Valuing forest land : an economic analysis of the 1987 changes to the British Columbia Assessment Act
Date
1990
Authors
White, Philip Andrew
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Abstract
On January 1, 1988 changes to the 8.C. Assessment Act became effective. Among the changes to the Act was an alteration of the valuation method used for private forest lands. These changes altered the timing and size of tax payments by forest landowners. The nature of the property tax system for forest land was also changed by the revisions to the legislation. This thesis examines the effects of three types of property tax on the economic rotation age and evaluates the changes to the Assessment Act.
Prior to the changes to the Act, forest land was valued as the sum of the assessed value of the land plus t he value of the standing timber. The revised legislation altered the method of land valuation and the way in which timber value is calculated. Land value is now computed as the capitalized income from the property as opposed to using the market comparison approach. Timber value is now determined as the value of cut timber at the point of harvest rather than the value of standing timber. The changes to the act have effectively altered the form of the tax from a straight ad valorem tax to a combination of an ad valorem tax and a yield tax.
The research conducted in t his paper uses the Faustmann equation for calculating the economic rotation age and the associated land value. Four cases were examined for two sample properties: 1) the no tax case; 2) the ad valorem tax; 3) a pure yield tax; 4) the combination of yield tax and ad valorem tax. The economic rotation age and land value were computed for each case. The relative efficiency of each tax is found by comparing the l and values and rotation age for each tax to the no tax case. The two sample properties are representative of a coastal site growing Douglas Fir and an interior site growing Lodgepole Pine. The two properties were created from real data to be single species, even-aged stands.
The results indicate that the pure yield tax on stumpage value has the least distorting effect. This is the expected result as a tax on stumpage value is a tax on the economic rent associated with the trees. The ad valorem tax had the greatest effect on the rotation age and land value indicating it ls the least efficient tax. The calculations were done using a real interest rate of 2%. A sensitivity analysis for the interest rate is included in the study. The result of this was the conclusion that reforestation for Lodgepole Pine is uneconomic for rates of interest over 2%. For Douglas Fir replanting will not occur for rates over 5%. Given current economic conditions these results suggest that private reforestation is not economically viable and that reforestation should be carried out by the government.