Administration Recommends Limiting Tax Breaks To Promote Wetlands.

The Clinton administration seeks to promote wetlands conservation by reducing or withdrawing federal financial incentives to developing these areas, according to a recent report issued by the Interior Department. "The Impact of Federal Programs on Wetlands," presented to Congress in March, is the second of two congressionally mandated reports focusing on different wetland areas across the country. The report argues that an approach that focuses on financial incentives such as taxation and subsidies is preferable to vigorous regulation or increased acquisition because it promotes conservation with "a minimum of federal involvement and economic disruption."

Interior states that current tax policies may have the unintended effect of increasing the incentive to drain and convert wetlands. "By lowering the cost of development to the landowner, these tax policies may reduce costs and create incentives to develop more wetlands than would have been developed in the absence of these policies," Interior concludes. The report discusses the impact of the Tax Reform Act of 1986 on wetlands, including changes in the agricultural section of the code regarding the treatment of conversion and development costs, elimination of the preferential tax rate for capital gains, and the alternative minimum tax rules. The report also addresses federal income tax provisions related to forestry, the oil and gas industry, and peat mining.

(Tax-related excerpts of Interior's report appear in this issue of Tax Notes Today.)

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A REPORT TO CONGRESS BY THE SECRETARY OF THE INTERIOR

THE IMPACTS OF FEDERAL PROGRAMS ON WETLANDS

VOLUME II: The Everglades, Coastal Louisiana, Galveston Bay, Puerto Rico, California's Central Valley, Western Riparian Areas, Southeastern and Western Alaska, The Delmarva Peninsula, North Carolina, Northeastern New Jersey, Michigan, and Nebraska

EXECUTIVE SUMMARY

FOCUS OF THE REPORT

This is the second of two reports to Congress on the impact of Federal programs on wetlands. /1/ Volume I was submitted to Congress in 1988, and examined how Federal programs have affected wet lands in the bottomland hardwoods of the Lower Mississippi Alluvial Plain and the prairie potholes of the Upper Midwest. Volume II focuses on 17 additional study areas, selected because they reflect the broad array of problems facing wetlands nationwide:

o in the South, Florida's Everglades, coastal Louisiana, the

o in the West, California's Central Valley, western riparian

o in the East, the Delmarva Peninsula (comprising parts of

o in the Midwest, Michigan's coastal and northern forested

A map of the study areas for Volumes I and II appears in Chapter 2. (See Figure II-1.)

Volume II is divided into five parts. The four chapters in Part 1 describe the Federal programs affecting wetlands: agriculture, water development and management; infrastructure, local development, and housing; and resource use, extraction, and development. Parts II through V are organized regionally and examine the 17 study areas.

BACKGROUND

THE FUNCTION OF WETLANDS

Wetlands are a vital element in the biosphere and produce numerous benefits for society. They provide critical nursery habitat for many species of fish and wildlife. By temporarily storing large quantities of water, wetlands play an important role in reducing flooding problems and recharging ground water. They help to maintain water quality by filtering out pollutants and sediments, and serve to control erosion by trapping soil washed from nearby uplands. In addition, wetlands are a source of recreation, timber, and other natural products for commercial use. Federal, State, and private conservation actions have slowed but not stopped their disappearance and functional degradation.

THE NATURE AND EXTENT OF WETLAND LOSSES

One hundred and four million acres (47 percent) of the original 221 million acres of wetlands remain in the contiguous 48 States, accounting for 5.0 percent of the land area. Annual losses in the period mid-1970s to mid-1980s averaged 290,000 acres. There are approximately 170 million acres of wetlands in Alaska, with less than 0.1 percent lost over the last 200 years. Lost acreage alone, however, does not depict the full extent of the problem. Few wetlands are in pristine condition. Comprehensive studies of the extent of the degradation are only now beginning, however. /2/

Since the mid-1980s, indications are that wetland losses are slowing. From 1987 to 1990, programs to restore wetlands under the 1985 Food Security Act have added about 90.0 thousand acres to the Nation's wetlands inventory. Other programs to protect wetlands, like the Swampbuster provision of the Food Security Act, have generated support for conserving wetlands. In addition, public education and extension efforts have helped heighten our Nation's awareness of the values of wetlands.

Approximately three-fourths of the remaining wetlands in the continental United States are privately owned. Only about 0.5 percent of these have protective covenants on them. Furthermore, some wetland conversions are not covered by Section 404 of the Clean Water Act (the principal Federal wetlands regulatory program).

The most important economic sector absorbing wetlands is the agricultural sector. As of 1985, 75 million acres of the nation's cropland had been developed by draining land. Significant portions of this drainage were conducted with Federal funds, loans, and technical assistance. Figure I-1 depicts land in organized drainage enterprises.

