oversight

Forest Service: Timber Harvesting, Planting, Assistance Programs and Tax Provisions

Published by the Government Accountability Office on 1990-04-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

        ‘.



                    United   States   General   Accounting   Office                ;
                                                                                   ..
                                                                                        1




GAO                 Briefing Report to the Honorable
                    Sander M. Levin, House of
                    Representatives


April        1990
                    FOREST SERVICE
                    Timber Harvesting,
                    Planting, Assistance
                    Programs and Tax
                    Provisions




                                                                          i
                                                                      .
                                                                              ‘,
                                          __.--~
      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community,    and
      Economic Development     Division

      B-226646

      April 13,199O

      The Honorable  Sander M. Levin
      House of Representatives
      Dear Mr.        Levin:
      This briefing       report    responds to your October 24, 1989,
      request    for information        on timber harvesting      and planting,
      federal    timber     assistance    programs,   and federal    tax
      provisions     affecting      the industry.     The answers to the
      specific     questions      you raised    are summarized below:
      Q:    How did timber harvestins              and nlantins    and seeding    levels
            chanse from 1986-88?
      A:    Timber harvesting    increased    4 percent  from 1986 to 1988,
            and timber planting     and seeding increased     23 percent
            over this same period.        Both of these increases    represent
            a continuation    of generally    steady upward trends dating
            back over several    decades.      (See sec. 2 for further
            details.)
       Q:   What were the imDacts  of federal     timber assistance
            proarams, and what were their     costs from 1986-88?
      A: Most of the increase       in timber planting       and seeding was
         comprised   of increases      under financial      assistance
         programs for small landowners         administered       by the
         Department   of Agriculture.       Annual payments under the
         programs for planting        and seeding grew from $23.6 million
         for 1986, to about $36.9 million          for 1988.        (See sec. 3
         for further   details.)
       Q:   What federal       income tax vrovisions          currently    avvlv to the
            timber   industry.      and what are their         imoacts    on federal
            revenues?
       A: Various     tax code provisions          affect    the industry's
          calculation       of taxable       income.      The Joint   Committee    on
          taxation      recently     estimated     that two such provisions
          reduce federal         revenues by $460 million           annually.     (See
          sec. 4 for further          details.)
    B-226646
    Major contributors      to this   briefing   report   are   listed   in
    appendix  II.
    Sincerely   yours,



John W. Hannan,
Director,      Food and
   Agriculture     Issues




3
APPENDIX                                                                           Paqe
       I         DEFINITIONS     OF REGIONS USED IN THIS REPORT                     18
  II             MAJOR CONTRIBUTORS TO THIS REPORT                                  19

