Of Public Interest

Volume 2, Number 6
June 2000

Land Trusts and Tax Exemption: A Treacherous Liaison
by Richard E. Wagner

The estate tax is a particularly destructive tax for small businesses, including farming, through making the sale of the business or farm often necessary to discharge the tax liability. A study by National Life of Vermont and the Small Business Council of America, Why Successful Family Businesses Fail, found that three out of four of those failures followed the unexpected death of the founder, and resulted from the liquidity problems created by the need to pay estate tax.

To be sure, people can reduce their estate tax liability, as well as their income tax liability, by making use of various deductions and sheltered positions that politicians have woven into those taxes. High taxes are maintained as the rule, but exceptions are granted to the extent a taxpayer pursues those activities that have been given a politically-favored status.

One such activity is the donation of conservation easements to land trusts. A conservation easement transfers the right to develop that land to a land trust, which itself is a nonprofit organization. The land would remain under private ownership, only further development on that land would be restricted or prohibited, according to the terms of the conservation easement. Suppose a parcel of land is valued at $800,000 prior to the easement, and is worth $600,000 after the easement has been created. The restriction on development that the easement entails reduces the value of the land by $200,000. It also reduces tax liability, under both income and estate taxes.

The easement qualifies for a $200,000 charitable deduction under the income tax. For combined federal and state marginal rates of tax between 40 and 50 percent, the easement would reduce tax liability between $80,000 and $100,000. The easement also reduces liability under the estate tax. Liability under the federal tax starts at $600,000, and with a marginal rate that starts at 37 percent and rises to 55 percent. If a decedent’s estate were comprised wholly of this land, it would incur a tax on the $200,000 that remained after the $600,000 exemption. A conservation easement would eliminate this tax liability of around $75,000.

Land trusts are spreading throughout the nation, and conservation easements are an important instrument in this spread. Why should tax codes induce people to create conservation easements and donate them to land trusts? Conservation easements are typically supported with the public policy claims that they are necessary to preserve agricultural land and to restrict urban sprawl. Neither of these claims, however, has any merit. The amount of agricultural land has not changed appreciably during this century. Such prominent agricultural economists as Bruce Beattie and Delworth Gardner have shown conclusively that there is no basis for any concern that we are running out of agricultural land. There is no valid public policy reason for any concern about maintaining a suitable supply of agricultural land.

Urban sprawl arises because people would like to live with more space and less congestion. Urban sprawl represents an increased demand for undeveloped land relative to developed 

land. Sprawl increases the value of undeveloped land relative to developed land, while giving people access to the types of living they prefer. Measures that impede sprawl reverse this pattern of shifting land prices. Such measures prevent or reduce the extent to which there is an increased demand for undeveloped land, thus lowering the value of such land. With sprawl restricted, there is a stronger demand for land that is already developed, which increases the value of that land. Such measures to reduce urban sprawl as land trusts allow people who own relatively developed, urban land to secure yet higher property values. This gain comes at the expense of people who own undeveloped land that otherwise would be brought under some form of development, and of those who would prefer to live in less urbanized environments. The restriction of urban sprawl is not a means of maintaining a supply of agricultural land, but rather is a means of redistributing wealth by changing relative land values.

Land trusts have a surface appearance that differs greatly from their underlying reality. On the surface, land trusts resemble ordinary market arrangements, as the assignment of development rights to a land trust seems to be the same kind of transaction as the assignment of mineral rights to a mining company. Beneath the surface, however, lies a strikingly different reality. The transfer of mineral rights is a mutually profitable activity, as both the land owner and the mining company gain from the transfer of rights. The transfer of development rights to a land trust, however, is not driven by mutual profitability but by the threat of taxation. The state faces the taxpayer with this choice: pay my tax or give your land to a trust of which I approve. Under ordinary language, the resulting transfer of land would be a contract made under duress, and would not represent a genuine contract.

Land trusts operate as a tax-induced form of "voluntary" regulation over land usage, even though they do not appear directly to be instruments of regulation. High taxation in conjunction with the conferral of a tax exempt status for the transfer of conservation easements becomes an undercover form of land regulation, with the regulation working to the benefit of the owners of land that is already developed. In the high tax world in which we live, tax relief is something always to hope for. Tax relief that is accompanied by requirements that must be fulfilled before relief is granted, however, is really just one more extension of government regulation, and is not truly a form of tax relief. So-called targeted tax relief is not tax relief at all, but is a means by which government extends its reach still further. So long as high taxation is the norm, and people secure tax relief by adhering "voluntarily" to what could otherwise have been accomplished through regulation, tax favoritism will serve as a treacherous source of tax relief. The only true relief is a genuine cut in tax rates.

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