[Congressional Record Volume 144, Number 85 (Thursday, June 25, 1998)]
[Extensions of Remarks]
[Pages E1222-E1223]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       THE REFORESTATION TAX ACT

                                 ______
                                 

                           HON. JENNIFER DUNN

                             of washington

                    in the house of representatives

                        Wednesday, June 24, 1998

  Ms. DUNN. Mr. Speaker, today I am introducing legislation, the 
Reforestation Tax Act, that will lower the tax burden on timber assets 
that are managed in a sustainable and environmentally sound fashion.
  Last year, Congress took a major step toward reducing the Federal tax 
burden on millions of Americans, eliminating the deficit, restoring 
greater fiscal integrity to the budget process and, in the process 
bringing a measure of greater equity to the tax code. Most importantly, 
we sought to encourage savings, to promote sustained, long-term growth, 
and to immediately reduce the tax burden of Americans by lowering the 
tax on capital gains.
  The Reforestation Tax Act recognizes the unique nature of growing 
trees by reducing the amount of gain subject to capital gains by 3 
percent each year a timber asset is held up to a maximum of 50 percent. 
Most importantly, it would apply this tax rate to all taxpayers, 
individuals as well as corporations. In this manner, we would avoid the 
inequity we have today whereby neighboring tracks of the same timber 
are taxed at different rates simply because of the business form of 
their investments (i.e. one is owned by a small group of investors 
while another is owned by a larger group of public investors).
  Besides ensuring fairness, the Reforestation Tax Act will encourage 
sound forestry practices that keep our environment healthy for the 
future. Currently, industrial timberlands help reduce demand for timber 
from public lands while generally being managed according to principles 
of sustainable forestry. Moreover, by sequestering carbon, managed 
forests help to offset emissions that contribute to the ``greenhouse 
effect''. Unfortunately, today's high tax burden on forest assets runs 
counter to our commitment to preserving and investing in the 
environment. This bill would encourage reforestation--or reinvestment 
in the environment--by extending tax credits for all reforestation 
expenses and shortening the amortization period for reforestation 
costs. As we consider policies to counteract global warming and improve 
water quality, we need to encourage sound forestry practices. It is 
this kind of approach that assures our tax policies take

[[Page E1223]]

into account the long-term risk of timber investments and rewards 
timber owners who responsibly sustain forest health over long periods 
of time.
  The Reforestation Tax Act represents the best of sound tax and 
environmental policy. I urge my colleagues to support and cosponsor 
this measure.

              Description of Reforestation Tax Act of 1998


Section 1--Proposal to increase incentives for investment in long-held 
                             timber assets

       Proposal: To reduce the negative interaction of tax rates 
     and inflationary gain on investment in long-held timber 
     assets. Section 1 would reduce the amount of gain on 
     harvested timber subject to tax by 3 percent each year the 
     asset is held, up to a maximum 50 percent reduction. The 
     proposal would be available for all timber owners.
       Description of Current Law: Under current law, timber is 
     considered a capital asset. However, the lower tax rate for 
     capital assets was eliminated in the Tax Reform Act of 1986. 
     This created a situation where timber owners, who must hold 
     their trees for 20 to 60 years before harvesting, were paying 
     taxes on inflationary gains. Congress partially corrected 
     this problem last year when it restored lower capital gains 
     rates--20% for individuals who held their capital assets for 
     at least 18 months. However, corporate timber owners must 
     still pay the higher regular tax rate of 35% on their timber 
     gains.
       Reasons for the Change: The 1997 Taxpayer relief Act (TRA) 
     significantly reduced the Federal tax bill on millions of 
     Americans by reducing the burdensome tax rates on capital 
     gains for individuals. The House passed version of TRA 
     included a capital gains tax reduction for individuals and 
     corporations. Unfortunately, the TRA as finally enacted 
     contains provisions that have unintended consequences for the 
     forest products industry. Because it ultimately excluded 
     corporate assets, the 1997 TRA established a much higher 
     capital gains tax threshold for all corporate assets, merely 
     based on the form of ownership. Discriminating against 
     taxpayers who make long-term investments, based solely on the 
     business form of their investment, is a particularly unfair 
     consequence for the forest products industry.
       Timber growing in any form is a long-term, high-risk 
     venture, subject to the unpredictable threats of disease, 
     fire, government intervention, and price in the marketplace. 
     The TRA outcome creates a differential between those who 
     invested in growing trees as a corporation and those who have 
     invested as individuals. Many non-industrial timberland 
     owners' assets are held in corporate form, based on 
     considerations under current law (liability concerns, estate 
     taxes, etc.), so a capital gains differential limited to 
     individuals excludes coverage for much of the nation's 
     privately held timberland. But no matter who pays the capital 
     gains tax, the investments are equally risky, and the 
     incentive to reinvest diminished. Private forest landowners--
     corporate and non-corporate--furnish most of the nation's 
     timber resources. In fact, less than 8 percent of the 
     nation's timber harvest comes from public lands. There are 
     currently 393 million acres of woodlands owned by 9.9 million 
     private owners, ranging in size from small woodlot owners to 
     large industrial concerns.
       How the Sales Price Adjustment Works: Upon the sale of 
     timber, for purposes of determining capital gain, the gain 
     would be reduced by 3 percent for every year the timber was 
     held. This provision is restricted as that the reduction in 
     sales price cannot reduce the gain by more than 50 percent.
       Environmental Benefits of the Section 1: U.S. Commercial 
     timberlands are managed in accordance with some of the 
     strictest environmental standards in the world. We need to 
     support this industry as it competes in the global 
     marketplace against international competitors, many of whom 
     are not subject to the same standards as the U.S. industry. 
     U.S. commercial timberlands are managed not only for purposes 
     of providing timber but also for promoting fish and wildlife 
     habitat and other public purposes. In addition, trees are 
     natural ``carbon sinks,'' sequestering carbon dioxide and 
     giving off oxygen. In plain terms, the U.S. forest products 
     industry is a major contributor toward reducing the 
     accumulation of greenhouse gases through its management of 
     timberlands.


