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SHOULD YOU RECLASSIFY YOUR TIMBERLANDS? A study of the financial aspects
of Washington's Reforestation Act
and what it means in tax costs
By NORMAN P WORTH.ING.TON Pacific Northwest Forest and Range Experiment Station Forest Service, U.S. Department of Agriculture t
'
';.
Revised Reprint from
Leading Timber Industry Journal
PORTLAND, OREGON
Vol. LVI, No.9
July, 1955
By NORMAN P. WORTHINGTON
Pacific Northwest
Forest and Range Experiment Station
Forest Service
U.
S, Department of Agriculture
*
Should You Reclassify
Your Timberlands?
A study of the financial aspects of
Washington's Reforestation Act
and what it means in tax costs
A RE YOU paying more taxes than
.£l. necessary on your woodland? Do
you know that an alternative to
the general property tax, known as the
Reforestation Act of 1931, may reduce
your taxes substantially in some instances?
This act combines an annual property
tax and a yield tax at time of cutting.
It applies to areas of 40 or more acres
upon which the forest products are not
mature in merchantable quantities. If,
after adequate investigation, the state
forest board rules that the land is eligible
under the act, the land is henceforth
termed "classified." Land under classifi­
cation must b e protected from fire; must
be used for forest production; and it
must not become more valuable for other
uses.
The original intent was that all eli­
gible forest land would be classified by
the state forest board. But in practice,
lands have been classified only upon ap­
plication of forest landowners. Conse­
quently, as of December 1954 separate
ownerships amounting to only 498,875
acres (out of an estimated 7.5 million
eligible) have been classified.
Lands classified under the act may be
declassified by petition to the state tax
commission. Either the state forest board
or 25 taxpayers of the county may submit
the petition. If the land is declassified,
the difference between the tax already
paid and the tax on similar unclassified
land must be paid for the period that the
land has been under classification.
The Reforestation Act has some disad­
vantages, which may have discouraged
use of its provisions, but many timb r
owners could save money by understand­
ing the act's advantages.
Land classified under the Reforestation
Act is assessed at $1 per acre in western
Washington, and at 50 cents per acre in
eastern Washington. Yield tax, at 1%
for each year the property has been clas­
sified- to a maximum of 12llz%- is
figured upon the stumpage value of prod­
ucts cut. These values are determined by
the state forest board. Products cut for
the owner to use at home are exempt. A
permit to cut is necessary, and the amount
of the expected yield tax must be depos­
ited with the county treasurer. Tax pay­
ments are made to the county treasurer,
and revenue is handled in the same way
as general property taxes. A fire protec­
tion assessment, also, is payable as under
the general property tax system. All rul­
ings may be appealed to court.
The two taxing systems can best be
compared by an illustration. For exam­
ple, a typical 40-acre tract of low qu lity
in southeast Jefferson County, Washmg­
ton, was logged in 1900 by ox-team.
Then the customary broadcast burning
destroyed practically all trees left after
logging. As is normal, the young trees
that came in after the logging and fire
grew well on favored areas, but poorly
on southern exposures, shallow soils, and
alder creek bottoms. On the whole, tim­
ber growth was below normal for the
area.
The 49 annual property tax payments
since 1905, accumulated at 3% interest,
Table 1- Comparison of General Property and Reforestation Act
taxes on 40 acres, western Washington
Age of
stand
{years)
10
20
30
40
50
60
70
80
90
100
Assessed
value
$
80
100
120
140
240
400
680
940
1,240
1,720
Accumulated Taxl
General
Property2
$
78
194
362
598
974
1,570
2,532
3,974
6,084
9,195
Reforestation
Act3
$
55
129
228
362
887
1,445
2,086
2,813
3,653
4,661
Difference
in favor of
Reforestation Act
$
23
65
134
236
87
125
446
1,161
2,431
4,534
1Tax rate 50 mills; interest rate 3°/0 compounded annually; fire patrol assessment of 7 cents acre included.
2Based on recommended assessments in "Appraisal Manual for Timber and Timber Lands for Use by Wash­
ington Assessors,'' state tax commission.
