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Southern Forest

Forest Service Research Note

Experiment Station SO-332

February 1987

Effect of Current-Use Valuation on

Forestry Investment Returns in

Selected Virginia Counties

Peter D. Gayer, Harry L. Haney, Jr.,

and Clifford A. Hickman

Results from three Virginia counties indicate that if

forest properties are taxed on the basis of their value for

continued timber growing as opposed to their fair market

value, forestry investment returns will be increased.

Where development pressures were insignificant, real

returns roseby less than $40 per acre when measured

in terms of Net Present Value (NPV) and by 1 percentage point when measured by the Internal Rate of Return

(IRR). However, where development pressures posed a

serious threat to continued timber production, NPV’s

rose by more than $850 per acre and IRR’s by over 6.0

percentage points. These findings suggest that in areas

experiencing significant development activity, use valuation may be an important policy tool for slowing the conversion of forest land to other uses. This method of assessment can maintain forestry as an attractive

investment when it would not be otherwise.

Additional Keywords: forest taxation, timberland

assessment.

In areas subject to pressures from urbanization, industrialization, or recreational development, rural lands

often have market values that exceed their values as

determined by income-producing potential in current

use. If these higher market values are reflected in increased assessments and taxes, as they should be

under a normal ad valorem property tax, the affected

rural lands are likely to be converted to more intensive

uses. To prevent &ph development, many states, including all of the southern states except Georgia, have

enacted so-called “use value assessment” laws. Although specifics vary, these statutes generally stipulate

that farm lands are to be taxed according to their value

for raising crops or livestock, forest lands according to

their value for growing timber, and open-space lands

according to their value as undeveloped rural acreage.

The effect is to tie the taxable value of such properties

to their income producing potentials so that owners can,

at their discretion, keep them in farm or forest use.’

At present, Virginia has two laws providing for the

assessment and taxation of forest and other rural lands

on the basis of current use. The first law, passed in 1971,

extends use valuation to qualifying lands in local taxing

jurisdictions that have: (1) enacted an ordinance authorizing use assessment, and (2) adopted a comprehensive

land use plan (Marshall 1981 a). The second law, passed

in 1977, extends use valuation to qualifying lands in

locally approved “Agricultural and Forestal Districts”

(Marshall 1981 b). The latter are aggregations of privately owned farm and/or forest properties that have

been voluntarily committed by their owners to continued

crop and/or timber production.

1 From society’s standpoint, the rationale for offering a tax incentive

to keep farm and forest lands in their current uses rests on the premise

that such lands provide important public benefits. These include:

(1) protection and maintenance of viable agricultural and wood-based

industries, (2) protection and maintenance of important environmental

and aesthetic values, and (3) minimization of the public service and

other cost increases that can result from scattered and unplanned

urban expansion (Gardner 1977).

Southern Forest Experiment StationIT- U.S. Postal Services Bldg., 701 Loyola Avenue, New Orleans, La. 70113

Forest Service, U.S. Department of Agriculture.

Sewing Alabama, Arkansas, Louisiana, Mississippi, E. Oklahoma, Tennessee, E. Texas, Puerto Rico, U.S. Virgin Islands

1
The purpose of this paper is to show how use assessment affects forestry investment returns in selected Virginia counties. The results should be of interest to both

private forest landowners and state and local tax officials. The former will be able to better judge the possible

financial gains to be realized by applying for use assessment. The latter will be able to better judge whether or

not use valuation is likely to impede the conversion of

forest lands to more intensive uses by owners who

prefer to continue with forestry.

METHODS

Selection of Study Areas

Three counties-Augusta, Isle of Wight, and Prince

William-were studied. Augusta County was selected

because it represents a typical hardwood management

area; Isle of Wight County was chosen because it represents a typical pine management area; and Prince

William County was picked because it represents an

area that has been experiencing substantial development pressure.

Biological and Economic Assumptions

To evaluate the effect of use valuation on forestry

investment returns in the three study areas, assumptions

had to be made concerning: (1) the productivity of the

forest sites that would be encountered, (2) the types of

timber management that would be practiced, (3) the intermediate and final harvest yields that would be received, (4) the stumpage prices and non-tax management costs that would prevail, and (5) the tax costs that

would be incurred under both market and use assessment. In general, the specific assumptions that were

made are the same as those employed by the Virginia

Division of Forestry (VDF) and the State Land Evaluation

Advisory Committee (SLEAC) to estimate forest use values in 1982. These assumptions are briefly reviewed

below.

Site Productivity -Three site productivity classeslow, medium, and high-were recognized in each study

county. The specific site indices assigned to each class

are shown in column 2 of table 1.

Timber Management Alternatives. -Three management options were recognized in the analysis. All were

predicated on the assumption that timber would be

grown in even-aged stands. In Augusta County, where

hardwood production predominates, it was presumed

that an 80-year rotation would be employed on all sites

and that commercial thinnings would be conducted at

ages 40 and 60. In Isle of Wight and Prince William

Counties, where pine production is most important, a

45-year rotation was adopted for low quality sites and a

40-year rotation for medium and high quality sites2

Commercial thinnings, under either option, were scheduled for ages 25 and 35. . .