FIGURE
  2.1            Volume    of National     Timber     Harvesting,       1986-88      8
  2.2            Volume of National        Tree     Planting    and
                    Seeding, 1986-88                                                 9
  3.1            Volume of Tree Planting   and Seeding                Under
                    USDA Assistance Programs,  1986-88                              11
  5.1            Projected     Volume of National          Timber
                   Harvesting,      1988-2040                                       14
  5.2            Projected    Changes in Regional   Timber
                   Harvesting    Volumes, 1986-2040                                 15
  6.1            Projected    Decreases in National    and
                    Regional   Timber Industry   Employment,
                    1985-2040                                                       17
                                 ABBREVIATIONS
ACP        Agricultural      Conservation       Program
ASCS       Agricultural      Stabilization       and Conservation        Service
CRP        Conservation      Reserve Program
FIP        Forestry     Incentive     Program
FmHA       Farmers Home Administration
GAO        General Accounting         Office
USDA       U.S. Department        of Agriculture
       5. What future    changes are expected   in timber  industry
       employment nationally    and by region from 1985-2040?
         We obtained      data on recent         timber harvesting,          planting        and
employment,       and projected         future     harvesting     and employment from
the Forest Service.             We obtained        program and cost data on current
timber planting         and seeding assistance              programs from the
Agricultural        Stabilization         and Conservation        Service       (ASCS) in the
Department      of Agriculture.            Because     of the limited        time     available
to conduct      our study,        we did not independently            verify       the accuracy
of the data provided             by the agencies.           Also,  Forest Service
projections       of future       conditions       were based on mathematical                models
whose reasonableness             and accuracy we did not assess.                   Information
on tax provisions           was largely       extracted       from a review of the
Internal     Revenue      Code.     We obtained        available    data on impacts on
the federal       revenue associated           with these provisions             from reports
published      by the Joint        Committee on Taxation.
      We did not evaluate    effects              of tax     provisions       or assistance
programs on the timber    industry.
        In every instance,        we attempted       to obtain     the latest     available
data.     In some instances,        the time frames for the data differ
because     of differences      in collection        and compilation       cycles between
the agencies.         Also, slight     discrepancies         may exist    between certain
harvesting     data contained       in our report         and previously      published
data because       the Forest Service         continually      reestimates     these data
on the basis of more current             information       it receives.
       A summary of the information      contained  in this report    was
presented    in testimony   before the House Committee      on Ways and Means
on March 8, 1990.       The Committee requested    we provide   supplemental
information     for the hearing   record in response to members’
questions,     which we agreed to do.
NATIONWIDE TREE PLANTING AND SEEDING, 1986-88
      As figure 2.2 indicates,     the number of acres planted   and
seeded annually  increased     23 percent nationwide  from 1986 to I988
(going from 2.75 million     in 1986 to 3.39 million    during 1988).
gFi ure          2.2:                                            1986-88

4   Millions   ot Acres




Source:               Forest   Service.
      Planting and seeding nationally   in 1987 was 280,000 acres
higher than in 1986.    In 1988 it was higher than the 1986 level by
641,000 acres.   Thus plantings   and seedings  for both years together
exceeded the 1986 level by a total    of 921,000 acres.




                                          9
                     up to 45 years.     We were not able to obtain    costs,                 as only
                     869 acres had been enrolled     as of 1989, and USDA
                     anticipates  little   further  use of the program.
      As figure   3.1 indicates, the number of acres farmers and
other small    woodland owners contracted    to plant and seed annually
under the three major assistance      programs  (ACP, FIP, and CRP) rose
from 479,000 acres in 1986 to 976,000 acres in 1987 and declined        to
813,000 acres in 1988.
Fiqure 3.1:   Volume                    of Tree Plantina        and Seedinq      Under USDA
Assistance  Proqrams,                     1986-88

Thousands      of Acres




                    r
1wO

 900

 6w

 700

 WI

 600

 400

 900

 200

 100

      0   I AI
            1966          1967
                                 A
                                 1966
            YWlfS

Source:              Agr -cultural       Stabilization        and Conservation      Service
      Planting and seeding contracted     by farmers and other small
woodland owners under these programs for 1987 was higher than the
1986 level by 497,000 acres.     For 1988, it was higher       than the 1986
level by 333,000 acres.    Thus, plantings      and seedings   for both
years together  exceeded the 1986 level by a total         of 830,000 acres.
This composed most of the 921,000 acres,        referred   to on page 11,
by which total  plantings  and seedings    nationally    for these years
exceeded the 1986 level.
       As a result,  the share of the nation's     total    planting        and
seeding that was done under these programs increased              from 17
percent   in 1986 to 24 percent    in 1988.   Forest Service         staff    told
us that the CRP program,     in particular,   which was created            as part
of the Food Security    Act of 1985, will   be the largest          publicly
sponsored tree planting    program in the nation's       history.

                                                         11
                                        SECTION 4
                        INCOME TAX PROVISIONS AFFECTING
                              THE

       Timber has long been classified        in tax law as a capital     asset
used in a trade or business.         Income from timber      sales is now taxed
at ordinary       income tax rates,  a maximum effective      rate of 28
percent    for individuals     and 34 percent   for corporations.     Timber
growers may elect to (1) recognize         income when trees are cut rather
than upon the sale of the timber         and (2) report    income on a cash or
accrual    basis.
       Two special   rules apply to reforestation       expenses.  One allows
for amortizing     up to $10,000 of reforestation       expenses annually
over an 84-month period.       The other provides     a lo-percent
investment    tax credit   for reforestation    expenditures.
        Indirect      timber   production      expenses are exempt from uniform
cost capitalization           rules that require        a broad range of costs to be
capitalized,         or added to the basis of goods sold,              rather     than
currently       deducted.       As a result,     most indirect       costs incurred
after     establishing       a stand of trees are deductible             currently     in a
fashion      similar     to maintenance      expenses.      Finally,     certain     publicly
traded partnerships           with significant       income from timber          sales are
exempted from corporate            tax treatment.
        Other general    tax code provisions      affecting     all industries,
including     the timber    industry,  limit   the deductibility        of losses
from nonactively      managed timber     stands and specify        depreciation
write-off     periods   for capital   assets such as equipment          and
structures.
IMPACTS ON FEDERAL REVENUES
        The Joint    Committee on Taxation          has, at various        times,
estimated      the impacts on federal          revenues of some, but not all,           of
these provisions.           Last year,    it estimated       that the amortization       of
reforestation       expenses and the related           investment    tax credit    would
reduce federal        revenues by $400 million           for the 5-year period       from
1990 through      1994.       Allowing  the deduction        of timber     growing
expenses after        establishing     a stand of trees rather           than
capitalizing      them was estimated         to reduce federal        revenues by $1.9
billion      over this same period.          Accordingly,       these two provisions
reduce federal        revenues by $460 million           per year.




                                            13
the nation.     The South will       have increased         its top-ranked       share of
the nation's     total  timber harvest        from 47 percent        in 1986 to 50
percent   in 2040, and the North will             have increased       its share from
23 percent    to 26.    The Pacific       Coast's      share of the national
harvest   is projected     to decline      from 25 percent        to 19 percent,
while the Rocky Mountain         regional     share remains stable            at 5
percent.     The reason for these shifts             is a relative       decline   in
supplies    of softwoods     from private       lands in the Nest, coupled with
increased    supplies   of eastern      hardwoods over the period.
Fiaure 5.2:    Proiected                   Chanaes   in Regional   Timber   Harvesting
Volumes,  1986-2040

16   Billions   of Cubic Feet

16




12

10

 6




Source:              Forest     Service.




                                                     15
 Ficiure 6.1:    Projected   Decreases                 in National   and Recrional   Timber
 Industry   Employment,    1985-2040

 10      h’ceMaga   Decline   in Employment




     0




-10




-20




30




40




Source:              Forest            Service.




                                                  17
APPENDIX II                                                APPENDIX II
                       MAJOR CONTRIBUTORS TO THIS REPORT
RESOURCES. COMMUNITY, AND ECONOMIC DEVELOP-
WASHINGTON, D.C.
Gustave Johanson,   Assistant    Director
Chester Joy, Evaluator-in-Charge
Scott Smith, Economist
GENERAL GOVERNMENTDIVISION,           WASHINGTON, D.C.
Martin     Morris,   Tax Policy   Attorney




(150500)




                                         19
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APPENDIX I                                                             APPENDIX I


                 DEFINITIONS    OF REGIONS USED IN THIS REPORT
Except as otherwise     noted, the regional     grouping      of states    used for
harvesting    and employment data in this briefing         report     is that used
by the Forest Service      in its report   An Analvsis      of the Timber
Situation   in the United States:       1989-2040,    (Draft),    Washington,
D.C., 1989.     It is as follows:
NORTHERN STATES
Connecticut,    Delaware,   Illinois,      Indiana,     Iowa, Maine, Maryland,
Massachusetts,    Michigan,     Minnesota,     Missouri,     New Hampshire,  New
Jersey,   New York, Ohio, Pennsylvania,           Rhode Island,    Vermont,  West
Virginia,    and Wisconsin
SOUTHERN STATES
Alabama, Arkansas,       Florida,    Georgia,  Kentucky, Louisiana,
Mississippi,  North      Carolina,    Oklahoma, South Carolina,     Tennessee,
Texas, and Virginia
ROCKY MOUNTAIN STATES
Arizona,    Colorado,  Idaho, Kansas, Montana, Nebraska, Nevada,            New
Mexico,    North Dakota, South Dakota, Utah, and Wyoming
PACIFIC    COASTAL STATES
Alaska,    California,    Hawaii,    Oregon,   and Washington




                                         18
                                       SECTION 6
             NATIONAL AND REGIONAL TIMBER INDUSTRY EMPLOYMENT
                 ARE PROJECTED TO DECREASE FROM 1985-2040
      Although    harvests are projected      to increase    substantially by
2040, the Forest Service      has projected      that timber   industry
employment     is expected to decline     considerably    over this period
because of labor productivity        gains due to mill     renovations.
However, the rate of decline       is expected to vary by region.
       As figure      6.1 shows, despite       anticipated      harvest    increases,
the Forest Service         has projected     that by 2040, national           timber
industry     em loyment will      generally     fall    about 27 percent        from its
1985 level. P The rate of employment decline                  is expected to be the
greatest     in the South, at 36 percent.              The rate of decline         in the
North is expected to be lower,             at 23 percent.        For the Pacific
coastal     and Rocky Mountain       states,    projections      of future      employment
are available       only for the lumber and wood products               sector     of the
timber    industry      (which made up three-fourths          of industry       employment
there in 1985), and are expected to decline                  by 13 percent        and 26
percent,     respectively.       Projections      of employment      in the remaining
one-fourth      of the industry      in those regions        are not available.




IThis does not include employment in the pulp and paper                     products
sector of the industry in the Rocky Mountain and Pacific                     Coastal
regions, which was not projected.
                                           16
                                                        SECTION 5
                                 NATIONAL AND REGIONAL TIMBER HARVESTING
                                ARE PROJECTED TO INCREASE FROM 1986-2040
        Timber harvesting       nationally    is projected    to increase
significantly       by the year 2040.        However, shifts    are expected   in
different     regions'    rankings     as producers    because of relative   timber
supply declines        in some areas.
        As indicated   in figure    5.1, the Forest Service    has projected
that timber harvesting       nationally    will increase  by 55 percent
between I988 and 2040 (from 17.56 billion           cubic feet to 27.17
billion    cubic feet).1
Figure           5.1:           Projected      Volume    of National     Timber   Harvesting,   1988-
2040

30   Billions   of Cubic Feel




Source:               Forest        Service.
       The latest    year for which regional      harvest  data were available
was 1986.2      As figure   5.2 shows, the Forest Service       projects      that
between then and 2040, the South and North are expected to
experience    large relative      increases  in harvest   volumes,    with the
North overtaking      the Pacific     Coast as the second-ranking       region     in

lIncludes               the      48 contiguous      states      only.
2For definitions                     of regions,        see app.    I.

                                                           14
      Payments for planting      and seeding under these three assistance
programs increased   from $23.6 million      in 1986 to $38.5 million  in
1987, and then declined     slightly   to $36.9 million  in 1988.




