Forest property taxation under the generalized Faustmann formula

This article represents the first part of a two-part series on forest taxation and valuation. In this first part, I derive the formulas for five types of forest property taxation under the generalized Faustmann formula. They are the unmodified property tax, the site value tax, the flat property tax, as well as the gross and net forest revenue productivity taxes. The impacts of these taxes in terms of fiscal neutrality and tax burden are then examined. Fiscal neutrality examines whether the imposition of a tax will affect management decisions. Tax burden measures the magnitude of the reduction in the value of the land, known as the site burden, and that of the forest as a whole, known as the forest burden, as a result of the imposition of a property tax on forestland of different productivities. Analytical results indicate that all forest property taxes are theoretically not fiscally neutral. They will all shorten the optimal harvest age. This is in sharp contrast to the results under the classic Faustmann formula under which the latter 4 types of taxes are all known to be fiscally neutral. In terms of tax burden, the unmodified property tax, the flat property tax and the gross forest revenue productivity tax impose a heavier site burden on less productive land than on more productive land. The forest burden is age dependent. At age 0, all but the flat property tax imposes a lighter burden on less productive land. At the optimal harvest age, the unmodified property tax, the flat property tax and the gross forest revenue productivity tax impose a heavier burden on less productive land. The net forest revenue productivity tax imposes a heavier tax burden on the less productive land when the annual management cost is small. When the annual management cost is significant, the tax burden could become lighter on the less productive land. Only the site value tax imposes a lighter site and forest burden on the less productive land consistently.