 Section 2--Proposed to improve the tax credit and amortization period 
                     for reforestation expenditures

       Proposal: To remove the current dollar limitation ($10,000) 
     on the amount of reforestation expenses that are eligible for 
     the 10 percent tax credit and that are allowed to be 
     amortized; secondly, to decrease the amortization period over 
     which these expenses can be deducted from seven to five 
     years.
       Description of Current Law: Current law provides a ten 
     percent tax credit to timberland owners who spend up to 
     $10,000 to reforest their land and allows the same amount 
     ($10,000) of reforestation expenses to be amortized over a 
     seven year period.
       What are Reforestation Expense: The initial expenses 
     required to establish a new stand of trees often include 
     items such as site preparation, the cost of the seedlings, 
     the labor costs required to plant the seedlings and care for 
     the trees in the first several years, and depreciation 
     equipment used in reforestation.
       Example of How the Credit and Amortization Provisions Work: 
     Today, if a timberland owner spends $10,000 on reforestation 
     costs in a year, the taxpayers can take a ten percent credit, 
     i.e., $1,000 off their tax bill for those expense. The basis 
     is reduced by 50% of the credit (in this case $500) and the 
     remaining $9500 of expenses are eligible to be amortized, 
     i.e., deducted over a seven year period, generally in equal 
     amounts of one-seventh each year. Reforestation expenses over 
     $10,000 are not eligible for this incentive.
       Environmental Benefits of the Section 2: The provisions are 
     intended to encourage reforestation, both on land that has 
     been harvested and on land that was previously put to other 
     uses, such as agriculture. Trees provide a tremendous benefit 
     to the environment--they prevent soil erosion, cleanse 
     streams and waterways, absorb carbon dioxide from the 
     atmosphere, and provide habitat for a range of species. Tax 
     incentives for planting on private lands also decrease the 
     pressure to obtain timber from public lands, allowing more 
     public land to remain untouched.
       Need for Tax Incentives to Encourage Reforestation: The 
     decision to reforest, particularly after harvesting, can be a 
     difficult one. The expenses are high and the eventual 
     benefits quite remote since trees must grow 20 to 60 years 
     until mature enough for harvesting again. During that long 
     period of time, the trees are subject to numerous risks such 
     as disease, forum insects, etc., as well as ordinary market 
     risks.
       Reasons for Eliminating the $10,000 Cap: The arbitrary 
     limit on eligible reforestation expenses restricts the number 
     of acres that can be automatically reforested. With the ever 
     decreasing availability of public timber, it is even more 
     important to encourage the maximum amount of private 
     reforestation possible. It is particularly essential that all 
     landowners be eligible for such tax treatment so that they 
     will have the resources to hire professional foresters, 
     wildlife biologist, and other experts which allow for more 
     environmentally sensitive forestry practices. Larger owners 
     are penalized under current law because corporations are not 
     eligible for lower capital gains rate on timber. If the tax 
     law is not changed to benefit all timber owners who reforest, 
     it could encourage owners who do not receive tax incentives 
     to get out of the business of owning timber and this would 
     ultimately be very harmful to both timber supply and the 
     environment.

     

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