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Choosing a tax program
I. Overview
 
In 2003, the Oregon Legislature enacted HB2197 and HB2188 that resulted in two forestland property tax programs.
  1. Forestland Program is for all owners with at least two acres of forestland.
  2. Small Tract Forestland (STF) Program is a special option for owners with 10 to 4,999 acres of forestland.
In 2004, the counties transferred all specially assessed forestland into the Forestland Program. Owners with fewer than 10 acres or more than 5,000 acres are required by law to remain in the Forestland Program. Owners with 10 acres to to 4,999 acres may find it advantageous and may apply to enroll in the STF Program.

Generally, the two programs reduce your tax. If you were paying a tax based on the real market value of your land, your property taxes would be higher. The main difference between the two programs is when you pay your taxes.

Deciding whether the Forestland Program or STF Program is best for you may be as easy as answering the question, "Do I want to pay all of my forestland property tax annually or do I want to delay payment until I have money from harvesting timber?" You might want to do a more detailed financial analysis to determine which is best.

When evaluating your options, you should answer the question, "Will I be selling my property in the next ten years?" If "yes," then you will probably be best served by the Forestland Program.
 
Remember, if you choose the STF Program, your county assessor must receive your application by April 1 to be assessed at the STF rate for the current year.
 
II. The STF Decision
 
General Approach
 
The chart below shows how the general relationship between harvest timing and harvest volume might influence your decision. Either the Forestland Program or STF Program may be beneficial for landowners with situations shown by the chart’s center region. It all depends on your future management plans and your property tax details.
 
Despite there being no "rules of thumb" regarding how much harvest volume is a "little" or "lots" or when "soon" and "later" are, this chart may help some landowners reach a decision. Some may know that they will harvest small amounts of volume and that harvesting will be 25 years from now. They could be clearly guided into the STF Program. Others may know that they’ll be harvesting a large volume in the next year or two. They’ll be guided to the Forestland Program. Timing is very important when harvesting anything less than a very large volume. In most cases, harvest volume is important regardless of timing. Owners with other situations will want to use the more analytical approach described below.
 

 
Analytical Approach
 
The analytical approach involves some financial analysis that depends on (1) the timber available for harvest, (2) the planned harvest timing, and (3) information about how your property is currently taxed. You must decide about harvest volume and timing. Your county assessor can help you with information about your property’s tax rate(s) and acres by forestland productivity class. The forestland productivity class is a measure of your land’s capacity to grow timber and sets the value used for the tax calculation.
 
Two tools are available for using this information to make a financial analysis. The Oregon Department of Revenue website provides a formula for a break-even analysis and a landowner model for a more complex spreadsheet analysis. Both tools and other information are available at:
 
http://oregon.gov/DOR/TIMBER/index.shtml
 
Break-even Analysis
 
The break-even (B/E) formula is designed for owners who harvest similar volumes of timber each year. The formula provides a quick calculation for determining a point where the tax paid under the Forestland Program equals the tax paid under the STF Option. If you plan to harvest more volume than the amount calculated by this formula, then the Forestland Program is most beneficial. If you plan to harvest less volume than the amount calculated by this formula, then the STF Option is most beneficial.
 
The B/E formula is shown below. Assuming that $600 of total property tax is deferred annually and using the 2004 Severance Tax rates of $3.89 per thousand board feet (MBF) (Western Oregon) and $3.03 per MBF (Eastern Oregon), we calculate the B/E volume for both situations.
Note: The total property tax deferred annually is the amount of tax difference between assessment at the forestland value (designated or highest and best use) and the Small Tract Forestland value. The assumption of $600 tax deferred annually would be realistic when applied to 287 acres in western Oregon and 1,764 acres in eastern Oregon. Other assumptions used are productivity class FS (site 3) and a tax rate of $10 of tax per $1,000 of assessed value for the western Oregon acres. The other assumption for the eastern Oregon calculation is a tax rate of $8 of tax per $1,000 of assessed value. The assessed value differences (designated FL v. STF) per acre for 2004 were also used.
 
      Property tax deferred annually ($)
  ________________________________    =    Annual Break-Even Volume (MBF)
      Severance Tax Rate ($/MBF)   
   Western Oregon $600 / $3.89 = 154 MBF
Eastern Oregon $600 / $3.03 = 198 MBF
 
We would conclude that:
 
• If harvesting more than 154 (198) MBF/year ---> choose FORESTLAND Program
• If harvesting less than 154 (198) MBF/year ---> choose STF Program
 
You need to assume that you are harvesting the same amount annually to make the B/E formula work. Most forestland owners don’t do this. As a first approximation, however, this approach is relatively safe if you plan to harvest within five years. With these examples, that would mean harvesting five times the annual volume [770 (990) MBF] during the five-year period.
 
