United States

Department of

Agriculture

Forest Service Research Note

Southern Forest SD-377

Experiment Station January 1995

Current Status and Trends in Timber

Severance Tax Legislation in the South

Terry K. Haines

SUMMARY

Severance tax programs currently exist in eight States

in the South. These laws have been enacted primarily to

encourage better forest management and to provide revenues for a variety of forestry initiatives. In most States,

either the severer or the primary processor of forest products is designated as the taxpayer. Severance tax rates

are established as either: (1) a fixed amount per unit of

measurement or (2) a percentage of the value of timber

harvested. Severance tax receipts have increased across

the South since 1987, a trend that will continue if anticipated demand for southern wood products is realized.

INTRODUCTION

Timber severance taxes are imposed when standing

timber is cut and are levied in addition to property or

yield taxes or both. The historical justification for these

severance taxes has been twofold: to discourage undue

or wasteful cutting of timber and to provide revenues for

State forestry programs that promote sound forest management practices.

Comprehensive surveys of State harvest tax laws have

been conducted periodically (Clements and others 1986,

Forest Industries Committee on Timber Valuation and

Taxation 1972-l 984, Hickman 1982, USDA 1968). Most

recently, Hickman (1989) reviewed-severance tax legislation in the United States. The status of severance tax

statutes in the Southern United States is updated, and

key provisions of existing severance tax statutes are compared in the paper. Recent trends in severance tax collections and the future outlook for severance tax programs

also are discussed.

Timber severance tax programs currently exist in 12

States across the country, including 8 in the South. The

first severance tax law in the United States was enacted

in Louisiana in 1922 followed by one in Arkansas in 1923.

Between 1935 and 1948, there were six additional enactments in West Virginia, New Mexico, Mississippi, Alabama, Oregon, and Virginia. New legislation, replacing

the earlier Louisiana law, was passed in 1935 and again

in 1955. Mississippi also enacted a new statute in 1956.

Little further activity occurred until 1977 when North

Carolina initiated legislation, followed by South Carolina

in 1981 and Arizona and Illinois in 1983. Most recently,

in 1987, West Virginia replaced its 1935 enactment with

a new law (Hickman 1989).

PRIMARY PROVISIONS

Three of the primary provisions of these laws are reviewed in this paper: (1) the party subject to taxation, (2)

rates and methods of taxation, and (3) statutory guidelines for revenue distribution (table 1).

Party Subject to Taxation

Severance tax programs in three States-Louisiana,

Mississippi, and West Virginia-designate persons severing timber for commercial purposes and/or purchasers of severed timber as the parties responsible for

payment of the tax. In contrast, primary manufacturers

of timber products or shippers (persons transporting

unmanufactured products out of State) are designated

as the taxpayers in Arkansas, North Carolina, South

Carolina, and Virginia. Alabama’s program is unique in

that both parties are subject to the tax; the severer is

subject to an initial severance tax, and the manufacturer

or shipper pays an additional privilege tax (table 1). Although severers, manufacturers, and shippers are burdened with paying the tax initially, it has been argued

that the tax is shifted back and is eventually borne by the

timber growers, because prices for wood products are

determined in national markets, which include timber from

both severance and nonseverance tax States (Hickman

1989, Marquis 1949).

Southern Forest Experiment StationK-10210 U.S. Postal Services Bldg., 701 Loyola Avenue, New Orleans, La. 70113

Forest Service, U.S. Department of Agriculture.

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

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Table 1 .-Current timber severance tax statutes in the Southern United States: key provisions, removal statistics, and reforestation accomplishments

Program feature A L AR LA

1945 1947 1955

State and year enacted*

M S N C SC VA W V

1956 1977 1961 1946 1967

Party subject to taxation

Severer

Primary manufacturer

Taxation method

Fixed rate per unit of

measurement

Percentage of stumpage value

Utilization of revenues

General funds of treasury

Other nonforest use

Forestry incentive programs

Other forest use

1992 severance statistics

Volume harvested

Cords (thousand)

Board feet (million)t

Incentive program

accomplishment

Number of landowners assisted

Acreage site prepared

and/or planted

Acreage released

1,157

57,108

5,185

1,513 106 980

38,441 5,500 21,147

2 559 19,246

* State laws are: Alabama (AL) Forest Products Severance Tax, Arkansas (AR) Natural Resources Severance Tax, Louisiana (LA) Forest Tax

Law, Mississippi (MS) Timber Severance Tax, North Carolina (NC) Primary Forest Product Assessment, South Carolina (SC) Primary Forest

Product Assessment, Virginia (VA) Forest Products Tax, West Virginia (WV) Severance Tax.

