7—
Policy and Program Investments

Introduction

With an understanding of the concept of sustainability and knowledge of the current status of nonfederal forests, values and benefits derived from these forests, existing policies and programs affecting forests, and forest ecological conditions, new ideas can be explored for improved policy and programs. In this chapter, opportunities are suggested to improve sustainability of nonfederal forests through policy and program options.

Investments in the nation's nonfederal forests to sustain their economic, social, and environmental contributions include investments in various types of public and private programs. These programs are a means to secure the range and magnitude of benefits potentially provided by nonfederal forests. Possible program activities include developing management responses to private market signals, forming ownerships of forest property by the public, distributing information, and providing technical assistance, access to financial resources, and the imposition of governmental regulations. The challenge for the government in policy development is to acknowledge the many kinds of landowners and goals, the effectiveness of public programs in addressing serious long-term forest-resource issues (for example, biodiversity or global climate change), and the large number of existing programs and the complex interactions between them.

Governmental initiatives

The history of federal involvement in nonfederal forestry has been one of providing leadership for establishment and application of progressive forestry



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--> 7— Policy and Program Investments Introduction With an understanding of the concept of sustainability and knowledge of the current status of nonfederal forests, values and benefits derived from these forests, existing policies and programs affecting forests, and forest ecological conditions, new ideas can be explored for improved policy and programs. In this chapter, opportunities are suggested to improve sustainability of nonfederal forests through policy and program options. Investments in the nation's nonfederal forests to sustain their economic, social, and environmental contributions include investments in various types of public and private programs. These programs are a means to secure the range and magnitude of benefits potentially provided by nonfederal forests. Possible program activities include developing management responses to private market signals, forming ownerships of forest property by the public, distributing information, and providing technical assistance, access to financial resources, and the imposition of governmental regulations. The challenge for the government in policy development is to acknowledge the many kinds of landowners and goals, the effectiveness of public programs in addressing serious long-term forest-resource issues (for example, biodiversity or global climate change), and the large number of existing programs and the complex interactions between them. Governmental initiatives The history of federal involvement in nonfederal forestry has been one of providing leadership for establishment and application of progressive forestry

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--> programs by private owners and by state and local units of government. In so doing, the federal government has been important in increasing the policy and program development of these entities (Dana and Fairfax 1980). However, many of the policies and programs, especially those for nonindustrial private forests, have been developed in response to single concerns (for example, timber, wildlife, or water quality) and assigned to different agencies for implementation: education to extension services; service forestry to state forestry agencies; tax policy to local governments; forest wildlife to state wildlife agencies; water quality to state pollution-control agencies, and so forth. There has never been a strategic, multidimensional program rooted in a comprehensive national policy focused on nonfederal forests. The result is numerous programs that often lack a common vision or direction. For example, U.S. Department of Agriculture's (USDA) Forest Service nonfederal-forests programs (see Part Two of this report) range from timber bridge initiatives to old-growth-diversification studies and from forest-products conservation and recycling to seedling, nursery, and tree improvements. For purposes of examination, assistance programs for nonfederal forest owners can be categorized as focusing on education, technical assistance, financial incentives, tax incentives, regulatory actions, and public easements or direct ownerships (Box 7-1). The categories are usually implemented together to obtain their complementary effects. For example, technical assistance and financial incentives are usually combined. Programs (and the combination of programs) are selected on the basis of their efficiency and effectiveness and the proficiency with which they can be targeted and carried out. The frequency of use of programs is also influenced by the ease with which they can be administered, the equitable distribution of services and benefits to landowners, and the strength of public sentiment for or against their implementation. Private and Voluntary Initiatives Private initiatives that foster management and protection of nonfederal forest are numerous. They include forest-industry efforts to enhance management of nonindustrial forests, voluntary engagement in public and private programs, conservation organizations purchasing and managing ecologically sensitive forest properties, and public-service announcements about protecting forests from wildfire. Many initiatives focused on nonindustrial private forests have expanded during the 1990s in response to growing pride in forest ownership, attempts to increase market share, and desires to avoid governmental involvement in forestry practices. Forest-Industry Initiatives Industrial-forestry concerns have brought about a number of programs focused on the use and management of forests, especially nonindustrial private