Digging channels, depositing spoil, and constructing access roads destroys riparian vegetation and reduces or eliminates beneficial filtering, flood control, and erosion control capacity. Once in place, the channels drain wetlands, increasing the rate of runoff which can cause downstream erosion, flooding, and surges of nutrient-loaded water in sensitive coastal marshes.

From the mid-1970s to the mid-1980s, wetland conversions to agricultural land uses accounted for 54.0 percent of the losses. This is an appreciable change from trends observed during the period mid- 1950s to mid-1970s in which agricultural conversion represented 87.0 percent of all wetland losses. This percentage change reflects decreases in wetland acreage lost to agriculture rather than a significant increase in losses from other activities. Urban land use conversions accounted for about 5.0 percent of the wetlands lost from the mid-1970s to the mid-1980s, while conversions to "other" land uses accounted for 41.0 percent of the losses. A word of caution: the substantial portion of conversions classified as "other" is attributable to wetlands that have been cleared and drained, but not yet put to identifiable uses.

THE ECONOMICS OF CONVERSION

That so much wetland conversion has occurred should not be surprising. The United States started with a great abundance of wetlands. With wetlands in abundance, other uses of the land were seen as more valuable. Land was considered to be more valuable when devoted to the production of market goods rather than left in its natural state, producing environmental services and amenities. Further, the initial conversions did relatively little environmental damage. Thus, even if the ecological functions of wetlands had initially been well understood and appreciated (and they usually were not), it would likely have been deemed to be in society's interest to convert wetlands during the early years of development.

Figure I-1: LAND IN ORGANIZED DRAINAGE ENTERPRISES

[Figure omitted]

As with all non-market commodities, however, it is difficult to determine the economic value of wetlands, and so there is no price signal indicating that the value of wetlands increases along with their scarcity and that they merit conservation. Therefore, the normal tendency of a private market is to encourage the conversion of wetlands to other uses. Wetlands constitute a classical example of market failure: the wetland owner generally cannot capture the benefits of his resource for his own use or sale. The flood protection benefits of wetlands accrue to others downstream. Many of the fish and wildlife that breed in and inhabit the wetlands migrate, and are captured or enjoyed by others. The ground water recharge and sediment trapping benefits cannot be commercially exploited. For the owner of a wetland to benefit economically from his resource, he usually has to alter it, convert it, and develop it.

The rate of conversion and development was not left to the determination of an unfettered, private market, however. Starting with the Swamp Lands Acts in 1849 and 1850, government actions supported the conversion and development of wetlands. The Swamp Lands Acts ceded millions of acres of swamp lands to the States with the proviso that the States sell the lands and use the proceeds for reclamation. Programs for flood control, drainage, irrigation, and hydroelectric power grew throughout the 20th century. The projects effected massive changes in the nation's hydrologic regime, and made it both technically feasible and financially attractive to develop the land.

Thus, in years past, the conversion and degradation of major acreages of wetland were the result of both concerted public policy and hundreds of thousands of decisions by people attempting to enhance their economic status. It is only recently that we have realized that wetlands have sufficient value in themselves to warrant preserving most of those remaining. In the interim, many of our wetland and ecosystems have been heavily depleted and are now highly stressed. Thus, although early conversions may have been viewed as a wise use of resources, most wetlands whose conversion would be most lucrative have long been developed, and those remaining are both less desirable from a commercial perspective and more valuable environmentally.

THE CURRENT FEDERAL ROLE

Today, there are a number of Federal programs designed to protect wetlands, but Federal policy is neither comprehensive nor consistent with respect to wetland use. Indeed, Federal programs affect wetlands in opposing ways. Some Federal programs encourage wetland conversion by reducing the cost, increasing the revenue, and/or reducing the risk of wetland development. Simultaneously, other Federal programs restrict or manage wetland use through a variety of techniques and programs: acquisition and easement; regulation; consultation among Federal agencies to identify and either avoid or mitigate the effects of agency actions, and reduction; or withdrawal of Federal financial incentives to develop wetlands.

This report to Congress focuses primarily on the last of these approaches to wetland conservation. Although more vigorous regulation or increased acquisition would preserve more wetlands, these approaches could be costly. The Administration prefers redesigning Federal programs which produce undesired effects on wetlands to additional land acquisition or regulation. This strategy has several appealing features:

o It discourages economically inefficient and environmentally

o It promotes a stronger, more competitive economy by modifying

o It fosters Federal budgetary savings at a time of large

o It conserves environmentally significant wetlands with a

Although restricting Federal financial support for unsound development cannot be relied on as the only conservation tool, it should be among the first approaches to the problem of wetland loss. Many Federal programs that affect wetlands are designed and financed in a way that violates the beneficiary-pay principle of public finance. They distort market signals and provide subsidies that have had negative environmental effects. Optimally these programs should be redesigned in order to present those who benefit from the programs and projects with the full cost of their activities. Volume II takes a broad look at over 35 Federal programs implicated in wetland decline, illustrating the range of effects that Federal activities can have on wetland ecosystems.