-f Log rules: Doyle Rule (D), Scribner Rule (S), International Rule (I), board-foot measure (bm).

X

X

X

X

6,775

1,492 (S)

395 (D)

X X

X

X X

X

X

X X

X

X

2,974 5,167 7,650

1,464 (D) 1,464 (D) 1,753 (D)

414 (bm)

200

X X X

X X X

X X X

4,759 1,755 2,645 300

1,972 (I) 128 (S) 1,214 (I) 700 (D)

X

X

X

Terry K. Haines is a research forester, Law and Economics, U.S. Department of Agriculture, Forest Service, Southern Forest Experiment Station,

New Orleans, LA 70113.

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Methods and Rates of Taxation

Severance tax rates are established as either a fixed

amount per unit of measurement or as a percentage of

the value of timber harvested (table 1). In either case, in

most Southern States, the tax is calculated on a volume

basis. However, in Arkansas the tax is based on weight;

and in Alabama, an optional weight assessment, at the election of the taxpayer, was recently added to the program.

The fixed amount approach is used in Alabama, Arkansas, Mississippi, North Carolina, South Carolina, and

Virginia. However, there is wide variation among these

States in the product and species classification schemes

that are used for assessment purposes. The number of

product/rate classifications varies from 2 in Arkansasi.e., pine lumber and all other lumber-to 17 separate

classes in Alabama. The Virginia program is unique in

two of its provisions. An optional annual flat tax may be

elected by small manufacturers, and a lower tax rate

schedule is initiated when general fund appropriations

are less than anticipated severance tax receipts. In South

Carolina, severance tax collections are also tied to general fund obligations and are suspended when receipts

equal four times the amount appropriated by the General Assembly for the State forestry cost-share program.

In Louisiana and West Virginia, the percentage of value

approach is used. However, the method of determining

product value differs.The Louisiana program establishes

two rates, 2.25 percent for sawtimber and 5.0 percent

for all other products. Product values are determined

annually by the Louisiana Forestry Commission and the

Louisiana Tax Commission. Prior to 1994, four product

classes were used-pine and hardwood sawtimber and

pine and hardwood pulpwood. In 1994, the commissions

created a separate product class for chip-n-saw, with a

2.25percent tax rate. However, local governments in the

State are concerned that the revenues returned to their

parishes, as stipulated in the State legislation, could be

less than they would have received under the four product class structure. The Police Jury Association of Louisiana has initiated legal actions and has also submitted

a resolution to the State Legislature proposing a severance tax rate of 7.5 percent for all forest products, even

though Louisiana already imposes the highest severance

tax in the South. In West Virginia, a tax rate of 3.22 percent is assessed on the contract price of each timber

sale, in contrast to the Louisiana method of using a predetermined value. Most of the Southern States’ programs

provide exemptions for landowners harvesting timber for

domestic use from their own property.

Distribution of Severance Tax Revenues

In all Southern States with timber severance taxesexcept Louisiana and West Virginia, severance tax revenues are reinvested to benefit the States’ forest

economies (table 1).

In Alabama, 85 percent of severance tax revenues are

dedicated to forest protection, with the remainder allocated at the discretion of the Commissioner of Conservation and Natural Resources. The Arkansas statute

dedicates all but 3 percent of tax revenues to the State’s

Forestry Fund, where distribution is determined by the

Forestry Commission. In Mississippi, 80 percent of the

tax collected is used to support the State forestry costshare incentives program, and 20 percent is distributed

to the counties where the timber was cut. The North and

South Carolina programs dedicate all severance tax receipts to fund the State forestry cost-share incentive programs. In Virginia, the bulk of the receipts also go to fund

the State forestry incentive program, with some funding

used to support nursery operations, education, and forest protection.

The Louisiana program dedicates 25 percent of severance tax collections to the State’s general fund and 75

percent to the parishes where the timber was harvested.

In West Virginia, all severance tax receipts are obligated

to the State’s general fund.