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--> Box 7-1 Most to Least Commonly Used State Programs to Influence Private Forestry Practices, 1992   Most (1) to Least (6) Used State Program to Promote Forest Practices Focus of Program and Practices Educational Program Technical Assistance Voluntary Guidelines Tax Incentives Fiscal Incentives Regulatory Program Protect Water Quality 2 1 3 6 4 5 Promote Reforestation 1a 1a 5 4 3 6 Improve Timber Harvesting 2 1 3 6 5 4 Protect From Wildlife, Insects & Diseases 1 2 4 6 5 3 Protect Wildlife & Rare & Endangered Species 1 2 5 6 3 4 Enhance Recreation & Aesthetic Qualities 2 1 4 5b 3 5b a Educational and technical assistance programs tied (ranked 1) in frequency of use to promote reforestation. b Tax incentive and regulatory programs tied (ranked 5) in frequency of use to enhance recreation and aesthetic qualities. Source: Ellefson et al. 1995. forests. The ''tree-farm program," begun in western Washington in 1942, certifies forest property, an action that makes property owners eligible for forest-industry-sponsored technical and financial assistance. In the late 1980s, over 7 million acres of nonindustrial private forest were eligible. Tree-farm members number 70,000 (including inactive members). In the early 1990s, the program's scope was broadened to reflect other interests, especially interests in wildlife, recreation, water, and wood. The standards for tree-farm management were also upgraded to ensure that each of those four resources was addressed. From an industrial perspective, the program has been supplemented by corporate "fiber farms," which focus on fiber production. Other private initiatives to enhance the use and management of forests include the American Pulpwood Association's "pilot forests" and the joint industry-government "family-forests" programs.

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--> The forest industry also started the "Sustainable Forest Initiative" (SFI) through the American Forest and Paper Association (AF&PA), whose member companies own 90 percent of U.S. industrial timberland. The program sets forth a set of forest principles and implementation guidelines that require companies to carry out a variety of actions, including reforesting harvested land promptly, protect water quality in streams and lakes, enhance quality of wildlife habitat, minimize visual impact of timber harvests, protect lands of special ecological significance, contribute to biodiversity by enhancing landscape diversity (American Forest and Paper Association 1995; Chapter 5, Box 5-5). Compliance with SFI is a requirement for continued membership in AF&PA. In 1996, 17 companies of more than 100 member companies were suspended from membership for failure to confirm participation in the SFI. A regional (Pacific Northwest) variation of the SFI is a cash supplement paid by mills to timber harvesters and log suppliers that engage in SFI principles and activities. Individual companies have also initiated landowner-assistance programs (LAPs) that provide technical and financial assistance to owners of nonindustrial private forests. Historically, these programs involved agreements in which companies providing services had "first-refusal" rights to buy the mature timber or at least bid on the timber. In 1994 and 1995, nearly 11,000 landowners received assistance via LAPs (over 3,500 occurring in Louisiana and South Carolina), an increase of 47 percent over 1993 and 1994 levels. Companies also assist landowners with the preparation of forest-management plans and, in many cases, provide them with seedlings for regeneration. In 1994 and 1995, over 72 million seedlings were provided (at no cost) by the forest-products industry (Heissenbuttel 1996). Because the industrial programs are private, governmental assistance is limited. However, these programs may seek governmental assistance in accessing and disseminating technical and program information. Government also might support initial development of various industry initiated programs, for example timber harvester certification and registration programs (MacKay et al. 1996). Nonprofit-Organization Initiatives Nonprofit organizations have initiated a number of programs that directly or indirectly involve nonfederal forests. Indirectly, the educational and assistance programs of these organizations influence the way in which owners of nonfederal forest manage their property. Directly, many conservation organizations own and manage forests and related property. The Nature Conservancy, for example, operates the largest private system of nature sanctuaries in the world: 1.3 million acres in the United States is under conservancy ownership or conservation easement. Similarly, the National Audubon Society owns and manages 100 sanctuaries that encompass 150,000 acres of wide-ranging habitat. Some nonprofit organizations, such as the Nature Conservancy and the National Audubon Society,

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--> acquire land on the basis of criteria associated primarily with protection and conservation of land; however, other nonprofit organizations, such as the American Land Conservancy, the Conservation Fund, and the Trust for Public Land, use criteria for land acquisition that largely reflect traditional federal criteria (National Research Council 1993). From 1988 to 1992, 18 nonprofit organizations acquired 249 parcels of land, much of which is forested (totaling 288,000 acres), that were either sold or transferred to a unit of government or were retained and ultimately became nonfederal ownership (GAO 1994b). Many nonprofit organizations focus on land acquisition; others are shifting from land acquisition to cooperative partnerships for ecosystem conservation. For instance, the National Fish and Wildlife Foundation was established by Congress as a private, nonprofit foundation to support U.S. Fish and Wildlife Service activities and related activities. Private and state funds raised are matched by Congress and are spent on land acquisition, research programs education, endangered species recovery, restoration of degraded habitat, and some policy work involving political analyses to assist government agencies and nonprofit organizations in working together to achieve conservation goals. Nonprofit organizations generally seek limited government involvement in their activities; yet, they often seek partnerships with government in protecting and managing sensitive forest ecosystems. Forestry-Consultant Initiatives Private-program initiatives on nonfederal forests are reflected in the actions of private-forestry consultants, especially those that focus on private nonindustrial forests. The magnitude of their impact on the latter is highlighted by the activities of the 500 members of the Association of Consulting Foresters. In 1995, association members provided technical forestry advice to nearly 29,000 clients; managed nearly 20 million acres of private forest under long-term agreements; assisted in the sale of $1 billion worth of private timber; and supervised the reforestation of almost 385,000 acres of private forestland. In context, the reforestation represents nearly 38 percent of all nonindustrial private forestland reforested with tree seedlings in 1995. Many forestry consultants favor limited involvement of government in forestry activities. If involvement is desired, it usually is in the form of referrals from governmental agencies or access to information and educational opportunities made available by governmental programs. Volunteer Efforts Nonfederal forests are affected by the voluntary actions of owners or users of these forests. Undertaken with a spirit of responsible stewardship, many owners act to protect areas of exceptional value in terms of biodiversity or act to apply forest practices that foster resource sustainability (Best and Wayburn 1995). The

