Articles

Giving Credits

Where Credits Are Due

Tax credits for conservation easements are costing state government $130 million a year.  But they’re also a cost-effective way to preserve thousands of acres of land from development. 

By Peter Galuszka

For a few fleeting seconds, car passengers zipping over an Interstate 95 bridge near Fredericksburg can enjoy the beauty of the Rappahannock River valley. Steep cliffs climb from a river bed, giving refuge to Peregrine falcon and deer. At the right time of day, sunlight dapples the boulders in the water with a soft, golden hue.

Thanks to Virginia’s 37-year-old law allowing conservation easements, this striking view will likely remain unchanged for decades. As part of its multi-use Celebrate Virginia project, The Silver Companies, a Fredericksburg-based development company, placed 437 acres on either side of the river into conservation easements.

The gift would seem to be a good thing, helping preserve the state’s natural beauty just as nearly 700 similar land easement donations have protected wild and open space from the Appalachian Mountains to the marshlands of the Chesapeake Bay. Virginia’s easement laws allowing donors to take tax credits of up to 50 percent of the value of the land, or sell those credits as they wish, is often cited as a pioneering national model. Says House Speaker William Howell, R-Stafford: “I think Virginia does more than any other state to preserve the land.”

But the Silver Companies’ donation has become a rallying cry for legislators who fear that the state may be undermining state finances by giving away too much in the tax credit scheme. Too many people are taking advantage of the tax credits without any oversight of the program, they say. The value of tax credits claimed quintupled to $130 million in just four years, from 2000 to 2004.

A related issue deals with the suspicion that some landowners inflate appraisals to win bigger tax credits. In at least one case, the state tax department came up with appraisals that were 90 percent less than the claim for a conservation easement in New Kent County. More aggressive oversight is likely. “We think we’ve seen other [instances] where there are issues,” says Larry Durbin, assistant tax commissioner for consumer service.

Sen. John Watkins, R-Midlothian, says that of the $130 million in credit claims, about $40 million was somehow suspect. He tried and failed to get a bill passed that would have set an annual cap of $600,000 per individual for the credits. "The system right now is without adequate safeguards to protect the state and the citizens," he says. The current setup is a "CPA's dreamworld," and some claiming the credits have used "phantom LLCs" (limited liability companies) to shield their identities. He declined to provide any specifics.

In the Silver case, the easements are suspect because the land was bundled into an approval process for the company’s 2,400-acre Celebrate Virginia development, which includes a corporate office park, five hotels, a golf course and 1,500 residences. The protected parcels are in the middle of that project. But Jesse Holshouser, Silver’s chief financial officer, denies there was any quid pro quo involving Celebrate Virginia and the tax credits. "We could have built-high rise condos with beautiful water vistas on that land,” he says. “We make a lot less with the tax credits, but we’re doing this because it is the right thing to do.”

The Silver Companies received tax credits worth about $28 million based on an appraisal stating that the riverfront property had a market value of $55.9 million. The firm used some of those credits to lighten its state tax burden and those of some of its investors. It also sold some tax credits openly, realizing about $10 million. Such sales were permitted by changes in the conservation easement law that Howell sponsored in 2002. That action accelerated the use of the tax credits and has led, by coincidence, to criticism of the tax credit program.

There is no indication that The Silver Companies did anything wrong, but the outsized tax credit did raise questions. Was the law on the books too generous to rich developers? Was the state shooting holes in its tax base?

A bill sponsored by Watkins and Sen. Emmett Hanger, R-Augusta, would have limited the aggregate amount of tax credits to $600,000 per transaction, among other restrictions. Their bill died in committee, along with one proposed by the house.

The Senate has inserted a new proposal that would set a floating cap of $75 million for tax credits for the easements. Once the $75 million level is reached, the tax credits would be delayed until the next tax year. Some resolution may come by June. “I expect a resolution but it will be very negotiable,” says Howell.

Affecting the tax credit issue is ongoing conflict over fiscal policy between the House of Delegates and the Senate. The two bodies have been locked in battle of a controversial transportation plan that has delayed important work such as passing a biannual state budget.

Leading the charge for restricting tax credits for conservation easements is Sen. John Chichester, R- Northumberland, chairman of the powerful Finance Committee. According to a source within the legislature, senators noticed a dramatic increase in claims for conservation tax credits about two years ago. In 2000, according to the Virginia Department of Taxation, the conservation credits totaled $24.3 million. In 2002, when the tax credits were made transferable or saleable, the number doubled to $57.25 million. By 2004, they reached $130 million. Taxman Durbin says that these are only the tax credits reported to his department or claimed in tax filings. The true numbers are probably higher, he says.