Yields.-The yield figures employed in the analysis

are shown in columns 3,4, and 5 of table 1. For Augusta

County, they reflect the premise that management is

directed towards the production of upland oaks (Quercus

spp.). For Isle of Wight and Prince William Counties, the

figures are based on the assumption that management

is directed towards the production of loblolly pine (P.

taeda L.).

Stumpage Prices and Non-Tax Management

Costs. -The stumpage price and non-tax management

cost figures utilized in the study are shown in columns 6,

7,8, and 9 of tab$ 1. In analyzing the prospective investment returns, ~1% pulpwood and sawtimber stumpage

prices were allowed to increase at a real rate of 2 percent

per year, but other prices and non-tax management

costs were held constant in real dollar terms.

Tax Costs. -Average per acre market and use value

taxes for forest lands in the three study areas were estimated from county tax records. These estimates, which

are shown in columns 10 and 11 of table 1, reflect the

assessments and millage rates that prevailed in 1982.3

In the analysis of prospective investment returns it was

presumed that these tax costs would remain unchanged

in real dollar terms.

Calculation of Investment Returns

The analysis entailed: (1) determining the investment

returns when given taxation based on market value,

(2) determining the investment returns when given taxation based on use value, and (3) comparing the returns

calculated in the preceding steps. The returns were evaluated using a program developed by Vasievich, Frebis,

and Wiethe (1984) and reflect those obtainable from a

single rotation. The program was capable of computing

several investment criteria, but only net present value

(NPV) and internal rate of return (RR) were considered.

RESULTS AND DISCUSSION

Results of the investment analyses are shown in

columns 3 through 8 of table 2. In interpreting these

2Most industrial timberland is managed on a shorter rotation.

3Tax information collected in conjunction with a study by Gayer

(1994).

Peter D. Gayer is assistant district forester, Westvaco Corporation, Parkersburg, West Virginia; Harry L. Haney, Jr. is associate professor,

Department of Forestry, Virginia Polytechnic Institute and State University, Blacksburg, Virginia; and Clifford A. Hickman is principal economist,

USDA Forest Service, Southern Forest Experiment Station, New Orleans, Louisiana.

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Table 1 .-Yield, price, and cost assumptions used to evaluate the effect of use valuation on forestry

investment returns in selected Virginia counties, 1982 1

(1)

County

c-4 (3) (4) (5) (6) (7) (8) (9) (10) (11)

Stumpage Non-tax Property tax

Site Volume yields3 prices4 mgmt. costs costs

index* Commercial Final Pulp- Saw- Stand Annual Market Use ”

thinnings harvest wood timber est. adm. value value

Ft Cords/at MBF/ac $/cd $/MBF ---- $/ac ----- ---- $/ac ----

Augusta

55 3.6 6.6 9.0

65 4.8 8.1 13.4 2.50 100.00 85.00 1 .oo 2.59 1.07

75 8.2 9.8 18.8

Isle of Wight

70 8.5 6.5 9.9

80 10.7 7.6 11.7 7.00 110.00 105.00 1 .oo 1.77 1.34

90 11.5 8.7 16.0

70 8.5 6.5

Prince William 80 10.7 7.6

90 11.5 8.7

9.9

11.7 5.50 65.00 9&00.. 1.00 46.09 2.63

16.0 ;’

‘Data from the Virginia Division of Forestly and county tax records.

*Base age 50 years.

sThinnings and final harvest at ages 40, 60, and 80 for Augusta County; 25, 35, and 45 for low sites

in Isle of Wight and Prince William Counties; and 25, 35, and 40 for medium and-high sites in Isle of

Wight and Prince William Counties.

4Pine pulpwood and sawtimber stumpage prices assumed to increase at a real rate of 2 percent per

year.

Table 2.-Forestry investment returns under market and use valuations in selected

Virginia counties, 1982, for comparison

(1)

County

(2)

Site

index’

(3) (4) (5) (6) (7) (8)

Given market Given

valuation use valuation Absolute change

NPV* IRR NPV* IRR NPV* IRR

Ft Sac Pet $/ac Pet $/ac Pet

Augusta

55 -128.37 1.80 -92.01 2.32 +36.36

65 -108.31 2.49 -71.95 2.89 +36.36

75 -82.70 2.97 -46.34 3.46 +36.36

+0.52

+0.40

+0.49

70 351.83 7.23 360.74 7.35 +8.91

80 505.13 8.41 513.64 8.53 +8.51

90 730.02 9.26 738.53 9.37 +8.51

+0.12

+0.12

+o.i 1

Isle of Wight

70 -750.22 3

Prince William 80 -814.87 3

90 -480.56 1.19

150.28 5.92 +900.50

245.32 6.99 +860.19

379.63 7.88 +860.19

>+5.92

>+6.99

+6.69

‘Base age 50 years.

