Impact of tax policies on decision making behavior of non-industrial private forest owners of United States

Federal and state governments provide financial incentives through tax policies to non-industrial private forest (NIPF) landowners to achieve the goal of sustaining private forestlands. Taxes are considered a major factor affecting the land use and land management decisions of forestland owners. This research identifies the extent to which taxes affect decisions of different types of forestland owners so that suitable tax structures can be developed that encourage forest landowners in sustaining their forestlands. Mail surveys in the states of Indiana, Missouri and Tennessee were used to assess the general tax awareness of landowners and to classify them into behavioral groups. Experimental economics methodology was then used to test the economic theory of capital gains lock-in effect and the effectiveness of property tax programs. Results of the mail surveys suggest that only a quarter of landowners recognized any affect of federal income tax whereas almost half of the landowners have taken advantage of itemized deduction of property tax. However the use of itemized deduction of management expenses and reforestation tax credits was almost negligible. More Indiana landowners used the tax deductions and credit than those in Missouri and Tennessee. Landowners of the three states could be classified in to three distinct types—Conservationists, Consumptionists, and Preservationists. Consumptionists have used the tax provisions most whereas conservationists have used the tax provisions the least. Results of a laboratory experiment with NIPF landowners as subjects suggest that higher capital gains tax rate induces a lock-in effect on mutual funds and forestlands. Also one can observe that NIPF landowners are locked into their forestland assets at low tax rates due to an apparent status quo bias and an endowment effect. Results of another laboratory experiment indicated a high propensity for landowners to enroll in property tax reduction programs.