FINDINGS AND CONCLUSIONS

The following discussion summarizes the background information, findings, and conclusions for the 17 study areas. For each area, the principal causes of wetland loss and functional degradation are identified, and recommendations for future wetland protection are listed. It should be noted that the recommendations are selective, with the purpose of giving the reader insight into the direction of the recommended approach to the problems identified. For the complete set of recommendations, the reader should refer to the end of each area chapter in Parts II through V.

FLORIDA EVERGLADES

1. DESCRIPTION AND IMPORTANCE

o The Everglades hosts a highly diverse spectrum of aquatic

o The Everglades protects the Biscayne Aquifer, the primary

2. EXTENT AND SOURCE OF LOSSES

o The Everglades originally stretched about 100 miles from the

o An altered water regime, initially designed to support

3. IMPACT OF FEDERAL PROGRAMS

o Federal drainage and flood control projects which alter the

o Agricultural programs and incentives for residential

o Federal funds for highways and airports have helped to

4. AGRICULTURE PROGRAMS

o Federal agricultural programs prominent in the Everglades are:

o The Swampbuster provision of the Food Security Act of 1985, as

5. URBAN DEVELOPMENT AND TRANSPORTATION PROGRAMS

o Tax deductibility of mortgage interest and property taxes,

o The Federal Government provides 90 percent of the funds for

6. RECOMMENDATIONS

o To protect the Everglades from further conversion and impaired

o Tie Swampbuster requirements to price support loans and the

o For almost a year, the Department has been negotiating with

o Explore the possibility of denying Federal program benefits to

o Consider having all Federal agencies assess the effects of

COASTAL LOUISIANA

1. DESCRIPTION AND IMPORTANCE

o Coastal Louisiana is heavily endowed with wetlands: 2.5

o This network of wetlands supports a fishery which accounts for

2. EXTENT OF THE LOSS

o Coastal Louisiana contained 4.07 million acres of wetlands at

o Louisiana loses approximately 35 to 37 square miles of coastal

3. SOURCES OF LOSS

o A combination of natural and human factors have caused the

o Natural factors contributing to the loss of wetlands include:

o Historically, sediment deposition from the Mississippi River

o Approximately three-fourths of Louisiana's recent coastal

4. IMPACT OF FEDERAL PROGRAMS

o Flood control and navigation projects have been the major

o To a lesser extent, Federal hurricane protection and highway

o A number of economic incentives offered by the Federal

o As a result of the Coastal Wetlands Planning, Protection, and

5. RECOMMENDATIONS

o Proceed with construction of two authorized but uncompleted

o Consider expanding the Corps' Civil Works Program to protect,

o Evaluate the revenue and industry import of eliminating the

o Consider developing a performance-bond approach for the

o Consider establishing stronger mitigation requirements within

o Consider suspending Federal subsidization and support for

o Consider having all Federal agencies assess the effects of

GALVESTON BAY OF TEXAS

1. DESCRIPTION AND IMPORTANCE

o This region contains highly valuable marine resources and

o The Bay's wetlands buffer inland areas from storm waves and

2. EXTENT AND SOURCES OF LOSS AND DEGRADATION

o From the mid-1950s through the 1970s, the Galveston Bay area

o The cumulative loss and the rate of loss are significant.

o The key factors currently contributing to wetland decline are:

