Time to Modernize West Virginia's Excess Acreage Tax
With tax reform looming on the state's public policy agenda, now would be a opportune time to revisit the state's Excess Acreage Tax. Since 1905, a corporation purchasing 10,000 acres or more of property in the state is subject to a one-time five cents per acre tax on owning the property. In 1999, Governor Underwood's Commission on Fair Taxation (3-694) recommended increasing this tax to 50 cents per acre, making it an annual tax, lowering the threshold to 1,000 acres and allowing a credit against the state's severance tax. This is a step in the right direction and it is long overdue.
As many West Virginians know, one of the state's historic economic problems has been large absentee land and mineral ownership. As we discussed in our 2013 report Who Owns West Virginia in the 21st Century?, this problem has not gone away. In 2012, the top 25 land owners in the state owned about 18 percent of the state's private land and none of the top 10 largest land owners were headquartered in West Virginia. In Wyoming County, two out-of-state companies - Heartwood Forestland Fund and Norfolk Southern - owned over half of the county's private land in 2012.
Adequate taxation of large landowners could not only spur development of more land in the state (especially in southern WV) but could also provide needed revenue to fund economic development and lower the tax responsibilities of landowners with improvements. According to data from the West Virginia Property Tax Department, approximately 352 corporate entities (excluding non-profits) owned at least 1,000 acres of land in the state for a total of 3,380,000 acres. At 50 cents an acre, this would amount to an estimated $1.7 million in annual tax revenue - not including the tax credit against the state's severance tax which would lower this amount. The state's largest private land-owner - Heartwood Forestland Fund, which owns about 500,000 acres in the state - would have an annual tax bill of about $250,000.
While the proposal of increasing the tax from 5 to 50 cents is a step in the right direction, it might not be high enough to incentivize the development of more land or provide adequate revenue to fund economic development and other priorities. Adjusted for inflation, the five cents per acre tax that was established in 1905 would be the equivalent of about $1.25 today.
One idea would be to create a graduated Excess Acreage Tax rate that increased with the amount of property owned over 1,000 acres. This could help provide a much greater incentive to the largest land owners to develop or sell their land and it would help ensure that those at the bottom end don't buy more land.
If we started with a tax rate of 50 cents per acre between 1,000 and 2,499 acres and ended with a top rate of $5 per acre over 250,000, it could yield an estimated $10.6 million in revenue (not including the severance tax credit). If the lowest rate was set at a $1 per acre and increased by a $1 per acre until it hit $10 for landowners over 250,000 acres, it could yield $21.2 million annually. It would also be wise policy to exclude any producing farms, which is something we do not want to discourage with the Excess Acreage Tax.
Along with reforming the Excess Acreage Tax, lawmakers could also consider revamping the state's preferential tax treatment of unimproved land. As the Lincoln Institute of Land Policy has pointed out, using the use-value assessment (UVA) approach instead of the market-based approach that is used on other types of property can dramatically lower property value and taxes. For example, in Wyoming County, Heartwood Forestland Fund owns a parcel containing 12,463 acres that has an appraised value of $2,358,450 (assessed value is $1.4 million) and their total property tax bill in 2014 was $31,490. This means Heartwood is paying about $2.53 per acre, with an appraised value of just $189 per acre. Using a market-value approach would mean that this land would be valued closer to $500 an acre.
Governor Underwood's Commission on Fair Taxation was correct in recommending much-needed changes to the state's Excess Acreage Tax. As the legislature moves ahead with reforming our state's tax code this year, they should consider reforming the state's Excess Acreage Tax. This could not only incentivize economic development in West Virginia, but also provide a much-needed source of revenue as coal continues to decline in southern West Virginia.