Tax Incentives

Tax Calculator Puts a Price Tag on Land Conservation

By Silke Schmidt

All else being equal, everybody likes a lower tax rate. But one of its less obvious consequences is that it tends to reduce charitable donations because it lowers the tax incentive for making them: With a federal tax rate of 40 percent, giving $10 to the Red Cross saves donors $4 because those ten dollars are deducted from their taxable income; with a lower tax rate of 30 percent, they only save $3.

While that calculation can be done on the back of an envelope, it takes a more sophisticated economic study to determine how state tax incentives, overlaid on top of the federal tax code, influence private contributions to land conservation—in the form of a particular type of charitable donation called a conservation easement.

Exactly this kind of study, along with a handy tax calculator, has now been published by CEnREP affiliate Wally Thurman, William Neal Reynolds Professor of agricultural and resource economics at NC State University, and his colleague Nick Parker at the University of Wisconsin–Madison.

“Conservation easements are private donations to a land trust that permanently restrict future land use, since nobody will ever be able to build on the property,” Thurman explains. “Our study shows that tax incentives are a big motivation for creating these easements.”

Depending on the state you live in and the kind of property you own, these incentives can be big indeed. If one half of a $1 million piece of property is donated to a land trust, the tax breaks may amount to as much or more than the $500,000 the owner has given up in land value, Thurman says.

The motivation for the study—the first of its kind—was the authors’ interest in the land trust movement, which is somewhat unique to the United States. The oldest land trusts trace their roots to the early 19th century and, Thurman suggests, may reflect the country’s tradition of local grassroots organizations taking matters into their own hands.

The study revealed two especially striking findings. One, the growth in the land area preserved by conservation easements from 1990 to 2010 surpassed the combined growth of all federal land holdings by a factor of more than 16; and two, state legislators purposefully created tax code, on top of general incentives for charitable donations, to encourage easement donations in particular. The nature of that tax code is complex and varies substantially by state.

In addition to the main conclusion—that tax incentives have induced land conservation during the past 20 years—the authors also uncovered nuanced evidence for effect of tax incentives on the quality of conserved land. On one hand, donated land is generally of inferior quality when compared to land purchased for a specific purpose, such as the conservation of wildlife habitat. On the other hand, more generous tax incentives do not amplify the difference in quality between donated and purchased easements.

“Some critics of easement-specific tax incentives argue that they don’t protect the most valuable land and, instead, result in a somewhat haphazard collection of individual parcels,” Thurman explains. “We showed that the extra land donated because of bigger tax incentives doesn’t differ in significant ways from land that was actively pursued and purchased by land trusts, at least in terms of overall acres.”

A caveat of this finding is that the conservation value of a piece of land has not been consistently recorded over time, making it difficult to evaluate potential differences in that dimension.

Land trust attorneys have already expressed great interest in the combined federal and state tax calculator Thurman and Parker developed for the study, as it puts a dollar value on the full set of tax advantages a conservation easement provides to the donor.

“I think land trusts, which are important political lobbyists for tax credits, will also appreciate knowing that what they’re advocating, in general, works quite well,” Thurman says.