Taxing the Tree Farm: Sensible Policies for Sensible Private Forestry.

This preliminary report is one of a series of studies on agricultural conservation and tax policy that examine how tax policies affect tree farms. Studies indicate nonindustrial private forest owners currently manage their land at far below its commercial potential, and that future demand will need to tap that potential. The report suggests reforms that could improve environmental quality while making tree farming a more attractive investment alternative.

Tree-farm constraints include a lack of liquidity associated with long-term timber management, an exceptional degree of risk, and diseconomies of scale. Many tree-farm owners also need more technical assistance and market information. Confronting these constraints through public policy could yield significant benefits.

The authors recommend that consideration be given to restoring preferential income-tax rates for timber held over the long term; and that adjustments be made in the deductibility of certain management expenses. Second, increased funding for several USDA programs serving nonindustrial private forest owners is called for. Finally, all federal tax and program benefits should be conditioned on compliance with sound forest management. Although the full effects of the 1986 Tax Reform Act are still being analyzed, the reforms recommended in this report seem justified and should be helpful tree farmers.