or stagnate without proper management. The Forest Recovery Act attempts to remedy that.
Thomas J. Straka is a professor emeritus of forestry and environmental conservation at Clemson University in South Carolina.