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--> landowner can view voluntarily maintaining natural forest diversity (represented by forest-age classes, native biodiversity, water quality, and soil productivity) as an ecological insurance policy that will reduce the risk of supplying future markets with forestry goods and services (Best and Wayburn 1995). The motives for voluntarily protecting and managing forests in a sustainable fashion are many and complex. The role of government is frequently one of identifying opportunities for voluntary action. Private voluntary initiatives also occur in the form of citizens volunteering to help various causes, including the application of sustainable forestry practices by private forest owners. Excellent examples are the "master woodland manager" programs that exist in at least 14 states. Engaged and trained by private (for example, the Ruffed Grouse Society) and public (for example, USDA Cooperative State Research, Education and Extension Service) organizations, volunteers seek to influence the forestry-related activities of other private landowners. To date, over 1,500 volunteers have been trained and have provided advice and counsel on forestry matters to thousands of private landowners. Again, the role of government is one of highlighting opportunities and providing educational assistance to further citizen interest in seeking those opportunities (Fletcher and Reed 1996). Certified Forest Practices Market demand driven by privately initiated certification programs is considered a way to encourage sustainable production of a full range of forest products, including high-quality sawtimber, nontimber forest products, and carbon storage (Elliott and Hackman 1996, Best and Wayburn 1995). An example having implications for nonfederal forests is the various international-buyers groups that have been established by the World Wildlife Fund (WWF) and other organizations. The WWF buyers groups consist of national retailers that have agreed to purchase timber products primarily from independently certified forestry operations that comply with the Forest Stewardship Council (FSC) certification principles and standards. Some of these buyers groups have already been successful. For instance, the 1995 Plus group in the United Kingdom holds approximately one-fourth of the nation's 1995 timber market, and to date, over 168 companies are members of buyers groups in North America, United Kingdom, Germany, Belgium, Switzerland, and Sweden, and other groups are forming in Australia, Austria, and The Netherlands. A similarly structured certification program is being developed by cooperative efforts of Finland, Norway, and Sweden (Barklund 1996). Successfully implemented in North America, such certification efforts could stimulate consumer demand for forest products originating from nonfederal forests that have been independently certified as using sustainable management practices. The role of the government in fostering these programs could include providing technical advice and assisting in building the

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--> technical and administrative capacity needed to ensure their success. The federal government could also assess impacts of certification efforts. Private and voluntary initiatives are important means of furthering the sustainability of nonfederal forests. Private initiatives focused on the use, management, and protection of nonfederal forests often must be given priority. The government should facilitate voluntary action so that the positive self-interests that citizens and private organizations have in nonfederal forests can be fully exercised. The government can assist the private sector in developing its ability to carry out their missions for nonfederal forests—assisting private sources of technical forestry information, including forestry consultation, in carrying out their efforts to meet the technical forestry needs and facilitate actions, such as certification of forestry practices, that will enable citizens to make well-informed choices about purchasing products or services they purchase in the market place and that originate from nonfederal forests. In addition, the federal government can cooperate with national and international organizations that develop certification standards. Federal involvement could advance the development of international standards of certification that lead forestry enterprises to seek certification of practices that are ecologically, economically, and socially sound. Federal forestland systems might also be included in programs providing independent, third-party certification, thus providing a model for state and private sectors. Participation by the federal government could facilitate effective assessment and monitoring procedures and could demonstrate high standards for sustainable forest management. Education and Technical Assistance Education and Information Education and information programs are prepared for groups or the general public. Forest owners, policymakers, and the general public should be informed about social, economic, and environmental impact of nonfederal forests in contributing to local, state, and national needs. The importance of good information from the landowner's perspective is highlighted by the usefulness of market information about timber prices. When available, this information enables landowners to make informed decisions regarding investments in their property and leads them to profitable markets for their products. Landowners have limited access to timely, high-quality information about market prices for forest products. In some measure, the responsibility for forestry and environmental education exists with the USDA Cooperative State Research, Education, and Extension Service, the USDA Natural Resource Conservation Service, the USDA Forest Service State and Private Forestry, the U.S. Environmental Protection Agency (EPA), programs of state forestry agencies, and a variety of private natural-resource organizations. All of these organizations are committed in some manner