Spreadsheet Analysis
 
The landowner model is a Microsoft Excel spreadsheet that uses information about your property taxes and harvest plans to compare the Forestland Program and the STF Option. You may download it from the Department of Revenue Web site shown above. If you do not have Microsoft Excel, please contact your OSU Extension Forester, ODF Stewardship Forester, or the Department of Revenue timber tax staff for assistance.
 
Examples:
 
Scenario 1 - Property owner owns 50 acres of FB forestland in Clackamas County and harvests 200 MBF in year 3. Amounts shown reflect years 1–5.
 
Acres Owned Average Annual
Property Tax as FORESTLAND
Average Annual
Property Tax as STF OPTION
Annual Property Tax Difference
50 $195.22 $38.76 $156.46
 
From the table above, when looking at the property taxes alone, the owner would pay an average of $156.46 per year more during the first five years using the Forestland Program.
 
As shown in the table below, if we then add in the amount of Severance Tax paid using the STF Program and look at the total amounts paid during the five years, it is obvious that the Forestland Program is the better choice, but only by a little. Slightly decreasing the volume harvested would lower the Severance Tax and the Property + Severance Tax total and, depending on exact amount harvested, could make the STF Program the better choice.
 
Acres Owned Total Property Tax as FORESTLAND Total Property + Severance Tax as STF Total Property Tax as STF Total Severance Tax as STF
50 $976.11 $1,019.16 $193.78 $825.38
 
Scenario 2 - Property owner owns 50 acres of forestland in eastern Oregon and harvests 30 MBF in year 3. Amounts shown reflect years 1–5.
 
Acres Owned Annual Property Tax as FORESTLAND Annual Property Tax as STF OPTION Annual Property Tax Difference
50 $27.89 $5.31 $22.58
 
 
Acres Owned Total Property Tax as FORESTLAND Total Property + Severance Tax as STF Total Property Tax as STF Total Severance Tax as STF
50 $139.44 $122.98 $26.54 $96.44
 
Here, the STF Program is clearly the better choice, but again not by much. Small changes in either harvest volume or timing could change the decision, so it is important to know both factors.
 
III. Summary
 
Several factors influence whether you should remain in the Forestland Program or choose the STF Program. The table below shows some general conclusions about choosing the STF Program.
 
    Greater Tax Savings With STF   Less Tax Savings
With STF
         
Productivity Class -
Western Oregon only
  High Productivity ---->   Low Productivity
         
Property Tax Rate   Higher Tax Rate ----->   Lower Tax Rate
         
Management Intensity   Lower Tbr Mgmt
Intensity ------------->
  Higher Tbr Mgmt Intensity
         
Rotation Age   Shorter Rotation Age>   Longer Rotation Age
         
Opportunity Investment
of Delayed Tax
  Investment at
High Rate ----------->
  No Investment
         
Harvest Timing   Delayed Harvest ----->   Harvest Now
         
Projected Length of
Property Ownership
  More than 10 years -->   Immediate sale
 
From this table and all of the other information shown here, some advantages and disadvantages of choosing the STF Program are clear. They are summarized below.
 
Advantages and Disadvantages of Choosing the STF Program
 
STF Advantages   STF Disadvantages
     
Times property tax payments with cash flows from harvest.
 
Pay annual property taxes based on 20 percent of the Forestland values.
 
Simplified method of computing Severance tax at harvest based on volume sold.
 
Severance tax paid only on sawmill grades and better.
 
No Severance tax on substandard grades (i.e., utility and special cull).
 
Growth in future severance tax rates tied to growth in underlying property tax values.
 
Severance tax rate assumes average growth on an average stand in Western and Eastern Oregon.
 
Can elect to place noncontiguous tax lots in different tax programs.
 
New owners and transferees (within 30 days of notice from the county) can choose to remain in the STF Program without paying rollback of back taxes.
 
Can choose the STF Program at any time. The application is due by April 1 of any year to be effective for that year and all future years.
  If substantial amounts of timber (above sustained yield amounts) are harvested early on, may pay more Severance tax at harvest than would be due on an annual basis under the Forestland program.
 
Severance tax rate assumes average growth on an average stand in Western and Eastern Oregon.
 
Election is irrevocable. Once made, it can only be changed by selling or transferring the property or changing it to a non-forestry use.
 
If property is sold or transferred and the new owner does not elect to continue in the STF Option, additional taxes of up to 10 years of amounts deferred under the STF Option may be due.
 
Must place all contiguous tax lots in this program.
 
Severance Tax returns need to be filed for harvests from STF lands.

 
Additional information: