Public incentives and conservation easements on private land

Transcription

1 Public and conservation easements on private land Jordan Suter Colorado State University Sahan Dissanayake Colby College Lynne Lewis Bates College November 2, 2013 Heartland Environmental and Resource Economics Workshop

2 Motivation easements on private land have expanded significantly over the past 25 years. Maine (1.6 mil. acres) and Colorado (1.2 mil. acres) have the most acreage under conservation easement protected by state and local land trusts.

3 Project beginnings Considerable research related to selection of optimal portfolio of land parcels for conservation. Taking into account cost and benefits (Ando et al. 1998), dynamic considerations (Costello and Polasky 2004), risk of development (Newburn et al. 2006), parcel connectivity (Onal and Briars 2006). Prior research has assumed that all parcels are available for conservation in given period. In reality conservation organizations may only be able to choose from a subset of parcels. Constrained choice set implies that conservation organizations must form expectations about land availability in future periods.

4 Project beginnings Considerable research related to selection of optimal portfolio of land parcels for conservation. Taking into account cost and benefits (Ando et al. 1998), dynamic considerations (Costello and Polasky 2004), risk of development (Newburn et al. 2006), parcel connectivity (Onal and Briars 2006). Prior research has assumed that all parcels are available for conservation in given period. In reality conservation organizations may only be able to choose from a subset of parcels. Constrained choice set implies that conservation organizations must form expectations about land availability in future periods.

5 Land trust realities Land trusts in Colorado and many other states rely almost exclusively on donations of conservation easements. Little room for improving conservation choices when the decision is whether or not the env. quality of the donated parcel meets a minimum threshold. Reason why donations in Colorado are so common has to do with the generosity of the tax. Easement donors receive state income tax credit equal to 50% of the fair market value of the easement. Easement value is determined with a before and after appraisal. Tax credit can be carried forward for 20 years or sold to another taxpayer.

6 Land trust realities Land trusts in Colorado and many other states rely almost exclusively on donations of conservation easements. Little room for improving conservation choices when the decision is whether or not the env. quality of the donated parcel meets a minimum threshold. Reason why donations in Colorado are so common has to do with the generosity of the tax. Easement donors receive state income tax credit equal to 50% of the fair market value of the easement. Easement value is determined with a before and after appraisal. Tax credit can be carried forward for 20 years or sold to another taxpayer.

7 Research dimensions Overarching research goal: Evaluate how related to conservation easements influence the efficiency and equity of land conservation outcomes. 1 Assess the effects of constraints on land availability and donation decisions using a dynamic simulation. 2 Model the generated by state and national tax policies for conservation easement donations. 3 Conduct cross-state empirical tests to evaluate how differences in policy and income influence the spatial distribution of conservation easement outcomes.

8 Research dimensions Overarching research goal: Evaluate how related to conservation easements influence the efficiency and equity of land conservation outcomes. 1 Assess the effects of constraints on land availability and donation decisions using a dynamic simulation. 2 Model the generated by state and national tax policies for conservation easement donations. 3 Conduct cross-state empirical tests to evaluate how differences in policy and income influence the spatial distribution of conservation easement outcomes.

9 Research dimensions Overarching research goal: Evaluate how related to conservation easements influence the efficiency and equity of land conservation outcomes. 1 Assess the effects of constraints on land availability and donation decisions using a dynamic simulation. 2 Model the generated by state and national tax policies for conservation easement donations. 3 Conduct cross-state empirical tests to evaluate how differences in policy and income influence the spatial distribution of conservation easement outcomes.

10 Research dimensions Overarching research goal: Evaluate how related to conservation easements influence the efficiency and equity of land conservation outcomes. 1 Assess the effects of constraints on land availability and donation decisions using a dynamic simulation. 2 Model the generated by state and national tax policies for conservation easement donations. 3 Conduct cross-state empirical tests to evaluate how differences in policy and income influence the spatial distribution of conservation easement outcomes.

11 Efficiency considerations Efficiency in the acquisition of conservation easements requires that society attain the highest possible benefits given the costs associated with procuring easements. In a dynamic setting, this involves land trusts using their annual budget to purchase easements with the highest environmental benefits relative to costs. If land trusts rely strictly on donations, their choice is whether or not to accept a donation and the cost to society is related to the reduction in tax revenue. modeling has enabled us to understand more about the tradeoffs associated with the two models.

