Joint Report of the New York State Department of Environmental Conservation and Board of Equalization and Assessment on the Forest Tax Laws (Sections 480 and 480A of the Real Property Tax Law)

December 1993

Summary of existing Forest Tax Laws

Background

Some form of tax exemption for certified forests has been in effect in New York since 1912. Section 480 of the Real Property Tax Law became effective October 1, 1959 as an amended version of the Fisher Forest Tax Law of 1926. The program was closed to new applicants in 1974. However, tracts certified prior to September of 1974 were allowed to continue to receive the tax benefits of Section 480.

Under Section 480, owners of 15 acres or more of forest land were eligible to apply for partial exemption. The Department of Environmental Conservation was responsible for determining whether the tract was eligible for certification. Ultimately, 311 tracts were certified by the Department, containing a total of 815,503 acres.

Section 480 provided for assessment based on the 'bare land" only, with exemption of the value of the timber. Assessments on the bare land were also frozen at the time the land was placed in the program, and could he altered only when and if a townwide reassessment occurred. Such alteration is achieved by applying a factor representing the overall increase in the level of assessment to the existing Section 480 assessment. Due to the variety of program entry dates, reassessment cycles, and other factors, participants in Section 480 may receive major or minor tax reductions, and some may even pay more taxes than other private forest lands in the same municipality.

Sale of a Section 480 property has no effect on its tax exempt status, but conversion from forest use to another use requires payment of a six percent tax on the value of timber stumpage. Participants must also pay this yield tax at the time of any harvest, and the assessor is responsible for determining the value of the harvest. The Department of Environmental Conservation may direct an owner to conduct a harvest when the tract has 20,000 board feet of hardwood or 40,000 board feet of softwood per acre; however, no such harvest has been mandated to date. An owner may withdraw land from Section 480 at any time by paying the six percent stumpage tax. Fees collected under Section 480 are allocated to affected taxing jurisdictions according to a formula fixed in statute.

Section 480-a of the Real Property Tax Law was enacted in 1974, and took effect in 1976. Under this program, owners of 50 or more contiguous acres of forest may apply for exemption, provided that the owner commits to managing the forest in accordance with an approved management plan for a ten-year period. The management plan must he prepared by a professional forester and meet certain standards. Once approved, the management plan must be adhered to, but amendments can be made through written request. Failure to follow the plan, or conversion of the committed land from continued forest crop production, results in the imposition of tax penalties (see below). As of June 1, 1993, DEC had certified 963 tracts containing 339,562 acres. The Department estimates that a total of 9,000,000 acres in New York could ultimately be eligible for enrollment.

In the first year of participation in the 480-a program, the owner must commit the land to continued forest crop production for ten years by filing a commitment form with the clerk of the county and with the assessor. In each subsequent year the owner must file another ten-year commitment to retain the exemption. The exemption allowed under Section 480-a is either 80 percent of the assessed value of the eligible land, or any assessed value in excess of $40/acre (equalized), whichever is less.

Section 480-a participants also pay a six percent yield tax at the time of harvest. However, the procedure for determination, collection, and distribution of this tax is different than the one used for Section 480. Section 480-a provides that DEC, rather than the local assessor, determines the value of the timber harvest and notifies the chief county fiscal officer of that value. The county fiscal officer collects the fee due and then distributes the revenue to the affected jurisdictions in proportion to their tax rates. The ten-year commitment required by Section 480-a runs with the property and passes on to the owner's heirs and assigns. To withdraw the property from the program, the owner can cease filing the annual commitment form, thus losing eligibility for tax benefits. If the management plan is adhered to for the remainder of the commitment period, i.e., up to nine additional years, the commitment expires and there is no penalty. The owner can request to withdraw the land immediately, which has the same effect as failure to follow the approved management plan, or change of use: payment of the penalty tax is required. The normal penalty tax is 2.5 times the tax savings received in up to ten prior years, including compound interest over the period. If only a portion of the tract is withdrawn or converted to another use, the penalty is 5 times the tax savings on the portion for the years in question, plus interest.

