> V "K Division of Agricultural Sciences UNIVERSITY OF CALIFORNIA ^i^fj ■:;.■:;■;:.■::■■;.:■::'■!-::-::':■■■: ■^ ■ ■■f/-i%ffl-':\ ■'■'.'■■-■■ ■■■'■■':■■ '%-- : >ty-'<-V>/:-?>■ f ■^./ A Young -Growth Timber Taxation IN MENDOCINO COUNTY An Economic Survey by Henry J.Vaux CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 780 YOUNG-GROWTH k This bulletin analyzes the operation of young-growth timber taxation in Mendocino County, the effects of such taxation on the county's current forest economy, and the long-term outlook for that economy. Specifically, it analyzes and answers the following questions: On the importance of young-growth: What is the extent of young-growth timber stands in the county? What is the extent and trend of young-growth cutting? What is the present contribution of young-growth stands to the county's ta base? What share of the county tax bill is young-growth timber now paying? What basis do young-growth stands provide for economic activity, present anc prospective? To what extent can better management of young-growth contribute to the county's economic future? On the effect of taxation on forest management: How is tax-paying young-growth assessed? How is the tax determined? What is the relationship between tax costs and such other costs as administra- tion and protection from fire, insects, and disease? What is the effect of taxation on time of cutting and on income from invest- ments from timber? Are there special impacts on timber growing arising out of current assessment practices? Does taxation bear more heavily on well-managed stands than on poorly managed ones? Are alternative assessment practices available which would modify these im pacts? What is the potential impact of different levels of young-growth taxation on the future of the forest economy? Will present taxing policies jeopardize the economic basis for the county's I in ure? R TAXATION IN MENDOCINO COUNTY An Economic Analysis by HENRY J. VAUX ' :; -^''>U^mmsm CONTENTS The Background 5 The Findings 7 Tax Policy Versus Forestry Policy 7 Are There Economic Inequities Under the Present System? 11 Are Present Tax Policies Affecting the Future Economy? 12 Would More Inclusive Taxation of Young- Growth Jeopardize the Future Economy? 13 'inclusion 14 rt I: Importance of Timber to Mendocino County 15 The Place of Wood-Using Industries in Mendocino County's Economy 15 Sources of employment 16 Trends in primary sources of employment 18 Trends in agriculture 18 Trends in service industries 19 Sources of payrolls and individual incomes 21 Recreation as a source of economic activity 22 Forest Products Industries of Mendocino County 23 The lumber industry 23 Establishment of Douglas-fir industry. 25 Growth of small and medium-size mills 27 Utilization of young-growth timber. . 28 The market for Mendocino lumber. . 29 The plywood and veneer industry 32 The pulp and hardboard industry 33 Other wood-using industries 34 Prospective trends in markets 35 Aggregate demand for wood 35 Diversification of output 37 Timber Supply: The Resource Base for Wood-Using Industries 38 Timber inventory on private land 38 Age class and stocking of timber 40 Timber growth and prospective timber supplies 41 The importance of young-growth stands 46 Ownership of Timberland 46 Size of ownership 47 Type of ownership 48 Changes in ownership 49 Typical kinds of forest ownership 50 Marketing advantages 50 Management advantages 51 Utilization advantages 52 Part II: The Taxation of Youth-Growth Timber 53 Forests in Mendocino County's Tax Base. . 53 Trends in taxes levied 54 Sources of assessed value 56 The outlook for timber in the tax base. . 58 Young-Growth Taxation and Assessment. . 59 Assessment practice 61 Young-growth in the tax base 64 Economic Effects of Young-Growth Taxation 66 Effects of taxation on young-growth management 67 Effect of tax on time of cutting — small holdings 69 Liquidation versus sustained yield — larger holdings 72 Impact on stand improvement cutting. . . 77 Tax instability 81 Tax uncertainty 83 Equity Aspects 83 Property tax problems 84 Maturity problems 85 Administrative cost 86 Appendix 87 Literature Cited 90 Submitted for publication December 9, 1960. A CKNO WLEDGEMENT Appreciation Is Expressed: • To the members of the Joint Timber Study Committee — W. L. Brown, H. B * Elliott, E. P. Ivory, Wendell Robie, P. R. Leake, K. B. McGuire, Russell Ells, Robert McMullen and K. R. Walker — for their interest and thought in planning « the study and their efforts in securing support. • To the assessors and boards of supervisors of Amador, Butte, Del Norte, Eldorado, Humboldt, Lassen, Mendocino, Modoc, Nevada, Placer, Plumas, Shasta, Siskiyou, Sonoma, Tehama, and Trinity counties which provided finan- cial support for the study. • To officials and members of the California Forest Protective Association and to the State Board of Equalization, both of which contributed funds. * • To Mendocino County Assessor W. L. Brown for his advice and counsel; and * to members of his staff for their helpful assistance. i • To Mendocino County forest land owners for providing detailed and conn- 4 dential information about their timber holdings. f • To Professor M. E. Krueger for much of the initial planning of the study, col- lection of basic economic data, and interviewing of forest land owners; K. M. Macdonald for preparing economic analyses of the forest industry of the County and making the estimates and projections of timber inventory; and to Dennis E. Teeguarden for conducting most of the financial analyses, interviewing forest owners, and contributing material to almost every part of the text. JUNE, 1961 The Author: Henry J. Vaux is Dean of the School of Forestry, Professor of Forestry (chairman of the department), Director of the Wildland Research Center, Assistant Director of the Experiment Station, and Forester in the Experi- ment Station and on the Giannini Foundation, Berkeley. 