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The Effects of a Federal Tax Reform on the US Timber Sector
Abstract
Under discussion in the US Congress is the desirability of reforming much of the US federal tax code. Recent proposals include lowering rates and broadening the tax base by, among other things, eliminating tax expenditure write-offs, preferences, and incentives. This study focuses on tax changes that might apply to the timber sector. The study looks at the effects of ending the capital gains treatment of timber, eliminating the timberland ownership form known as a real estate investment trust (REIT), restricting the deductibility of current management costs, and repealing the deductability of reforestation costs. Additionally, because our study focuses exclusively on the timber sector, it treats the rest of the federal tax system as unchanged except in one scenario, where we introduce lower corporate and individual income tax rates. We examine these changes using the Timber Supply Model, which projects their effects on timber sector investment, growing stock, harvests, prices, and international trade (net imports).
... This tax bill and the proposals have been of a great concern among timber owners as they view taxation as an impediment to achieving management objectives. Moreover, not many studies so far have explored the effects of proposed income taxation policies on returns to forest management (Greene 1996;Sedjo and Sohngen 2015). Therefore, this study analyzed and compared net financial benefit of managing and protecting timberland as an investment and business under several tax scenarios to show effects of the new tax bill and potential effects of proposals on timber income. ...
... Furthermore, not considering timber as a capital asset, Representative Camp proposed elimination of treating timber income as capital gain. However, Sedjo and Sohngen (2015) reported that such proposal would have greatest negative impact on 200 million acres of family ownerships in the U.S. Thus, all this explains importance of capital gain treatment of timber sales. ...
The 2017 Tax Cuts and Jobs Act is one of the most expansive federal tax legislations of the US. Effects of recently passed tax bill and other proposals on non-corporate private forest landowners have not been evaluated or understood yet. Using the Faustmann approach, this study evaluated and compared net financial benefit of managing timberland under various tax scenarios to show the effects of the current law and other proposals on timber income from investment and business in the US South. Results from economic analysis showed minimal impacts of current law on investors and material participants. Current law decreased after-tax LEV for both types of landowners by less than 7.5%. Among the proposals, expensing reforestation costs had the least effect while 50% exclusion of capital gain had the greatest positive impact. Therefore, management of timberland becomes less beneficial for median income investors and material participants under the current law.
... While the financial effects of tax reform acts or proposals have been analyzed in the past for private timber REITs and family forest owners (Cushing 2006;Cushing and Newman 2018;Baral et al. 2020), studies evaluating their impacts on public timber REITs are scarce. Sedjo and Sohngen (2015) used timber supply model to analyze the effects of the 2014 proposed federal tax laws on costs and net returns of public timber REITs and found negative impacts on investors. At the top individual tax rates of 39.6% and 35%, costs increased, respectively, by 31% at 35% maximum corporate tax rate and by 24% at 25% maximum tax rate. ...
Timber real estate investment trusts (REITs) are companies that own and manage timberland and generate revenue by harvesting and selling timber or other forest-related products. Due to their popularity with investors, timber REITs in the United States attracted growing research interest in the recent decades. This necessitates a review of existing knowledge on timber REITs’ evolution and their financial performance over the years. In this review, we summarized the history and development of timber REITs, discussed tax policies applicable to timber REIT growth and their implications. We also reviewed past studies focusing on the financial performance of timber REITs and synthesized methodologies used in those studies. At the end, we posited the possibility of consolidation waves in the timber industry and identified some opportunities for future research. This review can shed some new light on the evolution of public timber REITs and their financial performance.
... In the United States for example, there are now more than 25 million ha of planted forests, and globally, the area of planted forests is around 280 million ha (FAO 2015;Keenan et al. 2015). Management inputs in the United States exceed $140 per ha, on average, on managed timberlands in the United States (Sedjo and Sohngen 2015). Given the long time-frame of forest investments, little of this would be happening if landowners did not expect a reasonable return on their investment. ...
This paper develops structural dynamic methods to project future carbon fluxes in forests. These methods account for land management changes on both the intensive and extensive margins, both of which are critical components of future carbon fluxes. When implemented, the model suggests that U.S. forests remain a carbon sink through most of the coming century, sequestering 128 Tg C y⁻¹. Constraining forestland to its current boundaries and constraining management to current levels reduce average sequestration by 25 to 28 Tg C y⁻¹. An increase in demand leads to increased management and greater sequestration in forests. The results are robust to climate change. © 2018 by the Board of Regents of the University of Wisconsin System.
... The model also provides a host of other projected outputs from these tax changes including changes in investments levels through time (Sedjo and Sohngen 2015). If the tax reform measures were implemented without the reduction in federal tax rate, the total area in timberlands would be reduced by some 15 million acres between 2015 and 2055. ...
There is increasing discussion in the US Congress of the desirability of reforming much of the US federal tax code. During the last Congress Representative David Camp (R-MI) introduced his tax proposal that seeks to fundamentally reform the tax code by proposing to lower corporate rates while eliminating various tax write-offs and broadening the tax base. This study uses a Timber Supply Model to focus on tax changes that might apply to the timber sector. While our study follows the Camp proposal generally, it does not try to precisely replicate the Camp proposal.
