Tax plan should reflect the risk of growing trees in Washington
By DON BRUNELL
Port Orchard Independent Contributor
June 17, 2008 · Updated 2:58 PM
There is an old saying that the two things certain in life are death and taxes. Sometimes those two converge.
Take growing trees, for example. Tax policy can be the death knell for tree farmers.
Tree farmers are our country’s real risk takers. If they are fortunate, they buy land with mature trees on it.
They can recoup some of their investment harvesting their timberland, but then they turn around and invest in planting, thinning and nurturing a new crop of tree that may never reach maturity in their lifetime.
Meanwhile, whether they are a small tree grower or a giant company like Weyerhaeuser, insects, disease, fire and flooding threaten their crop.
In fact, the ink was barely dry on the 1900 buy-sell agreement between James J. Hill and Frederick Weyerhaeuser when nature unleashed its fury around Mount St. Helens.
It instantly devoured a good-sized chunk of Weyerhaeuser’s newly purchased three million acres.
In 1902, the Yacolt Burn, the largest forest fire in recorded state history, destroyed 238,920 acres of timber — more than 370 square miles.
Within 36 hours, the wall of fire roared 36 miles and killed 38 people.
When rain extinguished the fire, $30 million in timber — more than $600 million in 2001 dollars — were blackened or charred.
To salvage part of their investment, Weyerhaeuser started logging and scrapped their original plan to simply grow trees and sell logs to local mill owners.
In the early part of the last century, loggers often cut the best trees and left the rest, moving West until they hit the Pacific Ocean.
It was called “Cut and Run” or “High-Grading.”
Rather than wait for a new crop to grow, they abandoned the land, leaving cash-strapped counties with cutover land that had little value.
To remedy the abandonment, Washington’s Legislature passed the Reforestation Act in 1931 where landowners paid $1 per acre a year and made up the difference at harvest time with 12.5 percent severance tax.
It worked, and our nation’s tree farm movement started near Montesano that same year.
Washington lawmakers also passed the nation’s first Forest Practices Act in 1971 to encourage foresters to replant trees right after harvest and manage their lands for timber, wildlife, recreation and water quality.
Hand-in-hand with the Act, state tax policy changes penalized those landowners who broke up their forest for commercial development.
Annual property taxes were assessed on the productivity of the forest lands, and the tax at the time trees were harvested ratcheted down to 5 percent.
Later, those tree farmers received tax relief for putting lands in conservation easements to further enhance water quality for fish and people.
Over the years, companies like Weyerhaeuser became integrated, not only growing trees but processing them into lumber, plywood and pulp for paper.
Weyerhaeuser learned quickly that integration was a way to mitigate the risk of forest devastation.
In 1980, the company got a vivid reminder of the value of having its own wood processing plants when Mount. St. Helens erupted and wiped out 14 percent of its surrounding tree farm.
It launched the largest salvage operation in history by immediately restocking its portion of the blast zone with seedlings. Today, that new forest is being harvested.
Now, there are few integrated forest products companies. Federal tax policy encourages forest landowners to form Real Estate Investment Trusts (REITs).
Under REITs, landowner tax bills are negligible while shareholders pay a 15-percent capital gains tax.
Meanwhile, an integrated company like Weyerhaeuser is taxed at a 35 percent corporate tax rate.
To counter the tax impact, Congress recently incorporated the Timber Revitalization and Economic Enhancement (TREE) Act into the farm bill.
Weyerhaeuser and some other small company’s tax rates were cut from 35 percent to 17 with passage of the bill last month.
Whether integrated forest products will make a comeback with the new legislation remains to be seen, but it has a tax leveling effect which gives them a fighting chance.
Don Brunell is the president of the Association of Washington Business.