3Yield tax introduced at 50 years, based upon 213 of normal yield; timber valued at $10 perM.
amount to $598.97. Had it been possible
in 1905 to classify this tract under the
Reforestation Act (as can be done today)
the accumulated tax would have been
$237.81, or $361.16 less than under the
ad valorem tax. A yield tax of 12llz% of
the value of merchantable products
would also be due. The value is estimated
to be $600 ($1,000 present market value
less $400 value of land and young
growth). Thus an additional $75 would
be paid for yield tax, leaving $286.16 in
favor of classification. This is a very sig­
nificant difference. It illustrates the ad­
vantage of classification for low pro­
ducing lands.
Another comparison between the two
systems is illustrated in Table 1. The
basis for assessed values in the table is
the fair market value of land and timber
reduced to an actual assessment ratio
considered to be average for western
Washington counties. Reforestation Act
land is assumed to be classified at the
beginning of the forest crop. The land
is assumed to be of medium quality forest
land, producing an average of two-thirds
of the estimated normal timber-growing
capacity. The table shows that the re­
forestation tax always is less expensive
than the general property tax. As the
stand becomes older the difference natu­
rally increases. These two comparisons of tax costs bring out several fundamental advan­
tages of classification, namely:
1. Because of the unvarying assess­
ment, there is no difficulty in estimating
the tax liability. In the Jefferson County
example, the land was assessed on the
1905 property tax roll at $2 per acre,
raised in 1907 to $2.50, in 1908 to $3,
and in 1951 to $5.50. When the next
raise will be is neither known nor can it
be predicted. Under the Reforestation
Act the landowner knows that the assess­
ment will be $1 per acre for the life of
the timber crop.
2. Interest is a large item if timber
property is held longer than 20 years;
hence, any method to defer tax payments
unt'il the crop is cut is helpful. In the
Jefferson County example, interest on
property taxes paid amounted to $308.35.
Under classification, interest on annual
taxes would have been only $117.24.
As a substitute for large cld valorem taxes
the final yield tax prevents accumulation
of interest, which under the property tax
often exceeds the value of land and
forest crop.
3. On classified lands the tax is paid
at time of cutting when money is at
hand. Hence, the tax is easier to pay.
4. There is some insurance against
loss in value of the timber crop because
of fire, insects, disease, windthrow, tres­
pass or economic conditions. Although
the loss might result in a lower assess­
ment under the general property tax, yet
taxes already paid out would not be
affected. The yield tax, however, is com­
puted on fair value of the crop at the
time of harvest; hence, a sudden reduc­
tion in timber value immediately reduces
the tax should the timber be cut.
5. Classification under the Reforesta­
tion Act is a safeguard against the im­
pact of special assessments above the
general tax rate often levied by taxing
districts. A special levy of 10 mills, for
instance, is three times the burden with
a $3 general property tax assessment as
with a $1 reforestation act assessment.
At the same time, certain disadvan­
tages of classification should be recog­
nized, namely:
1. The yield tax creates a lien on the
timber crop. If the land owner wants to
sell a classified tract he may find it neces­
sary to allow a discount on the selling
price equal to the liability for the yield
tax when the prospect of paying the tax
is sufficiently close to influence the timber
value. This will depend upon value of
timber crop and when purchaser expects
to harvest.
2. Some owners do not like to bother
with notifying authorities of intention to
cut classified lands and to post the neces­
sary bond to insure payment of yield tax.
However, now that cutting permits are
required for all forest cuttings in the state, this objection becomes less signifi­
cant. 3. Many owners fear they will be un­
able to declassify lands should changed
circumstances make it desirable. In prac­
tice, however, any owner with 25 taxpay­
ing friends who .will sign his petition
can take advantage of the provision to
withdraw his land, assuming that he
can prove the land is more suitable for
other purposes than for timber growing.
His only liability will be the difference
between what his tax would have been
under the general property tax and what
he has paid under the Reforestation Act.
There is no chance of paying more under
classification. 4. Some landowners are afraid that
valuable salvage material, such as peeler
blocks or sawtimber, may be present on
the land. If there, this extra value would
increase the amount of yield tax at the
time of harvest. The yield tax then might
amount to more than the accumulated
ad valorem tax payments, which have
ignored salvage material. A close esti­
mate or inspection of the land will de­
termine whether such hidden values do
exist.