4 YOUNG-GROWTH TIMBER'' The Background -r In 1926, Section 12^, Article XIII, of the State Con- stitution was amended to exempt immature forest trees on planted or cutover lands from property taxation for a certain period. Under provisions in the amendment "immature for- est trees, either planted or of natural growth on cutover lands from which 70 per cent of the merchantable original growth timber in trees over 16 inches in diam- eter have been removed," shall be exempt from taxa- tion. The exemption period specified is 40 years and ' until such time as a timber maturity board determines, that the timber is mature. The land, however, is to be taxed on its "bare" land value. At the time this amendment was enacted, cutover timberlands were generally being assessed on the basis of land value alone. Thus, the immediate effect of the amendment was to serve as a guarantee to land owners that the then existing assessment methods would con- tinue during the period when timber crops were im- mature. For two decades following amendment of Section 1234 there was no active market for young-growth tim- ber in any of California's timbered counties. Market demand and silvicultural condition of old-growth for- ests were such that harvesting was concentrated on the oldest timber age classes. Property tax administration k under the amendment simply required classifying land from which 70 per cent or more of the old growth had been removed and assessing it on the basis of land value . alone. The increased lumber demand after World War II * altered conditions in California's forest-based indus- tries tremendously. Between 1946 and 1956 output of * timber products rose from 3.2 billion board feet to 7.0 . billion (May and Baker, 1958). 2 Before 1941, Douglas- fir amounted to about 10 per cent of the state's lumber production; by 1956 it jumped to 44 per cent of the total. During the same period redwood production more than doubled. These production gains were ac- * complished primarily by additions to the industry's lumber manufacturing capacity, particularly through * the establishment of many new mills that competed with existing mills for available timber supplies. As a consequence, stumpage values rose sharply, bringing * 2 References in parenthesis are to sources listed in Literature Cited, page 89. Immature forest trees exempt from taxation No active market for young-growth timber before WWII Postwar lumber demands lead to young-growth cutting TAXATION IN MENDOCINO COUNTY Mature timber defined New law brings administrative problems timber which previously was commercially unmer- chantable into a highly active market. By 1952, the impact of logging in young-growth timber which had been sporadic and unimportant became significant in several parts of the state. Young-growth timber well over 40 years of age was being harvested in significant quantities. The cutting of timber from land classified as "cutover" for many years apparently became finan- cially attractive to its owners and operators. These developments caused many persons to become concerned about the cutting of untaxed young-growth. The assessor of Humboldt County, feeling that such timber was taxable, initiated steps in 1952 to have it declared mature in accordance with Section 12^. His request to the State Board of Forestry and the State Board of Equalization to appoint members to the Humboldt County Timber Maturity Board prompted a series of meetings and studies to consider the prob- lems of administering the section. One problem was to define the word "maturity" — did it mean physiological, financial, or marketable maturity? Early in 1953, the State Board of Forestry adopted the policy that "timber be mature for assessment purposes when after 40 years the owner initiates cutting, except for stand improve- ment or sanitation purposes; or when 70 per cent by volume of the trees over 16 inches d.b.h. and larger is of a class which is generally and substantially dealt in and sold or operated within the county as commercial saw timber." From 1955, when the first timber maturity board was activated in Humboldt County, to the present the "ma- turity" policy of the State Board of Forestry has been used as a basis for decisions by maturity boards in con- sidering the return of young-growth timber to the tax rolls. However, in the administration of the law in accordance with the current maturity policy, the asses- sors and maturity boards have encountered perplexing problems. One is that cutting on small timber tracts may be completed before maturity board action can be taken. Even when the young-growth stands are re- turned to the tax roll before cutting has begun, the timber is often on the rolls for only a year or two before cutting is completed and most or all of the taxable timber value has been removed. This situation has an impact on the relationships between assessments and tax burdens on different forest ownerships and between young-growth forest property and other types of real property. A second kind of problem lies in the large money and YOUNG-GROWTH TIMBER time expenditures which must be incurred in locating, examining, and obtaining maturity board action on exempt timber properties in order to return them to the tax roll. These problems and others connected with Section 1234 led to the establishment of the Joint Timber Tax- ation Study Committee in 1957. It included representa- tives of the Assessors' Association, the State Board of Equalization, the State Board of Forestry, and