o The Galveston Bay Region is home to the largest petrochemical

o The Houston-Galveston area is one of the fastest growing

o Agriculture based on rice and cattle accounted for most of the

3. IMPACT OF FEDERAL PROGRAMS

o The major Federal construction activities that impair the

o The Federal Government provides incentives for urban

o Federal programs for constructing and providing technical

o Although industrial and urban development receive some impetus

4. RECOMMENDATIONS

o Examine the current approach to the regulation of water

o The Galveston Bay National Estuary Program is close to

o Have Federal agencies assess the effects of their programs on

o Consider suspending Federal programs which subsidize or

o Encourage development of integrated crop management approaches

PUERTO RICAN COAST /5/

1. DESCRIPTION AND IMPORTANCE

o Puerto Rico has several varieties of wetlands, but mangrove

o Mangroves serve several important functions, including: rapid

o Historically, estuaries covered 60,000 acres in Puerto Rico,

2. IMPACT OF DEVELOPMENT

o In the past, mangrove and upland deforestation resulted from

o Programs aimed at transforming Puerto Rico from an agrarian to

o Economic development and housing projects, often justified as

o Existing regulatory programs and pre-development consultation

3. THE FEDERAL ROLE

o Federal economic incentives play a major role in promoting

o Most significant seem to be flood insurance, federally insured

o Without this Federal support many of the development projects

o The Corps' regulatory office in San Juan appears to be

4. RECOMMENDATIONS

o Deny flood insurance and disaster assistance to communities

o Revise the flood insurance program in Puerto Rico to take

o Strengthen the enforcement program of the Corps of Engineers

o Consider amending the Coastal Barrier Resources Act to provide

o Encourage HUD to require grant recipients to provide

CALIFORNIA'S CENTRAL VALLEY

1. DESCRIPTION AND IMPORTANCE

o The wetlands of the Central Valley provide wintering habitat

o The Central Valley contains eight national wildlife refuges

o These wetlands help to maintain ecosystem productivity by

2. EXTENT OF LOSS

o In the mid 1800s, the Central Valley had an estimated 4.1 to 5

o By 1939, Central Valley wetlands had been reduced to

o In the mid-1980s, about 379,000 acres of wetlands existed in

3. SOURCE OF LOSS

o The conversion of wetlands to agricultural lands accounts for

o In the Central Valley, there are 15 Federal and 25 State and

o Water development and agricultural activity have altered the

o Prior to passage of the Central Valley Project Improvement Act

o Population in the Valley is expected to grow from 4.5 to 7.5

4. IMPACT OF FEDERAL PROGRAMS

o The major Federal factors causing wetland decline in the

o In the Central Valley, about 1.15 million acres which receive

o Among agriculture programs, the income and price support

o In the absence of water subsidies there would have been far

o Historically, water development and agricultural programs have

o The CVPIA dramatically alters the way in which water and the

o The CVPIA will not solve all the wetland problems in the

o The CVPIA also addresses the issue of drainwater contamination

5. INEFFECTIVENESS OF SWAMPBUSTER

o Normally, in an area where participation rates in Federal

o Swampbuster is likely to be almost completely ineffective in

6. RECOMMENDATIONS

o On future construction, eliminate the interest subsidy for

o Consider charging persons who alter Central Valley wetlands

WESTERN RIPARIAN WETLANDS

1. IMPORTANCE

o Western riparian areas and wetlands have great significance

o They slow flood waters; aid in erosion control through

2. EXTENT OF LOSS

o Nationwide, 60 to 75 percent of riparian wetlands have been

o Surveys of the riparian areas remaining within western public

3. SOURCES OF LOSS AND DEGRADATION

o Poorly managed livestock grazing is among the leading factors

o Water projects (multipurpose reservoirs, small hydroelectric

o "Vegetation management" in connection with water projects

o Timber harvesting and associated road building as well as

4. IMPACT OF FEDERAL PROGRAMS

o Federal involvement accompanies each of the activities

o Federal land management and water resources development

o The grazing programs conducted by the Bureau of Land

o In 1988, the General Accounting Office (GAO) reported that

o BLM has acknowledged deficiencies in its program. In order to

o The Forest Service is implementing a national strategy for

o As one of its principal resource management initiatives, the

o The Bureau of Reclamation, the Corps of Engineers, the

o Subsidized irrigation water is used to grow crops that are

o The Bureau of Reclamation, the Corps, the IBWC, and the

o Because of the arid climates in which they are located,

5. RECOMMENDATIONS

o Fund Federal water projects affecting wetlands in accordance

o Consider eliminating Federal financial incentives for the

o Re-examine the use of Federal funds for "vegetation

o Consider having all Federal assistance programs comply with

o As part of its technical review of wetland delineation issues

SOUTHEASTERN ALASKA

1. DESCRIPTION AND IMPORTANCE

o About 4.9 million acres (25 percent) of the 18 million acres

o The region is environmentally rich, containing: the Tongass

2. EXTENT AND SOURCE OF LOSSES

o Urban development and logging are the principal sources of

o The direct loss of wetlands has been small. Only about 2300

3. IMPACT OF FEDERAL PROGRAMS

o Large-scale logging in the Tongass began in the 1950s, when

o The major incentives to log the Tongass stemmed from mandatory

o ANILCA stimulated logging by mandating that the Forest Service

o The TTRA ended the non-competitive nature of the pricing

4. RECOMMENDATIONS

o FY94 appropriations for the Forest Service mandates a habitat

WESTERN ALASKA

1. DESCRIPTION AND IMPORTANCE