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--> to public education. However, the potential for duplication and uncertainty over the roles of these organizations exists and is often cause for confusion and overlap (Hoban et al. 1986). Information and education programs involving forestry often consume large amounts of financial resources and professional time and energy. For forestry and environmental education efforts to be successful, information must be timely and complete. Gaps in timeliness and completeness of information can impede the ability of persons and organizations to inform landowners and the general public, help set goals and shape policy, and facilitate the design and implementation of programs (Lewis and Ellefson 1983). Where these gaps occur, some suggest they are reflective of broader concern about the effectiveness of education and information programs especially for the general public, a concern that has received little attention (Dillman 1986, Rivera 1996). The impact of broadly based educational efforts is difficult to quantify. In part, the lack of evaluation of program effectiveness stems from the ambiguous goals and objectives of such programs. If program objectives are more clearly defined, more careful assessment of the effectiveness of information and education programs can be conducted, and the programs can be implemented more effectively. Technical Assistance Technical-assistance programs provide direct field advice on technical forestry and related topics primarily to landowners, timber harvesters, and timber processors. Federal involvement in technical-assistance activities began in 1937. Over the years, states and private industry have assumed the key role in these activities. Service foresters are the primary means of delivering technical assistance; states employed nearly 3,500 service foresters in 1995 (National Association of State Foresters 1995). In general, evaluations have shown service foresters to be efficient and effective in positively influencing the forestry activities of landowners (Henly et al. 1988, Cubbage et al. 1993, Cubbage et al. 1996). The potential for providing technical assistance is highlighted by the reality that only one in five nonindustrial private forest landowners has a written management plan for their forestland (Birch 1996). A number of issues involve technical-assistance programs. For example, concern is often expressed about the appropriate mix of providers of technical assistance, especially the mix of private consultants and state-employed service foresters. In reality, however, provision of assistance by several sectors is more likely to be complimentary than competitive (Cubbage and Hodges 1988). Concerns have also been raised about the appropriateness of providing technical assistance to virtually anyone that chooses to seek such services (Ellefson and Wheatcraft 1983, O'Leary et al. 1983, Cubbage and Hodges 1988). To improve efficiency, only those landowners with modest income, large holdings, highly productive forestland, or especially sensitive ecosystems might be targeted for

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--> federal and state technical assistance programs. The failure of landowners to seek out technical assistance from any source is also a concern for program administrators. In some states, less than 5 percent of private nonindustrial-forest landowners (representing less than 5 percent of private nonindustrial land) seek technical forestry assistance from any source (Cubbage and Hodges 1988, Hodges and Cubbage 1990). Fiscal And Tax Incentives Investment needs of well-managed forests are different from many other businesses: the investment must be held for long periods of time (up to 75-100 years) before any financial return is realized; interest costs on the invested capital must be paid for long periods of time; the capital (trees) is subject to risk because of fire, insects, disease, and disaster weather events; forests have a low degree of liquidity; and the investment is subject to a low return rate compared with alternative capital investments. For these reasons, fiscal and tax incentives become important programs for the sustainable management of private nonindustrial forests. Fiscal Incentives Fiscal incentives are payments made to private nonindustrial-forest landowners to help stimulate investments by reducing or offsetting large, initial capital costs and by improving rates of return. Incentives are an encouragement and reward for investments in sustainability for long periods of time. Although several studies have shown that fiscal incentive programs have been effective in increasing timber production on private nonindustrial-forestlands (Mills 1976, Risbrudt and Ellefson 1983, Gaddis et al. 1995), there continues to be concern over their role in augmenting investments in timber production. Most concerning is whether landowners would plant trees or perform timber stand improvement without public assistance. Are public incentive monies simply substituting for private capital? Although most studies have found this not to be the case, there are lingering concerns that from a social perspective there is little in the way of a net social increase in investments (DeSteiguer 1984, Cohen 1983, Lee et al. 1992, Wallace and Silver 1983). Implementation of fiscal incentive programs raises a number of important organizational and administrative issues. For example, federal incentive programs are administered by federal agencies, but technical assistance is provided primarily by state forestry employees or private consulting foresters, which requires coordination to be effective. Concerns have also been raised about the size of fiscal incentive programs. The question is whether they are large enough to gain the landowners' interests and to obtain investment opportunities (Hardie and Parks 1996). The federal government's use of reporting systems designed for large agricultural cost-share programs to report forestry cost-share information is