the Uni- versity of California School of Forestry. Its purpose was to study the operation of Section 1234, Article XIII, in order to develop guide lines and policies for taxing young- growth timber. The study was to include Section 1234, but was not to be limited to it. After several months of investigation, the Joint Study Committee recommended research into certain aspects of the tax problem. The School of Forestry at the University of California was requested to conduct an independent economic study of young-growth timber taxation, using Mendocino County as a case area. The study was to provide certain factual information and analysis needed for the work of the Joint Study Committee. Funds to conduct the study were provided by 16 con- cerned counties, the Board of Equalization, and the California Forest Protective Association, representing certain forest land owners. The School of Forestry con- tributed space, facilities, and personnel. This bulletin contains the findings of the study carried out in Men- docino County by the School of Forestry during the period 1958 to 1960. Joint Timber Taxation Study Committee established Pilot study in Mendocino County The Findings The economics of young-growth timber taxation in Mendocino County have been examined from the standpoints of (1) the role which the timber plays and is likely to play in the economy of the county, and (2) the effects of timber tax policy on young-growth forest management, on the tax base and on equalization mat- ters. Our principal conclusions are summarized here. TAX POLICY VERSUS FORESTRY POLICY Taxing young-growth timber on an annual ad va- lorem basis tends to encourage liquidation of such timber at an earlier date than would otherwise be the case and to discourage certain types of forest manage- ment practices that would increase forest growth and yield. From the standpoint of maintaining a timber Effect of taxation on cutting and forest management TAXATION IN MENDOCINO COUNTY Careful husbanding of young-growth timber important supply in Mendocino County which will support wood- using industries on a stable basis, deferred liquidation of the young-growth and much more intensive man- agement are highly desirable. Tax policy and forestry policy may thus be in direct conflict with each other. To what extent does this conflict exist in young-growth timber taxation in Mendocino County, and how im- portant are the economic stakes? The careful husbanding of young-growth timber in Mendocino County is of great economic importance for the following reasons: 1. Wood using industries are the largest primary economic activity in Mendocino County, and have oc- cupied this position for many years. The resources of the county, its location near major population centers, and other economic factors suggest that the economic fortunes of the county will continue to be closely geared to those of the wood-using industries. Recreation, based to a substantial degree on the use of forest land, is likely to increase in importance but is unlikely to displace forest industry as the county's economic keystone. 2. The lumber industry remains the predominant element in the county although other forest products industries exist. From the standpoint of economic de- velopment, further diversification of industry, more extensive remanufacture of wood products, and intro- duction and fuller use of additional industries using low-grade wood are the most promising and essential avenues for growth. To encourage such growth the prospect of a sustained supply of timber must be assured. 3. Timber supply is thus the critical factor in deter- mining the future trend of the forest economy of the county. The average annual log production of the county during the nine-year period 1950-58 was 839 million b.f. A steady flow of raw material close to this amount is essential for the maintenance of a vigorous forest economy. 4. The economic future of the county's forest indus- tries depends on the ability of existing young-growth stands to meet most of the volume of raw material needs before the end of the next 15 years. Total volume of timber in the county was estimated as 35.7 billion b.f. by the Forest Service in 1948. In 1958 the volume is estimated at 30.2 billion b.f. Privately owned old- growth timber declined in volume even more than the county total, showing a decrease from 22.6 billion b.f. in 1948 to 15.1 billion in 1958. If old-growth cutting YOUNG-GROWTH TIMBER were to continue at the average rate of recent years, old-growth volumes in the county would be reduced to 9.1 billion feet by 1968 and 2.9 billion by 1978. 5. The growth potential of the county's forest land is sufficient, if well managed, to provide a perpetual wood supply about equal to present levels of drain. But this fact does not assure the future stability of the county's timber economy. There must also be sufficient young-growth timber reaching maturity during the decades after 1968 to provide merchantable sized tim- ber in sufficient quantities to meet industry's raw ma- terial needs. The extent of existing young-growth forests and the way they are handled during the next decade or two will largely determine whether or not forest industries are faced with a critical raw material shortage by 1970 or 1975. 6. Analysis of available stand data suggests that under conditions of (1) annual drain sustained at 800 million b.f. per year, and (2) continuation of the present proportion of young-growth in the cut (20 per cent), the large young-growth remaining by 1978 will be only % of that needed to sustain the present level of cut. Such a curtailment in raw material supply would produce serious economic consequences for the entire county. 