As the demand for forest products and carbon storage in standing timbers increases, intensive planting of forest resources is expected to increase. With the increased use of plantation practices, it is important to understand the influence that forest plot characteristics have on the likelihood of where these practices are occurring. Depending on the goals of a policy or program, increasing forest planting could be a desirable outcome or something to avoid. This study estimates a spatially explicit logistical regression function to assess the likelihood that forest plots will be planted based on physical, climate, and economic factors. The empirical results are used to project the potential spatial distribution of forest planting, at the intensive and extensive land-use margins, across illustrative future scenarios. Results from this analysis offer insight into the factors that have driven forest planting in the United States historically and the potential distribution of new forest planting in the coming decades under policy or market scenarios that incentivize improved forest productivity or certain ecosystem services provided by intensively managed systems (e.g., carbon sequestration).
Use of wood biomass for energy results in carbon (C) emissions at the time of burning and alters C stocks on the land because of harvest, regrowth, and changes in land use or management. This study evaluates the potential effects of expanded woody biomass energy use (for heat and power) on net C emissions over time. A scenario with increased wood energy use is compared with a dynamic business-as-usual scenario where wood energy use is driven by its historic relationship with Gross Domestic Product. At the national level, we projected that up to 78% of increased cumulative C emissions from increased wood burning and up to 80% of increased cumulative radiative forcing (CRF) would be offset over 50 years by change in forest area loss, biomass regrowth on land, C storage in harvested wood products, and C in logging slash left in forests. For example, forest area is projected to decline in both scenarios, but 3.5 million hectares more are retained in the high wood energy-use case. Projected C offsets over a 50-year period differed substantially by U.S. region (16% in the North, 50% in the West, and 95% in the South) not only because of differences in forest regrowth and induced investment in retaining and planting forest, but also because of shifts in competitive advantage among regions in producing various wood products. If wood systems displace coal systems that have 75% of the C emissions of wood energy systems per unit energy, then the nationwide net C emissions offset would be reduced to 71–74%. If displacing natural gas systems that have 40% of the level of wood bioenergy emissions per unit energy, the nationwide net C emissions offset would be 46–52%.This article is protected by copyright. All rights reserved.
The Energy Independence and Security Act of 20075.
Energy Independence and Security Act of 2007, Pub. L. No. 110-140, 121 Stat. 1492 (2007). http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ140.110.pdf (http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ140.110.pdf) View all references mandates large increases in ethanol for transport, from about 6 billion gallons current annual production to 36 billion gallons by 2022. The act mandates that large portions of ethanol be cellulosic ethanol. Although there are a number of potential feedstocks for cellulosic ethanol, it is highly likely that much of the feedstock will come from the timber base as raw wood, especially in the early years before grass production, and alternative feedstock, has become well-developed and infrastructure networks created. This article uses a well-known timber projections model to estimate the impact of the potential near doubling of demand for industrial type resulting from the mandates and finds that real prices could raise 15–20%. It also projects a large increase in the importation of processed wood products as domestic wood products production is crowded out by high raw wood prices.
This article develops a global timber market model which captures how timber supply reacts to future predicted increases in the demand for timber. Higher future demand is expected to increase prices, increase investments in regeneration, increase establishment of plantations, and expand output. Dynamic market responses imply a greater reliance on plantations in productive regions, allowing large areas of natural forest in low-valued regions to remain largely intact. Sensitivity analysis suggests that price, harvest, and management are most sensitive to the rate of demand increase, the interest rate, the cost of plantations, and access costs of natural forests. Two forest conservation strategies are examined which predict the system-wide implications of forest conservation in Europe and North America. The policies indicate that whereas set asides can induce net conservation, harvests increase elsewhere, particularly in natural forests. Copyright 1999, Oxford University Press.
There is widespread concern that biomass energy policy that promotes forests as a supply source will cause net carbon emissions. Most of the analyses that have been done to date, however, are biological, ignoring the effects of market adaptations through substitution, net imports, and timber investments. This paper uses a dynamic model of forest and land use management to estimate the impact of United States energy policies that emphasize the utilization of forest biomass on global timber production and carbon stocks over the next 50 years. We show that when market factors are included in the analysis, expanded demand for biomass energy increases timber prices and harvests, but reduces net global carbon emissions because higher wood prices lead to new investments in forest stocks. Estimates are sensitive to assumptions about whether harvest residues and new forestland can be used for biomass energy and the demand for biomass. Restricting biomass energy to being sourced only from roundwood on existing forestland can transform the policy from a net sink to a net source of emissions. These results illustrate the importance of capturing market adjustments and a large geographic scope when measuring the carbon implications of biomass energy policies.
- D Adams
- J P Prestemon
- W B Smith
Forest resources of the United States, 2012: A technical document supporting the Forest Service 2015 update of the RPA Assessment