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--> also of concern. Although appearing to be efficient, such use often contributes to the lack of data needed to evaluate the program's effectiveness and raises suspicions about the information. The appropriate targeting of federal and state fiscal-incentive programs is also an issue. State governments might benefit from greater flexibility in administering federal fiscal-incentive programs to accommodate resource and landowner differences. States would be able to allocate cost-share grants on the broad basis of the potential social good and forest-resource sustainability. Furthermore, benefits could result from empowering local stakeholders, both public and private, to determine cost-share priorities, and giving the state governments the prerogatives to increase cost-share rates to those landowners who are willing to coordinate their plans and practices with neighboring properties. Obviously, care would have to be given to ensuring that local, state, and national interests are carefully addressed. The focus of fiscal-incentive programs is also a concern. Fiscal incentive programs can be broadened to apply to problems involving forest health, preservation of sensitive habitats, and urban and community forestry. To some extent, the Forest Stewardship Program and related fiscal incentives address those issues but only modestly. The intent of broadening fiscal-incentive programs is to improve broader forest ecosystems, of which an individual landowner's property is only one part. Tax Incentives Federal and state tax policies and their implementation reflect the complex diversity of the nation's industries, regions, and natural environments. There is some concern that these tax policies might unintentionally be lowering investments in forests and forest property. The difficulties of tax incentives often relate to questions of policy effectiveness, fairness among forest and nonforest sectors, the outlook for long-term stability in forest investments, and potentially affecting the integrity of some forest ecosystems adversely (for example, fragmenting ecosystems). At a minimum, tax policy should promote savings and long-term investments, foster equity with nonforestry investments, be easy to administer and understand, and remain stable over long periods of time so as to encourage long-term investments. From a federal perspective, concerns over taxation are rooted in policies concerning estate taxes, capital gains, and passive loss. From a state perspective, the concern often surfaces from the application of property taxes. Estate Taxes When a person dies and is not survived by a spouse or when there is no current estate plan, the estate, including land, may be subject to federal estate taxes. The most recent revision of the federal tax code (1997 Taxpayer Relief Act) will make federal tax liability begin at an estate value of $1,000,000 in 2006

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--> (maximum amount increased in steps from 1998 to 2006) or $1.3 million if the estate is part of a family-owned business. Tax rates are between 37 and 55 percent, depending upon estate value. Moreover, estate taxes usually must be paid in less than 1 year of the death of the owner. Unless heirs have other means to obtain large amounts of money, estate heirs may be forced to sell or change the use of their forestland to pay estate taxes. Estate taxes yield less than 1 percent of the national tax revenue, but they have been suggested as the cause for fragmentation of hundreds of forest properties each year (Raper 1995). As the Land Conversion Subcommittee of the Northern Forest Lands Council (1994) found, "Among individual and family landowners, estate tax concerns are a driving force behind land sales." A positive provision of the new tax law enables exclusion from the estate of up to 40 percent of the value of forestland which is placed in a qualified conservation easement. The recent revision in federal tax law may alleviate some of the problems associated with estate taxes. However, the potential consequences of the new law deserve careful and continuing analysis. Capital Gains Tax Growing forests is a long-term undertaking with substantial risks. Income tax on capital gains from forest income can be a major disincentive for long-term forest stewardship and sustainability. Many developed countries (Canada, Finland, France, Germany, Japan, Norway, and the United Kingdom) recognize the long-term nature of investments in forestry and have accommodated a special capital-gains tax rate in their tax codes (Arthur Anderson and Company 1985). The Taxpayer Relief Act of 1997 made important adjustments in the tax treatment of capital gain income from investments in timber. For timber sold after May 1997, the tax rate on long-term capital gains drops from 28 to 20 percent for most owners. However, for timber sold after July 1997, the holding period required to qualify for long-term capital gains increases from 12 to 18 months. For timber held 5 years beyond December 2000, the capital gains tax rate will drop another two percent, from 20 to 18 percent for most owners. These are important corrections in Tax Reform Act of 1986 which, among many consequences, discouraged landowners from extending timber-harvest rotations and managing older-age forests. As with recent changes in estate tax law, changes in capital gains tax law will also require continuing analysis to determine their impacts on timber investments made by private forest landowners. Management Cost Deductions In order to claim a tax deduction for regeneration expenses (site preparation, planting, vegetative control costs), individuals and corporations must record these expenses and then deduct them from income earned when the timber is sold. This treatment of capitalizing regeneration costs discourages many nonindustrial-forest