New York State's forest tax laws were put in place in recognition of the important public economic, recreational and natural values of long term forest management on private lands. From the outset of such legislation more than 80 years ago, it was understood that it takes many years to obtain a return on an investment in growing trees and that if lands are taxed at their development value, the accumulated taxes over the long term are likely to remove all profit for the landowner and, thus, the incentive to maintain and manage forest land. High property taxes may push land toward development and encourage destructive short term forest management practices.

To address these issues all of the New England states, New York and many other states around the country have adopted forest tax laws directed at ta3dng forest land at values which more closely reflect the use of the land for forest purposes rather than for its development potential. A recent detailed study of forest tax laws in New York and northern New England conducted by the Northern Forest Lands Council confirmed the importance of these measures in encouraging the long term conservation and management of privately held timberland.

Fiscal impact

Neither of the existing forest tax laws allows localities any option in terms of granting exemptions. Rather, these programs require the granting of tax benefits to all owners that have been certified as eligible by the Department. At present, the local costs associated with the tax exemptions are borne entirely by owners of taxable property in the jurisdictions where the certified lands are located. The degree to which a municipality's tax base is reduced depends upon the number of non-exempt parcels and the extent of other property types in the community. Municipalities having primarily forest land typically have narrow tax bases, and comparatively high levels of tax levy absorption by non-exempt parcels.

The fiscal impact of Section 480 can not be determined accurately. No good data for this older program are available, and there is anecdotal evidence that its provisions are not applied consistently by assessors. This is not surprising, given its emphasis on assessments determined many years ago, the separation of land and timber value, etc. Also, the Section 480 exemptions have been modified over time, in the context of changes in the local level of assessment. By today's standards of assessment administration, Section 480 is archaic and the source of much confusion and administrative difficulty.

Despite the lack of detailed exemption data, the Section 480 program is likely to involve a significantly large exempt value, given that over 800,000 acres are enrolled, nearly 2.5 times the total acreage enrolled in Section 480-a (see Table 1). Moreover, given that Section 480 has heavy participation in many municipalities in the Adirondack region, where local tax bases tend to be narrow, the resulting tax base erosion is likely to be significant for these jurisdictions.

The Section 480-a program participation and resulting fiscal impact have noticeably increased in the past decade (Table 1). The exempt value of land in this program totaled less than $20 million in 1982. By 1991 (the latest year for which exemption data are available) exempt value had risen to over $126 million. The estimated tax shifted to other property by Section 480-a amounted to over $3.21 million in that year. Of the 220 towns affected by the program, only 20 experienced tax base erosion of one percent or more (Table 2).

However, present trends suggests that the local impact of the Section 480-a program could become significantly larger over time. The value exempt in 1991 reflects an increase of 40 percent over the previous year. Given the right conditions in real estate markets and increases in local revaluation activity, such rates of growth may not be unusual in the foreseeable future. Clearly, the incentive to enroll in Section 480-a is likely to increase as assessments become more current and reflective of market value in those forested areas presently having low rates of participation. Furthermore, many potential participants who have heretofore balked at what they regard as an onerous management plan requirement may well decide to enroll if their taxes increase sufficiently. Given that only about four percent of commercial forest lands in New York (exclusive of Section 480 lands) are currently enrolled in Section 480-a, the potential for future increases is obviously substantial.

The average tax shifted per parcel exempted under Section 480-a was nearly $2,000 in 1991, in part due to the large average size of the parcels. Even without increasing enrollment, the fiscal impact is likely to be higher in 1993 and subsequent years, as local property taxes continue to increase to make up for lagging state and federal aid programs and the shortfalls in other taxes which have resulted from slow economic growth.

Thus it is clear that, while benefiting both the forest land owner and the general public, forest tax laws can be a burden on the towns where land within the programs is located. Given fixed overall tax levies, it is these other (generally rural and lower income) property owners who must make up the difference when the taxes of forest land owners within the town are reduced under the forest tax program. This may discourage some landowners from entering into the program out of concern for their neighbors. Moreover, since conservation of forest land has benefits to all of the people in New York State, current funding arrangements result in a few rural taxpayers paying the cost of a program of statewide benefit. A number of states have adopted programs of state reimbursement of taxes in communities where the impacts of forest tax laws unfairly affect other local taxpayers. A number of municipalities in New York State are so affected and, thus, a reimbursement program is required here if the overall program is to be equitable and successful.

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