How To Avoid Tax Cheating

Conservation Easments Face a Crisis

By Terry L. Anderson and Jon Christensen

One of the most useful, cost-effective methods of conserving land in America is in serious crisis. A series of scandals has revealed major abuses of conservation easements--”a legal tool increasingly used to protect private land from development. Landowners who donate easements to nonprofit conservation groups promise that the land will not be used for development; in exchange, they are allowed to write off the value of the development rights as a charitable contribution. However, some landowners who donate easements to nonprofit land trusts have used inflated appraisals to take huge tax write-offs at the expense of taxpayers. Others have used easements to protect swamps and mountainsides that could never be developed, or golf courses and private lots that have little or no conservation value.

Lawmakers are now rightly considering how to crack down on those abuses. But rather than fixing the problems, some of the proposals could destroy a tool that in most cases has worked well. It has protected important wildlife habitat, open spaces, and forests, as well as ranch and farm lands on more than 17,000 properties totaling more than 5 million acres.

Congress's Joint Committee on Taxation, which examines complicated tax issues for lawmakers, has proposed cutting the tax deduction that a landowner can take for donating a conservation easement from the full value of the development rights to just 33 percent of that value.

But cutting tax incentives is the wrong way to prevent inflated appraisals. In the first place, reducing tax deductions would discourage some of the most valuable conservation easements, such as those used by ranchers to keep using their land for their animals to graze. Because most ranchers and farmers are not in a position to take large tax deductions over a short time, it would make more sense to extend the period over which they can take tax deductions. A proposal to allow them to do that is pending in Congress, and it should be approved.

 Standards Needed

If the goal is to stop inflated easement valuations, however, then the Internal Revenue Service, state tax departments, county tax assessors, and appraisers need to police the appraisal process. Appraisers should be held accountable for their determinations, but the industry now has no specific standards for appraising conservation easements. Standards need to be set. If that is not enough, it may be necessary to require special certification for appraisers working on easements.

If appraisers cannot work together to fix this problem, then stronger governmental policing may be necessary. That is already happening in South Carolina, where the Department of Revenue is working with the Internal Revenue Service to audit conservation easements. The department has reviewed 51 conservation easements, covering 32,000 acres, valued at more than $255 million.

According to the State, a Columbia, SC, newspaper, those reviews have uncovered troubling cases of overvalued land and sham land trusts set up by developers.

Leaders of legitimate land trusts also can play a role in fixing the problem. They want nothing more than to help drive bad actors out of business before they take good conservation down with them. That explains why conservationists have applauded appraisal audits.

A Role For Self-Regulation

Congress should recognize and encourage self-regulation among conservationists and land trusts. Recent studies of conservation easements conducted by Dominic Parker, a research fellow at PERC, show that self-interest may be the most cost-effective way to curb abuses and encourage conservation.

Parker (2004) studied conservation easements held by 1,250 land trusts around the country. His results suggest that most land trusts make economically efficient choices about whether to acquire conservation easements on properties or purchase the land outright. Land trusts tend to acquire easements on properties for which the costs of enforcing such easements against violations are fairly low. For example, easements for land that provide open space and striking scenery are relatively easy for land trusts to protect from developers, especially when ranchers and farmers own the land and want to preserve their heritage.

On the other hand, the property that land trusts tend to buy--or seek to get donated outright--requires more intensive hands-on management to achieve conservation goals. Such property includes land where habitat for rare and endangered species needs to be restored, but it also includes land where people like to hike, ski, and undertake other recreational activities, and that takes special effort to conserve. Because easements for such purposes can be difficult and costly to enforce, it is more efficient
to own and manage that type of land.

Parker also discovered that self-regulation appears to be already working (2005). He found that trusts that are part of the Land Trust Alliance, an umbrella organization in Washington that encourages land trusts to adhere to standards and practices, generally are more efficient than those that are not members.

Still, the Land Trust Alliance recognizes that it could help more by moving from voluntary compliance to an accreditation program. Congress could give a real push to that idea if it said landowners could only take deductions for easements given to accredited land trusts and deny write-offs to easements donated to other organizations.

The beauty of conservation easements is that they provide a way for the public to help pay for environmental-protection efforts by landowners on private lands. Although some problems need to be fixed, Congress should be careful not to gut one of the few private efforts that, for the most part, works well for grassroots conservation.

 

REFERENCES
Parker, Dominic. 2004. Land Trusts and the Choice to Conserve Land with Full Ownership or Conservation Easements. National Resources Journal 44(2): 483-518.
---. 2005. Transaction Costs, Nonprofit Incentives and the Vertical Integration of Land Trusts. Working Paper. Bozeman, MT: PERC

Terry Anderson is PERC's executive director and a senior fellow at the Hoover Institution. Jon Christensen is a research fellow at the Center for Environmental Science and Policy at Stanford University. This article is reprinted with permission of the Chronicle of Philanthropy (philanthropy.com).

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Terry Anderson is the William A. Dunn Distinguished Senior Fellow and former President of PERC as well as the John and Jean De Nault Senior Fellow at the Hoover Institution, Stanford University. He believes that market approaches can be both economically sound and environmentally sensitive. His research helped launch the idea of free market...
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Jon Christensen is a research fellow at the Center for Environmental Science and Policy at Stanford University. This article is reprinted with permission of the Chronicle of Philanthropy (philanthropy.com).
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