                                   12
                                     SECTION 3
             FEDERAL ASSISTANCE PROGRAMSPLAYED A MAJOR ROLE
                 IN INCREASED TREE PLANTING AND SEEDING
      Most of the increase      in national     tree planting  and seeding
that occurred   in 1987 and 1988 was composed of a large increase             in
trees planted   or seeded under financial          assistance programs
administered  by the U.S. Department          of Agriculture  (USDA).    The
share of the nation's     planting    and seeding done under these
programs increased    from 17 percent       in 1986 to 24 percent     in 1988.
        USDA's Agricultural        Stabilization      and Conservation   Service
 (AS=),    and Farmers Home Administration              (FmHA), with technical
assistance    obtained      through the Forest Service         and State Foresters,
administer    four programs to assist            farmers and other small
landowners    in tree planting         and seeding:
           The Agricultural       Conservation      Program (ACP) is an
           environmental      conservation      program under which ASCS makes
           payments to owners of small woodland tracts                 to conserve
           water,   reduce erosion,        improve wildlife      habitat,     and
           develop timber      resources.       Most trees under this program
           are planted      on harvested     timber    lands.    Payments in fiscal
           year 1988 totalled        $8.1 million      for planting      trees on
           156,170 acres.
      --   The Forestry      Incentives      Program (FIP) is designed      to
           enhance timber generation            on promising    land through ASCS
           cost-sharing      payments to private        landowners   for tree
           planting.       Most trees under this program are planted           on
           harvested     timber    lands.     Payments in fiscal     year 1988
           totalled     $9.3 million      for planting     trees on 157,410 acres.
      --   The Conservation        Reserve Program (CRP) is an acreage
           reduction     program designed to encourage conversion              of more
           erodible     cropland      to vegetative    cover,  including
           merchantable       timber,    for 10 years through ASCS land rental
           and cost sharing        payments to farm owners.          However, trees
           under this program may not be planted              on harvested     timber
           lands,    but only on lands that had been planted              in other
           crops.     Payments in fiscal          year 1988 totalled     $19.5
           million    for planting       trees on 499,076 acres.
      --   The Softwood Timber Program is a debt relief            program
           allowing     FmHA to make loans for tree planting        and to
           reamortize     distressed    farmer program loans with anticipated
           future    revenues from resulting       softwood timber    crops
           planted     on former cropland     or pasture.   Payments may be
           deferred     until   the softwood   timber crop produces revenue or


                                          10
                                                          SECTION 2
                            TIMBER HARVESTING AND PLANTING AND SEEDING
                                     HAVE INCREASED SINCE 1986
        According      to data from the Forest Service,       timber   harvesting
and planting        and seeding have increased        since 1986.    These
increases      reflected     a continuation      of generally upward trends      for
harvesting       and which date back about 35 years for harvesting              and
about 45 years for planting.               We did not assess any causal factors
related     to these increases.
NATIONWIDE TIMBER HARVESTS, 1986-88
      As figure    2.1, below, indicates,   timber harvesting  increased                      4
percent  nationwide     from 1986 to 1988 (going from 16.96 billion
cubic feet in 1986 to 17.66 billion       cubic feet in 1988).
Fiqure           2.1:           Volume      of National      Timber   Harvesting,   1986-88

20   Bllllons   of Cubic Feel

Ia

16

14

12

10

 a
 6
 4
 2

 0
                A          L
      1986          1987        1988
      YeSrS

Source:                Forest          Service.
                                       SECTION 1
                                     INTRODUCTION
BACKGROUND
        The latest      data available        from the Forest Service       indicate
that in 1986, timber was the nation's                 number one agricultural        crop,
composing about one-fourth              of the total    value of all major
agricultural       crops.       Timber also ranked in the top three
manufacturing        industries       in most regions    of the country.         It was
most important,         however,      in the southern    and Pacific     coastal
states,      which accounted        for 47 percent     and 25 percent,
respectively,       of the nation's         total  timber harvest      by volume in
 1986, and for 45 percent             and 41 percent,    respectively,     by value.
        In 1986, about 50 percent             of the nation's      annual timber
harvest,     by volume, was obtained             by forest    products    firms from
private    farmers and other small individual                 woodland owners who
comprise the predominant             forestland      ownership    group in the eastern
United States.         Lands owned by forest            products    firms themselves,
located    in all timber-producing              areas of the nation,        produced about
30 percent       of the harvest.         National     forests    and other public
holdings,      located   principally         in the western United States,
supplied     the remainder       of approximately          20 percent.
       Over the years, various     tax provisions    and timber assistance
programs have been enacted to increase          the attractiveness  of long-
term investments    in timber,   in order to ensure that the nation
maintains   adequate timber    supplies.
OBJECTIVES,     SCOPE, AND METHODOLOGY
        On October 24, 1989, Representative         Sander M. Levin requested
that we identify         certain   data on the timber industry     and its
future    prospects      as well as on federal    assistance   programs and tax
provisions     affecting       it.  As agreed with his office,     our
objectives     were to answer the following        questions:
       1. How did      timber harvesting        and planting      and seeding      levels
       change from      1986-88?
       2. What were the impacts of federal                 timber assistance
       programs, and what were their costs               from 1986-88?
       3. What federal        income tax provisions    currently  apply            to the
       timber   industry,     and what are their    impacts on federal
       revenues?
       4. What future        changes are expected         in timber harvesting
       levels nationally       and by region from         1986-2040?