The time of expected major income
from the timber crop (or length of time
Table 2- Taxes on 40 acres under General Property law and Reforestation Act, by years until timber harvest and value of forest crop, western Washington1 Taxation
period
(years)
20
Reforestation act when crop value is:
General property
Assessed
Value
$ 120
200
280
400
$1,000
Tax
Diff,
Tax
$ 236 $ 254
344
451
613
$
I
$2,500
Tax
18 $ 441
-90
-197
-359
Diff.
I
$5,000
Tax
Diff.
$ 205 $ 754
97
-10
-172
$ 518
410
303
141
I
$10,000
Dlff,
Tax
$1,379 $1,143
1,035
928
766
30
200
280
400 600
609
799
1,085
1,560
353
-256
-446
-732
-1,207
540
-69
-259
-545
-1,020
853
244
54
-232
-707
1,478
869
679
393
-82
40
200
280
400
600
965
1,261
1,719
2,473
487 -478
-774
-1,232
-1,986
674 -291
-587
-1,045
-1,799
987
22
-274
-732
-1,486
1,612
647
351
-107
-861
50
280
400
600
800 1,895
2,572
3,700
4,828
666 -1,229
-1,906
-3,034
-4,162
853
-1,042
-1,719
-2,847
-3,975
1,166
-729
-1,406
-2,534
-3,662
1,791
-104
-781
-1,909
-3,037
60
280
400
600
800
2,739
3,718
5,348
6,979
908
1,831
-2,810
-4,440
-6,071
1,095 -1,644
-2,623
-4,253
-5,884
1,408
-1,331
-2,310
-3,940
-5,571
2,033
-706
-1,685
-3,315
-4,946
75
400
600
800
1,000
6,216
8,942
11,669
14,395
1,434
-4,782
-7,508
-10,235
-12,961
-4,595
-7,321
-10,048
-12,774
1,934
-4,282
-7,008
-9,735
-12,461
2,559
-3,657
-6,383
-9,110
-11,836
100
600
800
1,000
1,200 19,919
25,992
32,065
38,138
3,040 -16,879
-22,952
-29,025
-35,098
1Tax rate
50
mills, fire patrol assessment
7
1,621
3,227 -16,692
-22,765
-28,838
-34,911
3,540 -16,379
-22,452
-28,525
-34,598
4,165 -15.754
-21,827
-27,900
-33.973
cents per acre, interest rate 3°/o compounded annually,
that property will be held) is the pri­
mary factor in determining whether to
classify or not. As a rough estimate, for­
est stands to be held for 20 years or more,
whose average assessment will exceed
$2.50 per acre, are to the owner's finan­
cial advantage to classify (Table 1).
Whenever forest stands attain merchant­
able or near-merchantable values, the ad­
vantage of classification becomes smaller.
How to determine which system is
financially preferable is illustrated in
Table 2. Let us assume an owner of 40
acres of 30-year-old timber not yet of
merchantable size is interested in analyz­
ing his future tax liability. He plans to
hold the timber another 40 years, at
which time he expects the timber to be
readily salable. He estimates a yield at
that time of 500,000 board feet, worth
$5,000. Average assessed value of land
will be $2 0 per 40 acres. He consults
Table 2. In the first column opposite 40
years he finds the $280 assessed value
line and reads across to the column for a
$5000 crop value. There he finds a $274
advantage in favor of classification.
For another example, let us assume an
owner has a tree crop just starting. Esti­
mated crop value in 60 years will be
$10.,000 per 40 acres and expected aver­
age assessed value of land $400 per 40
acres. Consulting the table, he finds a
$1685 advantage in favor of classifica­
tion.
Still another case is an owner with a
30-year stand to be held for 20 years
and a crop value of $2500 per 40 acres.
Average assessment is $200 per 40 acres.
Table 2 shows a $97 advantage for gen­
eral property tax.
Almost any foreseeable combination of
time and value is included in Table 2
to give a financial comparison of the
two methods of taxation.
A landowner should consider each 40­
acre tract separately to determine which
taxing method best fits its condition.
Since classification is voluntary, he may
elect to classify one 40 and decline on
another. Areas approaching major har­
vest (within 20 years) should not be
classified. Those to be held for longer
periods should be analyzed closely to see
if some worthwhile saving is possible
through classification.