12 Efficiency considerations Efficiency in the acquisition of conservation easements requires that society attain the highest possible benefits given the costs associated with procuring easements. In a dynamic setting, this involves land trusts using their annual budget to purchase easements with the highest environmental benefits relative to costs. If land trusts rely strictly on donations, their choice is whether or not to accept a donation and the cost to society is related to the reduction in tax revenue. modeling has enabled us to understand more about the tradeoffs associated with the two models.

13 Two period simulation results Benefits association with easements drops as the choice set is constrained and is lowest when decision makers rely strictly on donations. Per. 1 Per. 2 Total Pct. of max parcels parcels benefits benefits Unconstrained % 50% available % 10% available % Donations %

14 Federal Donors of perpetual conservation easements can gain income, estate and capital gains tax advantages. Income: Fair market value, up to 50% of income can be deducted. Tax deduction can be carried forward for 15 years. Estate: Value of easement plus 40% of remaining land value (up to max. of $500,000) excluded from estate taxes. Estate tax only applies to estates over $5.2 million. Capital gains: Only the increase in value of the land net of the easement is subject to capital gains tax.

15 Federal Donors of perpetual conservation easements can gain income, estate and capital gains tax advantages. Income: Fair market value, up to 50% of income can be deducted. Tax deduction can be carried forward for 15 years. Estate: Value of easement plus 40% of remaining land value (up to max. of $500,000) excluded from estate taxes. Estate tax only applies to estates over $5.2 million. Capital gains: Only the increase in value of the land net of the easement is subject to capital gains tax.

16 Federal Donors of perpetual conservation easements can gain income, estate and capital gains tax advantages. Income: Fair market value, up to 50% of income can be deducted. Tax deduction can be carried forward for 15 years. Estate: Value of easement plus 40% of remaining land value (up to max. of $500,000) excluded from estate taxes. Estate tax only applies to estates over $5.2 million. Capital gains: Only the increase in value of the land net of the easement is subject to capital gains tax.

17 Federal Donors of perpetual conservation easements can gain income, estate and capital gains tax advantages. Income: Fair market value, up to 50% of income can be deducted. Tax deduction can be carried forward for 15 years. Estate: Value of easement plus 40% of remaining land value (up to max. of $500,000) excluded from estate taxes. Estate tax only applies to estates over $5.2 million. Capital gains: Only the increase in value of the land net of the easement is subject to capital gains tax.

18 Tax incentive examples Molly Moneybags has $1 mil. annual income, an estate of $10 mil. and donates a $500,000 easement. She receives income tax deduction of $500,000 which reduces her taxes (assuming 39.6% marginal tax rate) by $198,000 this year. Estate taxes reduced by at least an additional $200,000. John Doe has $50,000 annual income, an estate valued under $5 mil. and donates $500,000 easement. He deducts $25,000 per year for next 16 years (total $400,000) which reduces his tax burden (assuming 15% marginal tax rate) by $60,000. Outcome is inefficient unless wealthiest individuals also have highest environmental benefit land (also equity concerns).

19 Tax incentive examples Molly Moneybags has $1 mil. annual income, an estate of $10 mil. and donates a $500,000 easement. She receives income tax deduction of $500,000 which reduces her taxes (assuming 39.6% marginal tax rate) by $198,000 this year. Estate taxes reduced by at least an additional $200,000. John Doe has $50,000 annual income, an estate valued under $5 mil. and donates $500,000 easement. He deducts $25,000 per year for next 16 years (total $400,000) which reduces his tax burden (assuming 15% marginal tax rate) by $60,000. Outcome is inefficient unless wealthiest individuals also have highest environmental benefit land (also equity concerns).

20 Tax incentive examples Molly Moneybags has $1 mil. annual income, an estate of $10 mil. and donates a $500,000 easement. She receives income tax deduction of $500,000 which reduces her taxes (assuming 39.6% marginal tax rate) by $198,000 this year. Estate taxes reduced by at least an additional $200,000. John Doe has $50,000 annual income, an estate valued under $5 mil. and donates $500,000 easement. He deducts $25,000 per year for next 16 years (total $400,000) which reduces his tax burden (assuming 15% marginal tax rate) by $60,000. Outcome is inefficient unless wealthiest individuals also have highest environmental benefit land (also equity concerns).

21 State-level 15 states provide state-level income tax credits for conservation easement donations. Characteristics of tax credits: Percentage of market value of easement that the tax credit provides - varies between 100% and 20%. Maximum value of credit - varies between $10,000 and unlimited. Carry forward period - varies between 5 and unlimited years. Tax credit is transferable in CO, GA, NM, SC, VA.