                                            6
                            CONTENTS


LETTER
SECTION
   1      INTRODUCTION                                    6
              Background                                  6
              Objectives,    Scope,    and Methodology    6

   2      TIMBER HARVESTING AND PLANTING AND SEEDING
            HAVE INCREASED SINCE 1986                     8
              Nationwide Timber Harvests,     1986-88     8
              Nationwide Tree Planting    and
                Seeding, 1986-88                          9

   3      FEDERAL ASSISTANCE PROGRAMSPLAYED A
            MAJOR ROLE IN INCREASED TREE PLANTING
            AND SEEDING                                  10

   4      INCOME TAX PROVISIONS AFFECTING THE
            TIMBER INDUSTRY                              13
               Impacts on Federal Revenues               13
   5      NATIONAL AND REGIONAL TIMBER HARVESTING
            ARE PROJECTED TO INCREASE FROM 1986-2040     14
   6      NATIONAL AND REGIONAL TIMBER INDUSTRY
            EMPLOYMENTARE PROJECTED TO DECREASE
            FROM 1985-2040                               16
Q: What future    chanses are exoected in timber harvestinq
   levels  nationallv    and bv reaion from 1986-2040?
A: The Forest Service         projects     that the national      timber
   harvest    will    increase     about 55 percent     over the next           50
   years,    with shifts      taking    place in different      regions'
   shares due to changes in their              relative  supplies     of
   available      trees.     (See sec. 5 for further        details.)
Q: What future      chanses      are exoected    in timber industry
   emolovment      nationallv       and bv reqion   from 1985-2040?
A: Despite    anticipated      harvest     increases,    the Forest Service
   projects     that national      timber     industry   employment will
   generally      fall   about 27 percent        over the next 50 years,
   chiefly    because of labor productivity             gains due to mill
   renovations.         This decline     is projected      to vary
   considerably        by region.      (See sec. 6 for further
   details.)
Section     1 provides       background     information      on your request
and discusses        our scope and methodology.              In conducting        our
study,    between December 1989 and January 1990, we relied
primarily      on Forest Service         and Agricultural        Stabilization
and Conservation          Service    (ASCS) data.       Because of the
limited     time available        to conduct our study,          we did not
verify    the accuracy of these data nor evaluate                   the effects
of Agriculture's          assistance     programs or tax provisions              on
the timber       industry.       We  discussed     the  information        in  this
briefing      report    with Forest Service          and ASCS officials,          who
said it was fair           and accurate.
As agreed with your office,                unless you publicly          announce its
contents     earlier,      we   plan   no   further   distribution        of this
report    until     30 days from the date of this letter.                     At that
time, we will         send copies to the appropriate               House and
Senate committees:           interested       members of Congress;          the
Secretary       of Agriculture;         and the Director,         Office    of
Management and Budget.               Copies will     also be made available
to other interested            parties     who request      them.      Should you
need further        information,        please contact        me at (202) 275-
5138.




2