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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, October 21, 2012

The Inequality of Federal Tax Incentives for Conservation Easement Donations

Elliott G. Wolf (J.D. 2013, Stanford), Note, Simultaneously Waste and Wasted Opportunity: The Inequality of Federal Tax Incentives for Conservation Easement Donations, 31 Stan. Envtl. L.J. 315 (2012):

The Internal Revenue Code and regulations provide myriad federal tax benefits to the donors of conservation easements to non-profit organizations. The net present value (NPV) of these benefits increases with the dollar-value of the easement, calculated by the IRS as “the difference between the fair market value of the entire contiguous parcel of property before and after the granting of the restriction.” Because the tax benefits are all deductions or exemptions, their NPV also increases with the income and assets of the donor.

The government “pays” this price via foregone revenue in order to realize notional “conservation value” -- the value of any ecosystem services or intangible benefits that accrue to society due to the preservation of the property. The tax code, however, decouples an easement's conservation value from the foregone revenue in two ways: (1) an easement's conservation value differs from the IRS's development-based valuation; and (2) the IRS's development-based valuation differs from the NPV of the tax benefits to the donor.

Many commentators focus on the first decoupling, proposing a variety of valuation models that quantify the value of ecosystem services or other environmental benefits afforded by conservation easements. Focusing instead on the second decoupling, this Note quantifies the dramatic increase in the value of the tax benefits with increases in the donor's income and assets, factors which are irrelevant to conservation goals. This Note argues that the current scheme fails to maximize the marginal conservation accomplished per dollar of foregone tax revenue because of ample empirical evidence that the wealthy do not value conservation less than others, and thus do not require a higher inducement to donate conservation easements. The Internal Revenue Code should instead pay the same amount for any two easements of the same value. The most obvious way to achieve this is to replace the multiple tax deductions and exemptions with one refundable tax credit for a fixed percentage of the value of the easement. Donors of conservation easements would thus receive a “production tax credit,” a tool widely used in other conservation and environmental incentive scheme.

This analysis begins in Part II with a brief overview of federal tax benefits afforded to the donors of conservation easements. Part III models the NPV of the tax benefits by levels of donor income and wealth. Part IV uses studies of contingent valuations of non-use environmental goods to argue that the current system is inconsistent with maximizing the marginal conservation achieved per tax dollar foregone. Part V outlines specific changes to  §§ 170 and 2031 that would equalize incentives across the income and wealth spectrums. Part VI concludes with a discussion of the implications of equalizing incentives for responses to climate change.

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