o The landscape of western Alaska is very diverse. It ranges

o About 47 percent of an estimated 355 million acres of lands in

2. EXTENT AND SOURCES OF LOSS

o The major causes of wetland loss in western Alaska are from

o Less than one percent of the wetlands in western Alaska have

3. IMPACT OF FEDERAL PROGRAMS

o Two provisions of the Federal tax code specific to the oil and

o To the extent that there is a subsidy to placer mining, it

o The Arctic National Wildlife Refuge (ANWR) is located just

4. RECOMMENDATIONS

o Consider having mine operators submit mining plans prior to

o Consider developing a performance-bond approach for the

o Strengthen the mitigation requirements within the regulatory

o Expand the joint industry-government efforts to develop more

DELMARVA PENINSULA

1. DESCRIPTION AND IMPORTANCE

o The Delmarva Peninsula is bounded by the Delaware Bay and the

o These wetlands intercept and filter agricultural runoff and

2. EXTENT AND SOURCES OF LOSS

o Between the mid-1950s and the late 1970s, the average annual

o Inland wetland losses stem primarily from agricultural

o The loss of coastal wetlands is caused primarily by draining

3. IMPACT OF FEDERAL PROGRAMS

o Federal agricultural programs have had a major impact on the

o The Small Watershed Program (PL-566) has had the greatest

o Swampbuster may reduce some agricultural conversion. However,

o Federally insured mortgages, tax deductions for second homes,

o The interaction between these Federal programs adds to the

4. RECOMMENDATIONS

o Deauthorize the PL-566 small watershed projects authorized

o Eliminate Federal funding and technical assistance for the

THE POCOSINS OF NORTH CAROLINA

1. DESCRIPTION AND IMPORTANCE

o Found in the southeastern Atlantic coastal plain, pocosins are

o These wetlands serve as the last refuge for many upland and

o They stabilize estuaries by controlling the rate of freshwater

2. EXTENT AND SOURCE OF LOSS

o Originally, North Carolina is estimated to have had 11.1

o Since the 1950s, forestry and drainage for agriculture have

o By 1980, only about 695,000 acres (31 percent) of the original

3. STATUS AND PROSPECTS

o Intensive, softwood plantation forestry, peat mining, and

o The area has lost two-thirds of its wetlands and has numerous

o The current low price of oil has dampened the interest in

o The depressed agricultural economy has reduced wetland

o The forestry industry is also depressed, but long-term,

4. THE FEDERAL ROLE

o Federal economic incentives for forestry, agriculture, flood

o Silviculture benefits from cost sharing and tax concessions

o Prior to 1985 and the advent of Swampbuster, the principal

o Small watershed projects (multipurpose dams, stream

o Incentives for peat mining include Government guarantees for

o Wetland impacts have been systematically underestimated by

o The 404 program has had a turbulent history in the Pocosins

o Until recently, low participation in agricultural programs

5. RECOMMENDATIONS

o A number of Federal subsidies and tax concessions for

o Establish a uniform Federal mitigation policy, ensuring

NORTHEASTERN NEW JERSEY

1. DESCRIPTION AND IMPORTANCE

o In an area subject to severe flooding, the region's wetlands

o The wetlands filter pollutants from urban runoff that might

o These wetlands offer habitat for wildlife and migratory

2. EXTENT AND SOURCES OF LOSS

o The original acreage is known to be much larger than the

o Agriculture posed the initial threat to wetlands in

o Today, highway construction, commercial and industrial

o The driving force behind current expansion is the growth of

3. IMPACT OF FEDERAL PROGRAMS

o Federal financial support for highway construction and flood

o However, given Northeastern New Jersey's location on the

4. RECOMMENDATIONS

o Finance new Federal flood control and Federal-aid highway

o Consider requiring that a mitigation plan accompany proposals

o Acquire critically important and vulnerable wetland complexes

MICHIGAN'S COASTAL WETLANDS

1. DESCRIPTION AND IMPORTANCE

o Michigan's mainland coastal shoreline stretches for 2300

o These wetlands offer habitat for wildlife and birds and are an

2. EXTENT AND SOURCES OF LOSS

o The original coastal wetland acreage is unknown. Currently,

o A study of five representative areas revealed an average

o Early losses were due to drainage for agriculture and

3. IMPACT OF FEDERAL PROGRAMS

o Residential and recreational development constitute the

o Regulatory programs are generally effective in controlling

4. RECOMMENDATIONS

o Have Federal agencies assess the effects of their programs on

MICHIGAN'S NORTHERN FORESTED WETLANDS

1. DESCRIPTION AND IMPORTANCE

o Most of Michigan's forested wetlands are found in the upper

o These wetlands serve a variety of important functions,

2. EXTENT AND SOURCES OF LOSS

o The original acreage of forested wetlands in Northern

o Forest Service data indicate a 14 percent loss in Michigan's

o In the late 1800s, these regions underwent heavy logging.

o Attempts to clear and drain forested wetlands in the upper

o Wood products companies are conducting drainage research in

o In the future, peat mining and the development of vacation

3. IMPACT OF GOVERNMENT PROGRAMS

o The State Government promotes Michigan's forestry industry

o The Federal Government offers low interest loans and cost

o Although the impact of these programs on the drainage of

4. RECOMMENDATIONS

o Have Federal agencies assess the effects of their programs on

RAINWATER BASIN OF NEBRASKA

1. DESCRIPTION AND IMPORTANCE

o The Basin occupies about 4,200 square miles. An impervious,

o The Basin's wetlands provide spring, migratory habitat for

2. EXTENT AND SOURCE OF LOSS

o Historically, nearly 4,000 individual wetlands occupied about

o Between the 1960s and the 1980s, shallower, more easily

o The loss of Rainwater Basin wetlands has forced water-

o Most wetland conversion in the Basin has been to agriculture.