Table P.-Severance tax receipts*-5-year trends

State 1992

receiots

Increase from

1987

Alabama 5,637 12.6

Arkansas 3,609 7.8

Louisiana 10,654 49.8

Mississippi 3,955 12.9

North Carolina 1,724 16.6

South Carolina+ 400 0.0

Virginia 1,530 13.9

West Virginia 1,670 147.0

Thousand

dollars Percent

l Some receipts are for calendar year 1992 and some are for

fiscal year 1992.

+ Limit is $400,000 in severance tax unless general fund

contribution to the State forestry cost-share program is increased.

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TRENDS

Higher stumpage prices and greater harvest volumes

have resulted in increased severance tax receipts across

the South in recent years (table 2). Reduced harvest levels on public lands in the Pacific Northwest, demand for

wood products to restore property damaged by Hurricane Andrew, a growing export market, and increased

demands for hardwoods have been important factors

contributing to this trend. In addition, improved enforcement of the severance tax law has significantly increased

revenues in at least one State. Recent legislation enacted in West Virginia that requires notification of harvest and licensing of timber operators has had a dramatic

effect on tax collections (table 2). Lax enforcement of

the statute was exacerbated by the fact that many sales

were made to out-of-State buyers. Since passage of the

1992 law, the number of companies or operators reporting timber harvests has grown from about 800 to over

2,000.’

Severance tax collections in 1992 ranged from

$400,000 in South Carolina to more than $10.5 million in

Louisiana. With the exception of South Carolina, where

severance tax receipts are limited by statute, increases

in collections over 1987 figures reported by Hickman

(1989) ranged from about 8 percent in Arkansas to more

than 145 percent in West Virginia (table 2).

In response to increased demand for southern wood

products, there may be an expansion in the use of severance tax laws in nonseverance tax States to promote

forest management. The use of severance tax revenues

to fund forestry incentive programs has been an effective means of stimulating investments on nonindustrial

private forest lands in a number of Southern States (table

1). Forest protection, education, and State tree nursery

maintenance are also important functions funded through

severance tax collections. Because the burden as well

as the benefits of the tax can be directed to the forestry

sector, incentive programs funded through severance tax

receipts offer a politically attractive policy option to enhance forest management in the South.

LITERATURE CITED

CONCLUSIONS

Severance tax receipts in the South are likely to continue to climb through the year 2010 as a result of rising

stumpage prices and increased harvests. However, a

combination of increases in supplies from maturing pine

plantations in the South and from the recycling of paper

products is anticipated to moderate prices somewhat

after 2010 through the year 2040. Nonetheless, southern stumpage prices are projected to be double their 1990

level by 2040 (Kaiser 1994).

Continued improvement in reporting and collection

procedures, as well as increased enforcement of severance tax programs, may further enhance receipts. In

addition, comments from officials involved in administering severance tax programs where complex administrative systems are being used indicate that revisions to

simplify these programs may be forthcoming; these

changes may also affect receipts.

1 West Virginia Department of Forestry. 1994. Personal communication with the author on file with: U.S. Department of Agriculture,

Forest Service, Southern Forest Experiment Station, 701 Loyola Avenue, New Orleans, LA 70113-i 920.

Clements, S.E.; Klemperer, W.D.; Haney, H.L.; Siegel,

W.C. 1986. Current status of timber yield and severance taxes in the United States. Forest Products Journal. 36(6): 31-35.

Forest Industries Committee on Timber Valuation and

Taxation. 1972-l 984. Survey of state forest tax laws.

Timber Tax Journal. 8-20(l).

Hickman, C.A. 1982. Emerging patterns of forestry property yield taxes. In: Proceedings of the second forest

taxation symposium; 1982 February 1 O-l 1; Williamsburg, VA. Publ. FWS 4-82. Blacksburg, VA: Virginia

Polytechnic Institute and State University. 42-69.

Hickman, C.A. 1989. Timber severance taxes: current

status and changing role. Forest Products Journal.

39(10): 31-34.

Kaiser, H.F. 1994. Forests and timber supplies in the 21 st

century. In: Proceedings of the 70th annual outlook

conference; 1994 December 1; Washington, DC. Publ.

YCON-94. Washington, DC: U.S. Department of Agriculture. 167-l 78.

Marquis, R.W. 1949. Severance taxes on forest products and their relation to forestry. Land Economics.

25(3): 315-319.

U.S. Department of Agriculture. 1968. State forest tax

law digest. Misc. Publ. 1077. Washington, DC: U.S.

Department of Agriculture. 56 p.

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