22 Efficiency implications By themselves, state tax credits also primarily benefit high income earners. Low income households do not pay sufficient state taxes to take full advantage of the credits. Longer carry forward periods and transferability provide for land rich and income poor households. Going back to John Doe, who lives in Colorado. His conservation easement donation, valued at $500,000 would generate a $250,000 tax credit (Colorado provides a 50% tax credit up to $375,000). His annual tax liability is $2,315. CO has a 20 year carry forward, so he could gain a $48,615 benefit over that time frame. Alternatively, he could sell the $250,000 credit (typically sell for 80-85% of face value).

23 Efficiency implications By themselves, state tax credits also primarily benefit high income earners. Low income households do not pay sufficient state taxes to take full advantage of the credits. Longer carry forward periods and transferability provide for land rich and income poor households. Going back to John Doe, who lives in Colorado. His conservation easement donation, valued at $500,000 would generate a $250,000 tax credit (Colorado provides a 50% tax credit up to $375,000). His annual tax liability is $2,315. CO has a 20 year carry forward, so he could gain a $48,615 benefit over that time frame. Alternatively, he could sell the $250,000 credit (typically sell for 80-85% of face value).

24 Related literature Analysis of the effects of tax policy on conservation easement outcomes draws from three areas. Public finance literature related to taxes and charitable giving (e.g., Steinberg 1990, Auten et al. 2002, Bakija and Heim 2008). Law review articles that focus on legal aspects of easement donations (e.g. Pidot 2011, Wolf 2012). Literature related to the effects of on land trust activity (e.g., Albers and Ando 2003, Chamblee et al. 2009, Parker and Thurman 2011)

25 Ideal empirical test To study how state and federal influence conservation outcomes it would be ideal to have: Exogenous variation in state-level. Panel data providing the timing of specific tax and implementation of conservation easements. Information on the environmental quality of land conserved by easements. Knowledge of whether an easement was donated or sold. Instead, we have easement data from the National Easement Database that is still a work in progress, and data on the implementation of tax at the state level (also a work in progress).

26 Ideal empirical test To study how state and federal influence conservation outcomes it would be ideal to have: Exogenous variation in state-level. Panel data providing the timing of specific tax and implementation of conservation easements. Information on the environmental quality of land conserved by easements. Knowledge of whether an easement was donated or sold. Instead, we have easement data from the National Easement Database that is still a work in progress, and data on the implementation of tax at the state level (also a work in progress).

27 strategy Using counties as the unit of, we assess the relationship between income, state-level conservation, and private conservation easements. At this point the is static, focusing on current and conservation easements. Expect conservation easements (both number of easements and acreage) to be positively correlated with income and states that offer specific. Further expect income to play less of a role in driving easements in states with longer carry-forward periods and transfers. Estimate models with all states and with states in which the data contain at least 80% of all easements.

28 Models with county-level obs from all states Pct. Conserved Num. Easements Top 5% income ** ** (0.0004) ( ) Median income ** (0.0023) (0.0001) State Incentive 0.212** ** (0.046) (0.0029) Transfer (0.182) (0.0115) Trans*Inc (0.0007) ( ) Pop dense ** ( ) ( ) Pop growth (3.756) (0.237) R 2 = R 2 = N = 3107

29 Models with county-level obs from states with at least 80% of easements in database Pct. Conserved Num. Easements Top 5% income ** ** (0.0009) ( ) Median income ** ** (0.0054) (0.0004) State Incentive (0.102) (0.0078) Transfer (0.367) (0.028) Trans*Inc * ** (0.0014) (0.0001) Pop dense ** ( ) ( ) Pop growth ** (15.72) (1.199) R 2 = R 2 = N = 928

30 Summary of findings Federal and state tax provide greater benefits for easement donations to wealthy households. Could generate inefficiencies for two reasons: 1 Land trusts depend on donations and therefore less likely to secure easements with high env. benefits. 2 Easement donations from wealthy households reduce taxes collected more than poor households. In theory, allowing tax credits to be transferred provides greater for lower income households. Results suggest distribution of easements is significantly influenced by high income earners. States with transfers have a slightly lower correlation between income and conservation easements.

31 The path forward More work to be done collecting easement data and improving state incentive data over time. Helpful to develop a measure of the percentage of easements by state that are donated. Spatial location of conservation easements is a potentially important outcome variable. Expect more clustering where easements are driven by land trust purchases as opposed to donations. Need to consider how public land conservation influences private land conservation outcomes. could be complemented by an experiment where are varied exogenously.