3. IMPACT OF FEDERAL PROGRAMS

o Much of the conversion in the Basin has been conducted with

o The agricultural commodity programs (price and income

o In recent years, the farm program participation in Nebraska

o Collectively, the Federal subsidies have kept more land in

4. RECOMMENDATIONS

o Consider precluding the use of Federal financial and technical

FOOTNOTES

/1/ The requirement for this report appeared first in the FY85

/2/ In 1988, the Environmental Monitoring and Assessment Program (EMAP) of the Environmental Protection Agency was initiated to provide improved information on the current status and long-term trends in the condition of the Nation's ecological resources. EMAP has a wetlands component. Its first interpretive report, describing the conditions of coastal wetlands, is scheduled for completion in 1996.

/3/ Marketing orders are Government-sanctioned rules between producers and handlers to establish production and commodity standards and exert an influence on market price. See discussion in chapter 7.

/4/ Of course, any future sea level rise may be due in part to global warming, and hence, related to human activity.

/5/ Although the text focuses on Puerto Rico, the problems and trends apply to the Virgin Islands, as well.

/6/ Most wetlands in the Central Valley are managed for wintering waterfowl habitat which requires a large volume of water in the late fall.

/7/ Widespread conversion of wetlands occurred in the Valley long before Federal water development. Farmers diked the floodplains for cultivation, but their efforts were only partly successful. The process of reclaiming the lands and developing the area took many years and required extensive Federal assistance.

/8/ R. G. Stutheit, Work Plan S-87, Mortality and Disease Investigations, W-15-R-44, Nebraska Game and Parks Commission, 1988.

END OF FOOTNOTES

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FEDERAL INCOME TAX CODE

The Tax Reform Act of 1986 repealed the investment tax credit that allowed agricultural investors to reduce their tax liabilities by 10 percent of the cost of sprinkler systems and other capital installations. The code now allows accelerated write-offs for certain "depreciable" property such as capital investments in irrigation. These investments are also subsidized by a special provision within Section 179 of the revenue code, which permits taxpayers to deduct as an ordinary business expense the first $10,000 of any investment. Irrigators commonly use accelerated depreciation and section 179 expensing for sizable investments such as sprinkler equipment, water well drilling, and ditch excavation, all of which can have negative effects on wetlands. In addition, certain irrigators may claim a special water depletion allowance. This deduction is available where an underground source is being pumped at an unsustainable rate. It enables an irrigator to compensate for a theoretical decline in property value that is presumed to go with the exhaustion of the water supply.

Collectively, these tax code provisions encourage groundwater overdraft. This is ironic, since one of the major reasons for dam construction in the arid West was to relieve pressure on the aquifers. Development of the surface water supplies was intended to alleviate groundwater depletion. /24/ Indeed, cheap surface water did replace groundwater in some service areas, but as the aquifers recovered, pumping for irrigation became technically and economically feasible elsewhere. /25/ Thus, in the absence of any regulation, groundwater depletion continues, although at a reduced rate.

FOOTNOTES

/24/ See CVP purposes in House Document No. 191, 73rd Congress, 1933 and House Document No. 416, Central Valley Project Documents, Part I, Authorizing Documents, 1956.

/25/ See Bertoldi, et al., 1991 for a discussion of groundwater problems in the Central Valley of California emanating from the hydrologic changes due to 1) development of groundwater for agricultural purposes and subsequent depletion of groundwater and 2) surface water development in relation to groundwater depletion.

END OF FOOTNOTES

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FEDERAL TAX PROGRAM

In addition to the effects of Federal programs, tax policies may

The income tax code played a more significant role in decisions to convert and develop wetlands in the past than it does now. Changes instituted by the Tax Reform Act of 1986 (TRA) eliminated many economic incentives affecting wetlands. Arguably the most important of these changes occurred in the agricultural section of the code, where provisions which allowed expensing (rather than capitalizing) of conversion and development costs were eliminated. The elimination of the preferential tax rate for capital gains may have had a significant effect on forestry, because most timber sales qualified for capital gains treatment under prior law. As a result, a major advantage of holding forest land was eliminated, but the implications of this for wetland conservation is different in different areas, and the net result is not at all clear. The TRA did reduce the after-tax gains on sale of improved cropland converted from wetlands. /26/ In general, tax reform eliminated a number of special provisions which were designed to promote wetland conversion and development, while leaving unaltered the tax deductibility of expenses and depreciation incurred during the ordinary conduct of business activities which happen to affect wetlands. For a more detailed discussion of past tax provisions which affected wetlands and tax reform see Volume I of this report.

