The States that use Federal adjusted gross in- 
come as a basis have automatically offered two 
Federal incentives to timber investors. These are the 
long-term capital gains exclusion of 60 percent of 
net gain, available under pre-1987 Federal law, to- 
gether with the associated depletion allowance, and 
the reforestation amortization deduction. 
Of those States that do not use Federal adjust- 
ed gross income as the basis for computing taxable 
income, none exclude a part of long-term capital 
gains from tax, although Arkansas will do so begin- 
ning in 1987. However, all allow taxpayers to use the 
Federal schedule for reporting business income 
and expenses and, therefore, indirectly permit refor- 
estation costs to be amortized. Louisiana additional- 
ly allows a tax credit equal to 10 percent of total 
Federal credits. Thus Louisiana landowners who 
claim the Federal reforestation investment tax credit 
may additionally deduct 10 percent of that amount 
against their State tax. 
North Carolina woodland owners who meet the 
qualifications for Federal forestry incentive pay- 
ments may also elect to report income from timber 
sales either entirely in the current tax year or over a 
3-year period. Reforestation expenses may either 
be deducted entirely in the year incurred or amor- 
tized over 60 months. 
Long-term capital gains treatment has probably 
been the most important provision affecting State 
income taxes (McGee and others 1983). In those 
States that use Federal adjusted gross income as 
the basis for computing taxable income, only 40 
percent of the net gain on qualifying timber sales 
has been--through 1986--subject to State income 
tax. On the other hand, woodland owners in States 
that compute taxable income separately from the 
Federal return have had to pay tax on the full 
amount of the net gain. Therefore, State income tax 
on timber revenue had been much more significant 
in those Southern States that do not exclude a part 
of the long-term gains. 
Beginning in 1987, all of those States that utilize 
Federal adjusted gross income as the State tax 
base will no longer automatically exclude 60 per- 
cent of the long-term gains as was done previously. 
This means that the entire gain will be taxable next 
year in all of the Southern States except Arkansas. 
Beginning in 1987, as mentioned previously, 
Arkansas--which computes its own taxable income 
basis--will tax only 40 percent of a long-term gain. 
Thus, one of the major provisions of the new 
Federal law that will increase Federal adjusted 
gross income is directly timber related--the loss of 
110 
the 60-percent long-term capital gain exclusion. An 
increase in Federal adjusted gross income affects 
the State income tax in two ways in those States that 
utilize the Federal figure as their tax base. 
First, of course, more income is subject to the 
State tax. Second, such an increase may very well 
place the taxpayer in a higher marginal State tax 
rate bracket, resulting in an even larger State tax bill. 
Tax rates also are important in determining the 
total tax obligation. Advantages derived from in- 
come deductions may be offset by a high or exces- 
sively progressive tax rate. Rates in the Southern 
States vary considerably, both in terms of percent- 
age and progressiveness. However, they are all low- 
er and generally less progressive than the Federal 
rates. As income rises, therefore, Federal taxes in- 
crease more rapidly than do State taxes, and the 
State's portion of the total tax decreases. 
Forest Property, Yield, and Severance Taxes 
Historically, forested properties in the South, as 
in other parts of the country, were annually as- 
sessed and taxed on the basis of their fair market 
value in highest and best use. That is, they were 
subject to the unmodified ad valorem property tax. 
Over the years, however, this method of taxing the- 
se properties was increasingly criticized. Among the 
major criticisms were the following: 
1. The tax was not equitable--it placed a greater 
burden on low-valued and deferred-income land us- 
es. 
2. The tax was not neutral regarding the alloca- 
tion of resources--it worked to reduce stocking lev- 
els, shorten rotations, and shift marginal forest 
lands into other uses. 
3. The tax was not convenient in the time and 
manner of its levy--it mandated annual collections 
even though most forest properties were not regu- 
lated so as to provide annual incomes. [For a more 
complete discussion of the preceding and other 
alleged disadvantages, see Duerr (1960) or Grego- 
ry (1972).]} 
Because of these complaints and others, many 
States in the region, as well as in other parts of the 
country, Saw fit to develop and enact "special" forest 
property tax laws. Nationally, these "special" forest 
taxes assumed several different forms, but only 