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--> owners from managing and conserving their forests for long-term private and public benefits. Further complicating the matter is the imposition of complex passive-loss rules which attempt to eliminate the practice of deducting expenses of one activity against income earned from other sources. Changes that would help alleviate these problems include eliminating the passive-active rules; allowing private nonindustrial-forest landowners to deduct normal annual stewardship expenses against current income; and indexing to the inflation rate all expenses that must be capitalized (thereby eliminating taxation of arbitrary inflated gains). Tax credits also could be considered for landowners who invest for purposes other than timber and related forest products. Reforestation Investment Tax Incentive In 1980, the Recreational Boating and Facilities Improvement Act authorized investment tax credits for reforestation. For up to $10,000 per year of reforestation expenses, investors are allowed a 10 percent investment credit plus deduction of the expenses over an 8-year period. The credit cannot exceed $1,000 annually. The U.S. General Accounting Office (1990) estimated that the credit reduced federal revenue a modest $80 million annually. The reforestation tax credit is widely used by nonindustrial private forest landowners. In nine southern states, Royer and Moulton (1987) reported 59 percent of the landowners who planted trees claimed the tax incentive. The credit also augments rates of return on investments. For landowners in the 40 percent tax bracket in 1983, rates of return on loblolly pine increased from 6.9 to 8.4 percent and for Douglas-fir from 7.3 to 8.2 percent because of the tax credit (Dennis 1983). Expanding the tax benefit to $25,000 per year would increase the deduction commensurate with inflation. Consideration should also be given to expanding the application of the credit to timber stand improvement activities and possibly other important public interests in private forests. State Tax Policies Federal tax policy is not the only concern of owners and managers of private forests. Local governments rely upon property taxes to raise revenues. In the colonial agrarian society, land was a true measure of wealth. Cash crops came directly from the land. Today's nonagrarian society still bases local taxes on land values. Land value is often based on the most highly valued use of the land. That determination generally refers to the assessed value of the land if it were sold on the open market for industrial, commercial, or residential development. Demand for open land to develop for an increasing population has raised the land values substantially over the recent decades. Now, the value of land for development is far greater than the value of land for agriculture or tree growing. Thus, the land

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--> value for a forest landowner is determined not by the owner's land-use practice but by the development of neighboring properties. The agrarian property-tax system has become outdated. Many forest landowners near developing areas have been forced to sell their land, because annual revenue from the land could not pay the annual ad valorem property taxes. Even the most productive forestlands cannot survive as forests if property taxes exceed the break-even threshold. Moreover, the ad valorem tax penalizes landowners for holding older-age trees (Northern Forest Lands Council 1994). The ad valorem property-tax policy produces many of the largest negative effects on stability and sustainability of private nonindustrial-forestlands. Little attention has been given to the use of tax policy as an economic incentive for private investment in watershed-management activities, protection of scenic beauty, recreational opportunities for the public, and preservation of forest ecosystems for certain types of flora and fauna. Although the potential effectiveness of tax credits (or tax penalties) to influence private forestland activities has yet to be explored, they might be considered for landowners who would invest for purposes other than (or in coordination with) timber and related forest products (Hudson 1993). Level of compliance with Best Management Practices could be used to determine the amount of incentive provided. A serious void in the design of tax policies that focus on the management of private forests when viewed as a public investment is the lack of rigorous analyses that clearly show the consequences of tax measures (Klemperer 1989). Little analytical attention has been paid to evaluations of the rates of return to the public sector from reduced tax rates for beneficial forestry activities. Analysis of returns to the public via direct cost-share payments to landowners is extensive. However, analysis of the rates of return on foregone revenue resulting from federal tax subsidies is rare. Regulatory Programs Government regulation of private-forest practices reflects growing public concern over the integrity of forest and related ecosystems. However, regulatory programs are not without problems. They are often a burden for users, managers, and owners of nonfederal forests, especially private forest landowners. Yet, when society's interest in maintaining and enhancing forest ecosystems is evident, owners and managers of forest resources are obligated to examine the range of programs available for achieving such interests. It is critical to realize that the structure and administration of federal, state, and local regulatory programs vary greatly. Many innovative, imaginative approaches emphasize adaptive management, administrative flexibility, and landscape-level resource management and protection.