In addition to those provisions of the tax code which encourage development, there are also provisions which encourage conservation. The Federal tax code allows landowners who donate land or easements to qualified conservation organizations to deduct the value of the donation as a charitable contribution. By reducing tax rates, the TRA reduced the value of tax deductions. Limited evidence to date suggests that subsequent charitable contributions have fallen.

The Alternative Minimum Tax (AMT) may have had an even greater effect on conservation donations than the TRA. Under the AMT the marginal tax rate is 21 percent, considerably less than the top bracket (28 percent) under the ordinary income tax code. More importantly, however, until 1993, under the AMT the amount of a deduction for the charitable contribution of property was limited to the original purchase price of the property. Under the ordinary income tax code the fair market value of the property constitutes the value of the donation for purposes of tax deductibility. Thus, for wealthier taxpayers subject to the AMT, the tax savings resulting from a gift was significantly reduced. In the case of wetlands, this was important, because conservation donations tend to come from wealthier individuals. In the Revenue Reconciliation Act of 1993 (RRA), however, Congress eliminated the restriction on charitable giving imposed by the Tax Reform Act of 1986, and reinstated the full deductibility of contributions of appreciated property.

FOOTNOTE

/26/ Sec. 403 the Tax Reform Act specifically subjects the gains from sale of "converted wetlands" to ordinary income taxation rather than to capital gains tax treatment. This was done as a precaution, i.e., in the event that preferential tax treatment of capital gains is reinstated in the future, such preferential treatment will not automatically be extended to wetlands converted to agriculture. However, Sec. 403 does not apply to wetlands converted for any other purpose.

END OF FOOTNOTE

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USDA FOREST PROGRAMS

The Agricultural Stabilization and Conservation Service (ASCS) in conjunction with the Forest Service administers the Forestry Incentives Program (FIP), a cost-sharing program available to private, non-industrial landowners for forestry practices such as planting trees. This program was funded at $12.4 million in 1993. ASCS also administers the Agricultural Conservation Program which shares costs for various agricultural land conservation activities, including tree planting. The program was funded at $194.5 million in 1993, but the extent to which these funds were applied to forestry activities is not specified. The Federal Government will generally cover from 40 percent to 75 percent of allowed expenses. Often plantation trees rather than the mix of native species are planted, thus altering the original environment.

The Farmer's Home Administration (FmHA) aids the forest industry by offering: farm ownership loans to buy or develop forest land; refinancing of forest land, soil, and water loans for improving forest resources; and operating loans to help with normal costs of producing, harvesting, and processing forest products. Previously, these loans could be used to cover drainage costs, but if properly enforced, Swampbuster should preclude that. The 1985 Food Security Act included a new feature that, at the Secretary's discretion, allows delinquent farmers to reamortize loans and delay repayment if they plant at least 50 acres of softwood timber. This feature also offers an incentive to replace native hardwoods with softwood plantations.

FEDERAL INCOME TAX CODE PROVISIONS RELATED TO FORESTRY

Several provisions in the Federal income tax code allow special expensing, rapid amortization, and investment credits for forestry activities. Reforestation expenditures up to $10,000 for site preparation, seed or seedlings, tools, and labor are eligible for a 10 percent tax credit and may be amortized over only 7 years. It is not known how great an impact these programs have on the drainage of forested wetlands. However, if it proved significant, consideration might be given to conditioning eligibility for these provisions on avoidance of wetland conversion or degradation.

TIMBER PRODUCT EXPORT ASSISTANCE

Several export programs can be used for timber products, but no special timber export assistance programs exist. In general, timber products are included as agricultural commodities, and as such qualify for and are included in agricultural export assistance programs. Data on assistance for timber export are not reported separately from assistance for other agricultural commodity exports. It is not clear whether these programs are a significant factor in promoting the substantial exports of timber products to Japan from Northeast Alaska, but, if so, they could be implicated in some wetland loss and more importantly, some wetland degradation.

BUREAU OF LAND MANAGEMENT AND FOREST SERVICE GRAZING POLICY

In 11 western States, /6/ 48 percent of the land is federally owned and about 75 percent of that is grazed by domestic livestock. Thus, federally-permitted grazing occurs on 36 percent of the land in these States. In 1990, there were approximately 17 million beef cattle and 102,800 beef producers in 11 western States. About 18 percent of the producers had Federal grazing permits. In some of these States the percentage is much higher.

Both the Forest Service and the BLM administer livestock grazing programs on the lands that they manage. Together they administer 87 percent of the Government's rangeland.

The BLM and the Forest Service regulate grazing on public lands by granting 10-year permits or leases that specify the number of animal unit months (AUMs) of grazing allowed each season on a particular tract (called an allotment). The grazing program has been criticized for exceeding the carrying capacity on some parts of the range, especially in riparian wetlands.

FOOTNOTE

/6/ Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.