*Assumes a 4 percent, before income tax, discount rate.

3No positive IRR exists.

figures, note that they represent “real” returns-i.e., returns net of inflation.

The data show that, without exception, use valuation

served to increase forestry investment returns; the

amounts of the increases, however, were highly variable. In Augusta and Isle of Wight Counties, the gains in

NPV were less than $40 and $10 per acre, respectively.

Considering the RR criterion, the increase in returns

was less than 1 percentage point. In contrast, gains for

Prince William County were in excess of $850 per acre

when measured by NPV and 8.0 percentage points

when measured by RR. These findings suggest that in

any given area, the effects of use valuation on forestry

investment returns are primarily a function of the development pressures being experienced. As development

pressures increase, disparities between market value

and use value taxes also tend to increase, thereby making it possible for use valuation to have a greater impact

on timber growing profits. Although they influence forest

use values, differences in site productivity and the types

of timber being managed appear to be of relatively little

consequence in determining the discrepancy between

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market and use values and thus the potential savings to

be realized from use assessment.

The question of whether or not use assessment is

likely to impede the conversion of forest lands to other

uses cannot be definitively answered on the basis of this

study. However, if we can assume that a 4-percent real

alternative rate is appropriate for the woodland owners in

the three sampled counties, the information in table 2

suggests the following:

l In Augusta County, timber production would be

an unacceptable investment under either market

or use valuation. The latter reduces the opportunity costs associated with holding forest land but

would probably have little effect on land use decisions. Only those tracts that provide their owners

with substantial nontimber benefits (i.e., recreation, watershed, wildlife, etc.) would likely be

kept in forestry.

l In Isle of Wight County, timber production would

be an acceptable investment under either market

or use valuation. The latter increases rates of

return but would probably have little effect on

land use decisions. The same tracts would very

likely be devoted to forestry under both assessment systems.

l In Prince William County, timber production

would be an unacceptable investment under

market valuation but an acceptable one under

use valuation. The latter increases rates of return

and could conceivably influence land use. Those

owners desiring to keep their lands in forestry

would be able to do so profitably.4

The preceding results are consistent with what one

would expect to observe. In areas where development

pressures are insignificant, forest land market and use

values tend to be roughly equal. As a consequence, use

valuation should have little effect on forestry investment

returns or owner decisions regarding future land use. By

contrast, in areas where development pressures are significant, forest land market values can exceed use values by substantial amounts. Under these conditions, use

valuation might trigger sizable cost savings and make

forestry an acceptable investment when it otherwise

would not be.

4Even though use assessment would render forestry profitable, this

should not be interpreted to mean that continued timber production

would be the rational economic choice. By making this decision, forest

owners would be foregoing the income they could earn by developing

their properties.

CONCLUSIONS

Virginia’s use value program increases forestry investment returns and may thus impede the conversion of

forest lands to other uses5 The impact that the program

has in any particular county is largely a function of the

development pressures being experienced. In predominately rural counties, use assessment probably has little

effect on forest land use because the market value of

such lands tends to be determined by the timber yields

obtained, the stumpage prices received, and the non-tax

management costs incurred. By comparison, in counties

threatened by development, use assessment can significantly influence timber growing decisions because tax

costs tend to be a much more important determinant of

forestry’s overall profitability. Even in these latter situations, however, use valuation does not ensure that forest

lands will be kept in’timber production. Numerous economic, demographic, *iand sociological factors can enter

into the decision to sell or develop a property; thus,

woodland owners must want to continue practicing

forestry. -

LITERATURE CITED

Gardner, B. D. The economics of agricultural

preservation. American Journal of Agricultural

nomics. 59(5): 1027-l 036; 1977.

land

EcoGayer, P. D. The financial impacts of current use assessment of forestland in selected Virginia counties

and cities. Blacksburg, VA: Virginia Polytechnic Institute & State University; 1984. 99 p. M.S. thesis.

Marshall, J. P. Use-value taxation in Virginia-some

questions and answers. Blacksburg, VA: Virginia

Polytechnic Institute & State University, Department of

Agricultural Economics. Publ. No. MB-271 ; 1981 a.

27 p.

Marshall, J. P. Virginia Agricultural and Forestal Districts

Act-some questions and answers. Blacksburg, VA:

Virginia Polytechnic Institute & State University, Department of Agricultural Economics. Publ. No. MB272; 1981 b. 37 p.

Vasievich, J. M.; Frebis, R.; Wiethe, R. W. Quick-Silver:

the forestry investment analysis program. Research

Triangle Park, NC: Southeastern Center for Forest

Economics Research; 1982. 50 p.

51t should be noted that the optional nature of the program at the

county level adds an element of financial risk to the investment. Governing bodies can give the tax benefit, but they can also take it away,

as has been done in at least one instance.

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