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--> Federal Regulatory Initiatives The federal government has a long tradition of regulating a variety of activities that involve forestry directly (for example, the Endangered Species Act) and indirectly (for example, the Rivers and Harbors Act). In recent years, however, states have assumed important regulatory responsibilities, especially for forestry practices. Various compilations of regulatory programs demonstrate the extent to which regulatory initiatives have become commonplace the forestry community (American Forest and Paper Association 1994; Ellefson et al. 1995; NCASI 1994, 1995, 1996). Federal regulatory initiatives often have serious implications for use, management, and protection of nonfederal forests, and they often result in political conflict among those claiming a stake in the future of these forests. Although the subject of the regulatory action might be the source of the issues (for example, protecting an endangered species), the issues involve the appropriateness of the allocation of regulatory power among various units of government; the appropriateness of assigning regulatory power to a specific agency (regardless of level of government; for example, U.S. Environmental Protection Agency versus USDA); the complex and time-consuming rule-making and administrative processes that petitioners and landowners must engage in to comply with regulations; and the legalistic culture that regulatory programs (rather than collaborative solution-oriented approaches) tend to spawn among citizens. The federal administrative landscape of regulatory programs bears little relation to a holistic approach to maintaining the integrity of forest ecosystems, which include nonfederal forests. The large number of federal regulatory programs results in questions over authority among the agencies. The appropriate distribution of regulatory authority will require resolution of political struggles, which is unlikely to be resolved easily or very soon. The federal government should continue to monitor regulatory responsibility among the various levels of government. Although the creative and responsible regulatory actions of lower levels of government should be acknowledged by monitoring, proliferation of locally initiated regulatory programs should be avoided. Federal regulatory programs are subject to all the administrative problems associated with regulatory programs generally (Cubbage and Siegel 1985, Hickman and Hickman 1990, Hoberg 1993, Hoskisson et al. 1993, Sitkin and Bies 1993, Cheng and Ellefson 1993b, Ellefson et al. 1995, Aust et al. 1996). Administrative problems associated with federal regulatory initiatives on nonfederal forests need to be acknowledged and addressed appropriately. To ensure program efficiency and effectiveness, the following actions should be considered: implement appropriate administrative designs (for example, notification versus permit-inspection systems); foster administrative flexibility by making the standards rules rather than laws; engage the interested public in collaborative rule-making and program establishment; promote administrative structures that encourage

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--> adoption of new scientific findings; reduce the legalization of administrative processes; develop sensitivity to the legal and constitutional soundness of regulatory initiatives; and acquire understanding of the costs of regulation that must be borne by the government and the regulated parties. State and Local Initiatives State and local governments have been especially active, although often subtly, in establishing regulatory programs for nonfederal forests, especially private forests. As described in Part One of this report, nearly every state has some form of forest-practice standard that must be complied with by private landowners or persons involved in forestry operations on private property. Similarly, local units of government involved in forest-practice regulatory standards number in the hundreds. Establishment and administration of state and local regulatory programs have caused concern over the relation between these programs and federal programs. Program Coordination The nature of the problem of coordinating state and federal regulatory initiatives becomes apparent when ecosystems owned by nonfederal concerns are imposed on by multiple regulatory laws, multiple layers of government, multiple administering agencies, and conflicting client expectations of forest ecosystems. The very ecosystems that are of concern to society can become fragmented by the multiple regulatory programs developed to guide their use and management. How all the regulatory initiatives, including federal actions, relate to one another is unclear. The narrow focus of federal regulatory programs (for example, wetlands or endangered-species habitat) and their state counterparts (for example, reforestation or road construction) is also a concern (Kilgore and Ellefson 1992). When units of state and federal government are responsible for regulations for a single good or service from a forest ecosystem, they lose their ability to address conditions on an entire forest ecosystem. At issue is how narrowly focused programs can deal with nonfederal forests in a more holistic way. Federal Regulatory Role The extensive expansion of state and local regulation of forestry practices raises the issue of whether the federal government has a role in regulatory initiatives focused on nonfederal forests. The federal government has a role in communicating information to states about the administrative structure and effectiveness of regulatory programs generally. This role should enable states to make more informed choices about the programs (including regulatory programs) they select to address issues involving

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--> nonfederal forests. However, the need for a direct federal regulatory initiative depends on the existence of a national interest in a forest resource. Even when an interest does exist, state agencies have often efficiently and effectively accomplished the national goal for a specific resource through state regulatory programs. In fact, nearly 22 percent of the nation's privately owned timberland is already subject to state regulatory programs (Ellefson et al. 1995). Regulatory Program Issues Federal and state governments play a major role in developing and implementing regulatory programs on the use, management, and protection of nonfederal forests. The intensely held views of the public about the use of regulatory programs to influence forestry practices demand a special sensitivity to the design and implementation of regulation. At the very least, federal and state governments should adopt regulatory programs only when they are clearly more efficient than other types of programs that might be available for influencing private actions. If chosen, most forest-practice regulatory authority is best positioned with state governments, preferably with the state's lead forestry agency. Regulatory programs should accommodate a community's political and resource situation. Regulatory programs should be designed and administered to accommodate specific environments. Inflexible and exacting forest-practice standards should be avoided. Users, owners, and managers of nonfederal forests should be engaged cooperatively in processes used by agencies to establish forest-practice rules and regulations, and administrative structures should be adopted to enable easy and quick incorporation of new technologies, especially information about new or modified forestry practices, into a regulatory program. Federal and state regulatory-program administration should foster a climate in which long-range plans and investments can be made by private forest landowners without inordinate concern for major changes in regulatory standards and their administration. Regulatory programs should be attuned to changes in the legal and constitutional bases for government regulations generally and avoid imposing regulations that severely limit private investment in forests. Careful consideration should be given to the cost of administering regulatory programs, especially to appropriate allocation of costs to public and private interests. The cost of regulatory programs should be fully acknowledged. The public should not be given the impression that the programs are largely cost free and that minimal public investments in them will lead to results consistent with their expectations for private forests. Easements and Rental Agreements Policy initiatives to ensure the sustainability of nonfederal forests can also include government actions to own various rights to property that continues

