Information on Timber Harvesting, Planting, Federal Assistance Programs, and Tax Provisions

Published by the Government Accountability Office on 1990-03-08.

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

                    United States General Accounting   OffIce

For    Release       Informatlon       on Timber   Harvesting,     Plantlnq,
on Delivery          Federal     Assistance    Programs,      and Tax Provisions
Expected     at
lo:30    a.m. EST
March 8, 1990

                     Statement    of Flora     H. Milans,   Associate      Director
                     Food and Agriculture        Issues
                     Resources,     Community,     and Economic
                        Development    Division

                     Before    the
                     Committee     on Ways and Means
                     House of Representatives

GAO/T-RCED-90-45                                                        GAOForm160(12/27)
Mr.   Chairman and         Members      of the Committee:

      -We are pleased              to present     information        on timber      harvesting
and planting,           federal      timber     assistance      programs,     and federal         tax
provisions       that     affect      the industry.           Our testimony       is based on
information       we obtained          from the Department             of Agriculture          and the
Internal      Revenue Code in response to a request                        from Representative
Sander Levin.            Because of the short             time frame available            to
respond,      we did not verify               the information        nor evaluate        the effects
of Agriculture's           assistance          programs or tax provisions               on the
timber      industry.

         We were specifically             asked to identify            (1) timber       harvesting,
planting,       and seeding          levels     from 1986-88,         (2) available       federal
timber      assistance       programs and their              costs    over this     period,      (3)
federal      income tax provisions               which apply         to the timber       industry,
and (4) projections                of future     timber      harvesting     and employment both
nationally       and regionally           over the next 50 years.

         In summary we found:

         -- Timber harvesting             increased       4 percent       from 1986 to 1988.
             Tree 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.
          --   About       90 percent          of the increase               in national               tree     planting
               and seeding           came from         increases            in the       number of trees
               planted       under        three      Department            of Agriculture               programs
               which       expanded rapidly               over the period.

          -- 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.

          -- The Forest           Service          projects         that     timber       harvesting
               nationally         will         increase       by more than one-half                          over the
               next 50 years,              from nearly             18 billion          cubic          feet     to over      27
               billion        cubic       feet.       Over the same period,                      it     projects         that
               industry        employment will                   drop by about one-fourth                       because
               of increased            labor       productivity.              However, these changes
               are       expected      to vary considerably                   by region.

          Before         elaborating           on these points,               I would like              to point         out
that      a description             of the scope and methodology                              of our work is
contained            in an appendix             to this          statement.           Also,      I would like              to
briefly        provide        some background                on the timber             industry,


         The latest       data available           from the Forest               Service      indicate
that     in 1986, timber          was the nation's              number one agricultural                    crop,
comprising       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,            especially
in the southern           and Pacific        coastal          states.

         There are three          types of forest              landowners:          Private        farmers
and other       small woodland owners:                the forest           products        industry:         and
public      agencies.          In 1986, about 50 percent                   of the nation's               annual
timber      hanest,       by volume,        came 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 remaining
20 percent.

                                            ING. 1986-88

         According       to data from the            Forest          Service,     timber      harvesting
nationally        increased       4 percent        from 1986 to 1988, going                       from
slightly       less than 17 billion               cubic       feet     to about 17.7 billion

cubic      feet.         Planting      and seeding           increased     by 23 percent            over        this
period,         going         from about      2.8 million        acres    to   about     3.4 million
acres.          These increases              reflected       a continuation          of generally
steady upward trends                  for     harvesting        and planting        which date back
several         decades.

c                                                                               0

         USDA's Agricultural                  Stabilization         and Conservation              Service
(AS-),          in    coordination           with   the Forest       Service        and State
Foresters,            administers           three   major timber         planting       assistance
programs.             These programs are:

          (1)        Faricultural           Conservaon          Prow,                   which 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:

          (2)        Forestrv       Incentives       Prouram CFIP), which is designed                           to
                     enhance timber           generation        on promising         land through           ASCS
                     cost-sharing           payments to private           landowners         for tree
                     planting;       and

          (3)        Conservation           Reserve Pro-m           [CRP), which 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.

         Large increases        in trees         planted       or seeded under these three
programs comprised          90 percent           of the increase          in total      tree
planting     and seeding        that     occurred         between 1986 and 1988.

         Funding     for these programs increased                     by an average of 60
percent     for     1987-88 versus        1986, going              from about t24 million
annually     to an average of about S38 million.                          The largest          funding
increase     was in the Conservation                    ResrLve Program.

         As a result,      these programs'               share of the nation's           planting
and seeding         increased     from about one-sixth                 of the total      in 1986 to
an average of over one-fourth                    of the total          during     1987 and 1988.
According         to the Forest        Service     and      ASCS,     the Conservation          Reserve
Program will         be the largest         publicly         sponsored      tree-planting
program thus far          in the nation's               history.


         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

         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.


          The    Forest          Service     has projected               that      timber      harvesting
nationally             will      increase        55 percent          ovsi       the next SO years,                   from
less than 18 billion                     cubic      feet     annually           in 1988 to more than 27
billion         cubic         feet    in the year 2040.                  However, shifts               are expected
in different              regions'         rankings         as producers,             due to relative                 timber

supply      declines             in some areas.                  In particular,              the North          is
expected         to surpass            the Pacific           coastal         region         as the nation's
second-ranking                 production         region         over this         period.

          Although            harvests      are projected               to increase           substantially                over
the next half                 century,      the Forest            Service       has projected              that       timber
industry         employment will                 likely      decline         about 27 percent               over this
period.          This         is because of labor                 productivity              gains     due to mill
renovations.                  However, this          is expected            to vary by region.                       The
sharpest         regional            employment decline,                 about 36 percent,                 is
expected         to take place              in the southern               states.

           In summary,    Mr.    Chairman,     national      timber     harvesting      and
planting       from 1986-88 continued           their     generally      steady      upward trend
of the previous          several    decades.        Much of the recent            increase     in

planting       can be linked       to rapid     expansion      in USDA financial
assistance       programs which currently               are costing      about $38 million
annually.        We did not evaluate           whether      any relationship          exists
between changes in harvesting                 or planting      levels       and tax
provisions       which affect       the industry.

           This concludes       my statement,       Mr. Chairman.           I will    be happy to
answer any questions             you or the other         members     may    have.

APPENDIX                                                                                   APPENDI

                                    SCOPEAND METHODO7CGY

We obtained         information      in December and January                  from the          Forest

Service        and the Agricultural         Stabilization             and Conservation                Service
(ASCS) in the Department               of Agriculture.              Because of the short
time frame for our work,               we did not independently                  verify         the
information         provided      by these agencies.               The projections              of future
harvesting        and employment were            obtained       from a draft           Forest         Service

report.         Also,   we did not      assess the accuracy                 or reasonableness                 of
the   Forest      Service's       mathematical        model on which it               bases these
estimates.          We discussed       our findings         with      the    Forest       Service         and
ASCS,     who    said   they were fair          and accurate.           The information                  we
obtained        is the latest       available       and   generally          covers       the years
1986-88.         In some instances,         there       may be slight           discrepancies
between these data and previously                     published        data because of minor
adjustments         due to subsequent           reestimation.           Information             on tax
provisions        was largely       extracted         from a review          of the Internal
Revenue Code.           We did not evaluate             effects       of tax provisions                  or

assistance        programs on the timber               industry.