END OF FOOTNOTE

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INCOME TAX CODE PROVISIONS RELATED TO THE OIL AND GAS INDUSTRY

The oil and gas production from wetland areas represents a significant amount of the energy used in the United States. Two special tax incentives are available to the oil and gas industry: the deduction for intangible drilling costs and the percentage depletion allowance, the latter benefit having been greatly reduced in recent years. The deduction for intangible drilling costs, allowing rapid write-offs of expenses related to oil and gas production, was introduced into the tax code through a series of administrative rulings by the Treasury Department, and then sanctioned by Congress in 1954. The deduction allows the owner to take an immediate tax deduction for "intangible" expenses -- labor, fuel, power, material, supplies, and tools -- associated with drilling and preparing an oil or gas well for pumping. The deduction was not available for "tangible" costs such as expenditures for pipe, tanks, and pumps used in an oil or gas rig. For most other types of construction projects, intangible costs can be deducted, but they have to be spread over the number of years that the facility will be used. In contrast, a full deduction can be taken for intangible drilling costs in the year the expenditures are made. This tax code provision is thought to be a significant factor in offsetting the costs of canal dredging and access road construction in Louisiana and pipeline construction in Alaska.

In 1926, Congress enacted percentage depletion to establish a rule-of-thumb measure for depreciation in the value of a well as its oil or gas is pumped out. Investment in the resource was considered to be a capital investment. The depletion allowance was arbitrarily set at 27.5 percent of production. The allowance bore no relation to actual costs and permitted tax-free recovery that in some cases vastly exceeded the amount invested in the property. Producers were allowed to deduct 27.5 percent of gross income from taxable income, with a limit on the deduction equal to 50 percent of taxable income.

In 1969, tax reform cut the oil and gas depletion allowance to 22 percent. In 1975, the depletion allowance was discontinued for all but independent producers. The reform phased in a lowered allowance for independents, leaving it at a permanent level of 15 percent by 1984 for the first 1000 barrels of oil and the first 6 million cubic feet of gas produced daily. These measures greatly reduced economic incentives to engage in marginal oil and gas exploration and production. The depletion allowance for independents may promote wetland loss in coastal Louisiana.

The Tax Reform Act of 1986 further diminished the tax incentives associated with oil and gas exploration and production by limiting both the percentage depletion allowance and the expensing of intangible drilling costs for purpose of calculating the alternative minimum tax. However, amendments to the tax code in 1992 granted relief from this provision to independent producers.

DEPARTMENT OF ENERGY PROGRAMS RELATED TO PEAT MINING

The Federal Government promotes the mining of peat for energy by guaranteeing a market and by conducting research. The Public Utilities Regulatory Policies Act of 1978 (PURPA) requires that public utilities purchase power from small producers at the utilities' own generation costs. This significantly reduces the risk associated with a new economic venture. The Government sponsored millions of dollars of research from the mid-1970s through the early 1980s on peat energy demonstration projects.

INCOME TAX CODE PROVISIONS RELATED TO PEAT MINING

Because peat is an alternative fuel in the pre-commercial stage, major research, development, and construction cost savings derive from special tax incentives. Of particular importance are those incentives that give peat mining a relative advantage over more traditional energy sources. Peat mining along with other alternative energy sources, for example, qualifies for accelerated depreciation of investment costs. Peat also qualifies for a five percent depletion allowance, a deduction from taxable income related to extraction levels that more conventional energy sources no longer receive. Peat may profit, too, from research and development credits. These are available for selected basic research expenditures and, because traditional energy technology is more developed, the credits will probably benefit peat and alternative energy disproportionately.

MINING LAW GOVERNING PLACER MINING

Placer mining (mining for minerals which have been deposited by stream action, often in a stream bed) has a long history of causing adverse impacts to fish and wildlife and their habitats in Alaska. Under the Mining Law of 1872, no fee is charged to miners for access to hard-rock minerals on designated Federal lands. Originally the Act covered oil and gas as well as hard-rock minerals. Now however, coal, oil, and gas are subject to leasing arrangements that require a fair price to be paid for public resources.

In 1990, hardrock minerals worth at least $1.2 billion were extracted from Federal lands. The known, economically recoverable reserves of hardrock minerals on Federal lands were estimated to be worth $64.9 billion (GAO 1992).

A mining company must stake a claim to secure a deposit against others. Although a claim may not exceed 160 acres, a mining company may stake an unlimited number of claims. A claim may be kept indefinitely so long as at least $100 of work is conducted on it annually and the company files an annual notice of work performed. Should a mining company wish to purchase the surface rights as well (a procedure known as patenting a claim), it may do so by demonstrating to the Government the existence of a mineral deposit that can be produced with a reasonable prospect of being profitable and paying a fee of $2.50 to $5.00 per acre, depending on the type of claim. However, the expense of developing the necessary geologic, engineering, and economic data often discourages companies from patenting claims.