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--> fundamentally in private ownership. When engaged in by private landowners, such initiatives can prove to be important. Conservation Easements Easements are deed restrictions that are voluntarily designed by landowners interested in protecting forest values. Easements can prohibit subdivision, limit nonforest uses, and encourage long-term forest management to benefit both timber production and species conservation (Best and Wayburn 1995). Easements are donated to or purchased by land trusts or conservancies and provide landowners with an incentive through income and estate tax benefits. They also can aid in monetizing forest resources that have no ready market, such as habitat or water quality (Best and Wayburn 1995). Tax reductions could be used to defray costs of restoration or protection on easement lands. In addition, other voluntary conservation measures could be used, as appropriate, including acquisition and resale of development rights by the public on nonfederal lands, term easements (easements of specific duration), rolling easements (term easements whereby the easement can be renewed at specific times), and voluntary agreements (Northern Forest Lands Council 1994). These conservation measures can best be facilitated through the creation of an open public process to establish state and federal partnerships to fund public-land acquisitions and to purchase lands from willing sellers. Additionally, the USDA Forest Service has created the Forest Legacy Program to provide funding to purchase conservation easements from willing sellers. Although this program has great potential for achieving conservation on nonfederal lands, it must be largely modified to achieve wider application. The program could be improved through increasing funding levels in key regions where biodiversity can be accomplished best through easements and land acquisitions (for example, northeastern forests that are primarily privately owned; Northern Forest Lands Council 1994). Other suggested improvements include an option for state ownership of easements, direct grants to states for easements, payments in lieu of taxes to communities for easements, amendments to include timber management as a Forest Legacy Program objective, and funds for states to monitor easement compliance. Conservation Rental Contracts Conservation rental contracts can provide opportunities to protect endangered or threatened species on private forests. Using rental contracts, landowners give up a portion of land-use income in exchange for protecting listed species to earn conservation payments. Landowners earn income in exchange for habitat protection, management, and species protection in a similar way to landowner income earned by participation in the Wetland Reserve Program and

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--> the Conservation Reserve Program (Bourland and Stroup 1996). Rental contracts could be used to encourage large industrial landowners to provide protection for listed species. For example, conservation rental payments have been proposed in red-cockaded woodpecker habitat in the long-leaf pine ecosystem of the Southeast. Biodiversity trust funds supported through public land user fees and private donations and government renting of habitat from private owners have been proposed as funding sources to support this program (Bourland and Stroup 1996). Safe Harbor Agreements Forest landowners who wish to restore or manage portions of their property for endangered species are often penalized because of the costs they must incur to do so (for example, the value of the timber is foregone and special practices must be applied). In some situations, such costs can be so high that landowners have an incentive to harvest trees prematurely to ward off the species in question, for example, the red-cockaded woodpecker (Bonnie 1997). A partial solution to this dilemma is the use of a ''safe harbors" program. Under this program, landowners voluntarily agree to enhance endangered species on their property and maintain the current, or baseline, population occurring at the time of signing the agreement. In return, if the population of an endangered species increases on their land, the landowners are not liable for additional land-use restrictions under current endangered species law. Some have suggested that landowners should be allowed to sell the "safe harbor" rights that they have been granted to other landowners. Such could ease the burden on those who have especially high costs associated with the designation of endangered-species habitat on their property (Environmental Defense Fund 1995). Summary Of Findings And Recommendations Policies and programs affecting nonfederal forests include governmental initiatives, private and voluntary initiatives, education and technical assistance, fiscal and tax incentives, and regulatory programs. By far, the most cost-effective application of federal funds to state and private forestry is through education and technical assistance. These existing federal programs could become the cornerstone of the federal role in sustainable management of nonfederal forests. Fiscal and tax incentives are also an important role for the federal government to encourage sustainability of nonfederal forests. Recommendation: Coordinate and suitably strengthen incentive, technical-assistance, and regulatory programs for nonfederal forests, and broaden their application to a wider variety of individual and societal interests.

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--> This recommendation points to the following specific recommendations: Privately initiated programs that lead to investments in nonfederal forests should be promoted. Coordination of federal incentive, regulatory and technical assistance programs should be improved and these programs, as well as tax policies and programs, should be periodically evaluated to improve effectiveness. Technical assistance, fiscal incentive, and tax programs that target special landowner categories should be considered. A clear set of purposes for educational programs focused on nonfederal forests should be established with a well-defined statement of federal agency responsibility for attaining these goals. Tax policies and programs that discourage investments in the sustainable management of private nonfederal forests should be eliminated. Federal and state regulatory programs for nonfederal forests should be designed to honor public and private interests in nonfederal forests.