Those numbers purportedly spooked Chichester. One source close to the legislature recalls overhearing another senator comment: “When Chichester figures out how much this is going to cost, he is going to hit the roof.”           

Chichester, who could not be reached for comment, has told reporters that the easement program is the most liberal in the country and that there are no gatekeepers to police it. His concern, he told the media, is that wealthy landowners might cash in on the program for remote land that isn’t under the threat of development. On the House side, Howell insists such credits are beneficial and wants to keep them as free as possible.

Ironically, both Chichester and Howell are from the Fredericksburg area where, fairly or unfairly, Silver has become a poster boy for the easement issues. Celebrate Virginia is not the only such case, however. In New Kent County, state tax officials questioned a proposed tax credit for an easement granted to Wetlands America and Ducks Unlimited, a hunting conservation group.

The tract in question is a marshy tract near the Pamunkey River west of the town of West Point. One appraisal stated that the land was worth $18 million, giving its owners a credit of $9 million. But Virginia Department of Taxation ordered other appraisals and one valued the land at about $2 million. The matter is now in litigation.

However the issue regarding caps on tax credits is resolved, there is broad consensus within the environmentalist community that conservation easements are successful and should be encouraged. Chris Miller, president of the Piedmont Environmental Council, says the program is “a very important tool in a state that has always had a very conservative approach to regulation and land use.” The tax credits also are a less expensive way to preserve land than buying it outright. A typical easement, he notes, reduces the value of a tract of land by about 20 to 30 percent and the state tax credit allows for the transfer or sale of only half that reduction in value. 

In order for the tax credits to take effect, the land in question must have some demonstrable value that must be protected, such as protection of watersheds, farm soils, vistas, endangered plants or animals, or property with an historical value such as a Civil War battlefield. The easements must fit into a local comprehensive plan, Miller notes.

Over the long term, conservationists argue, easements help reduce infrastructure costs by discouraging development in inappropriate places. State and local governments save money on building unnecessary roads, water and sewer lines and other amenities.

“From our perspective, this has always been a national model and has always been conserving land,” says Stewart Schwartz, executive director for the Coalition for Smarter Growth in Washington. ”From the perspective of state and local government, we’re convinced that it is saving infrastructure costs. Easements are a critical part of the puzzle especially when they are tied to zoning issues.”

As for the program shortchanging state coffers, Schwartz points out that even if the state loses $100 million or so in taxes a year, the current Senate plan to remedy transportation woes runs more than $1 billion a year. If the easements help stem unwanted sprawl, which would reduce future infrastructure liabilities, the tax credits would be worthwhile.

The construction industry seems to agree that Virginia’s approach to conservation easements is a plus. Michael L. Toalson, executive vice president of the Home Builders Association of Virginia, says that the current program is a good example of beneficial “checkbook” conservation because land is given or bought with protection intact. “If there is property that should be permanently preserved, buy it,” he says. “Don’t use police powers to take it.”

“There certainly should be some formula to balance the permanent preservation of open space and tax revenues,” adds Toalson, whose organization is not taking a side on the current tax credit fight. He also says that, with a fast-growing economy, Virginia needs to ensure that land is available to build new homes, stores and schools.

The disagreement, then, seems to focus mainly on tax credit cap, not the conservation easements. Howell and environmentalists worry that the cap will make conservation easements to costly for anyone but very rich individuals and powerful corporations, who can make large enough donations to make a difference. In one such recent deal, International Paper Company, one of the country’s largest wood product firms, announced it was selling 217,000 acres of forests in 10 Southern states including Virginia. The buyers in the $300 million deal are the Nature Conservancy and the Conservation Fund. Transactions of that magnitude are rare.

What makes Virginia’s program special, argues Howell, is that the transferable nature of the tax credits makes them attractive to larger numbers of individuals. That, in turn, results in more land being preserved.

Some objections to the conservation credits, such as inflated property appraisals, can be tamed by tweaks to the law. The most divisive issue is whether the conservation credits will endanger the state’s ability to raise revenue. Curtailing the credits could be subsumed in a larger financial strategy emerging from the Senate to put caps on many types of tax credits. Some form of restraint may be needed – as long as legislators don’t ruin one of the most successful land conservation programs in the country.  

Bacon's Rebellion News Service

April 6, 2006