Background

A conservation tax credit is just one tool in a policy toolbox used in states with effective growth management and conservation programs. With current rates of development, states need to be creative in their approaches to conservation and growth management. The Natural Heritage Preservation Tax Credit is a creative approach because it targets private properties for conservation that are parts of larger habitats or ecosystems. Leaving a small fraction of a watershed or ecosystem unprotected could result in irreparable damage to those systems as a whole.

At the federal level, the Income Tax Charitable Contribution Deduction is a key incentive to encourage landowners to make qualified conservation contributions. The donation of a conservation easement normally qualifies as a charitable contribution that may entitle the donor to receive federal income tax deductions. The value of a conservation easement is based on the reduction of the land’s value after the easement is in place. Generally, a conservation easement donor may take a federal income tax deduction of up to 30 percent of their adjusted gross income, and any excess amount may be carried forward and deducted over the five succeeding years.

Under certain circumstances, families inheriting land can reduce estate taxes by placing a conservation easement on the property within nine months after the decedent owner’s death. The equivalent development value of the property given up may then be taken as a charitable deduction against the value of the gross estate. Estate beneficiaries also can exclude from the taxable estate 40 percent of the land’s value, up to $500,000, subject to qualifying conservation easements.(1)(2)

State conservation tax credit programs vary considerably (for more detailed information on different programs, see SERC’s State Activity page on this subject). Some allow only easements or fee interests, while others, such as the California program that our sample bill is based on, allow both; in addition, donations of water and water rights are allowed. Easements allow greater flexibility than fee interest donations and most of the preservation benefits. An easement on property containing rare wildlife habitat might prohibit any development, for example, while one on a farm might allow continued farming and the building of additional agricultural structures. An easement may apply to just a portion of the property, and need not require public access. The main advantage of a fee interest donation is that it minimizes potential unauthorized use of preserved property, which could also cut down on monitoring costs. Ideally, states should allow both easements and fee interest donations, since the goal is to preserve as much private property as possible.

The bill text in this policy issues package is based on California’s Natural Heritage Preservation Tax Credit Act of 2000. The program has provided over 1,000 people and organizations with applications for the tax credit since it was implemented in March 2001. Approved donations have resulted in the permanent protection of 7,061 acres of park, open space, wildlife habitat, prime farmland, archaeological resources, and 539 acre feet of water rights. The appraised fair market value of donations is $60.9 million, at a cost to the state, in tax credits, of only $33.5 million.

A range of groups, including large development companies and family farmers, have taken advantage of the opportunity to benefit the environment and local economic development by donating land and receiving a tax credit. The distribution of tax credits among the various landowner donors range from $20,350 to $16,115,000.(3)

California’s tax credit program was chosen as a model bill for this policy package not only because of its success, but because of the conditions that must be met for a piece of property to qualify for donation in the program. To be considered for donation, a piece of property must meet at least one of the following criteria. It must: 1) fulfill the goals of a conservation plan; 2) protect species or habitat; 3) conserve threatened farmland; 4) be a water right that helps protect a species or habitat; or 5) increase public access to parks or open space.

California budgeted $100,000,000 for the tax credit for FY 2001-2005. Due to a fiscal crisis in the state, the program was temporarily suspended.(4) However, this should not sway states from adopting a cap on the total tax credit available as opposed to setting limits on individual credits (for example, Colorado’s program allows for a landowner only one credit per year, not to exceed $260,000). Budgeting for the total credit available allows the program’s administrating board greater flexibility in their acquisition choices, and gives legislators a firm number to work with, which is especially useful if your state has other conservation mechanisms at work.

Budgeting for the total credit available is one way your state could expand and strengthen your existing conservation tax credit program. In addition, if your state program allows for only either corporations or personal income tax credits, consider allowing both. Consider also the types of donations allowed; add new benefits, such as fee interests, water donations, or water rights donations. One of the most important ways a state could strengthen and focus a program is by establishing firm criteria for donations to qualify for the credit. As discussed above, the program featured in this package ensures donations meet conservation goals or have specific public benefits. Such criteria maximize a program’s dollars and targets preservation where it’s most needed.

Click here to see a flow chart of the administrative process for donating a piece of property under the Natural Heritage Preservation Tax Credit.

For information on incentives for conservation, visit the Biodiversity Partnership’s “Incentives for Conservation” web page.