7. The key factor in minimizing this potential dis- ruption to the future forest economy is the manage- ment given to large young-growth stands during the next 15 years. If liquidation continues at the present estimated rate of about 160 million b.f. per year (or, as seems probable, at an even higher rate) drastic curtail- ment of forest-products output during the decades fol- lowing 1975 appears inevitable. On the other hand, careful management of the young-growth stands aimed (1) at maintaining the maximum possible volume for harvesting during the period after 1975, (2) salvaging the normal mortality which will occur in such stands during the interim, and (3) increasing the net growth and quality of those stands by judicious thinning oper- ations could greatly reduce the prospective dearth of timber supply. Taxation of young-growth under practices so far employed in Mendocino County does not appear to have stimulated liquidation of such timber; there is some evidence that it is discouraging the spread of more intensive forest management practices. Young-growth timber in Mendocino County was first declared mature for tax purposes in 1957. Timber has been declared mature primarily in those situations Taxation has not stimulated liquidation of immature timber but tends to discourage intensive management TAXATION IN MENDOCINO COUNTY Maturity Board rulings on maturity 1957-1960 The role of timber in the tax base where cutting of the young stands had already begun or appeared to be imminent. Under such a policy little impact of taxation on time of cutting is to be expected. A modified policy which subjected young-growth to taxation before the decision to cut it had been reached, would set-up significant financial pressures on owners to accelerate young-growth cutting. Present uncertainties as to the legal interpretation of "maturity" and as to how the tax status of young- growth may be affected by stand improvement cuttings are discouraging to more intensive forest management. Policies should be clarified so that there is a clear understanding of what constitutes "improvement cut- ting" and that such cutting will not be interpreted as evidence of maturity for purposes of taxation. But it must be borne in mind that taxation is not the only obstacle to the needed more intensive forest manage- ment and that, in many cases, it may not be the most important obstacle. By Maturity Board actions in 1957-1960, 96 owner- ships including 55 ,947 acres of second-growth had been declared mature for purposes of taxation. The total volume of young-growth thus declared mature was 478.4 million b.f. Of 320 million b.f. declared mature in 1957 , 1958 and 1959, only 39 per cent remained on the tax roll in 1960. In 1958 7 per cent of the total assessed timber volume was mature young-growth. The total assessment against such timber is estimated at $700,000, or less than 1 per cent of the 1958 tax base. Standing timber of all kinds has dwindled in relative importance as a source of county tax revenue, account- ing for 35 per cent of real property assessments in 1932 and for less than 10 per cent in 1958. The existing tim- ber inventory and the outlook for future drain indicate clearly that aggregate assessments on old-growth timber will continue to decline and that these declines will not be offset by commensurate increases in taxable young-growth. Given present classification and assess- ment practices, the maximum assessed valuation on young-growth during the next 20 years appears unlikely to exceed $1 million. The role of timber in the tax base has changed sig- nificantly during the last three decades. In 1932 the assessed value of timber-dependent property such as sawmills and logging equipment amounted to $110 per million b.f. of assessed timber; in 1958 the comparable figure had risen to $2,460 per million b.f. In recent years the assessed value of plants and equip- ment dependent on timber has been 1.7 times the as- 10 YOUNG-GROWTH TIMBER sessed value of the timber itself. Thus, from the stand- point of tax revenues, timber's indirect contribution through taxes on plants and equipment dependent on it is greater than the direct contribution of taxes paid on the timber itself. As Mendocino County moves further toward a second-growth forest economy, the importance of the indirect contribution of timber to taxes will increase further. This suggests that tax reve- nues will be favored by timber tax policies which en- courage the permanence and diversification of wood- using industries. This means timber taxation which is not discouraging to stable and intensive management of young-growth stands. From these facts one may draw the following con- Conclusions elusions: Young-growth timber and its management hold the key to much of the county's future economic development. To date young-growth taxation has had limited effects on young-growth management because of the nature of the specific guide-lines which have been used in determining maturity. Future changes in either tax policy or administrative guide-lines could intensify the effect of taxation on young-growth man- agement and hence on future timber supply. The structure of the economy of Mendocino County appears to be such that the manufacturing plants and equipment which depend for their value on timber supply provide more taxable wealth than does the tim- ber itself. Under such conditions the potential conflict between forestry policy and timber tax policy is re- duced; a policy for young-growth timber taxation con- ducive to the maintenance of maximum sustained tim- ber supply will also be conducive to the broadest possible timber-dependent tax base. If this point is clearly understood and recognized, it can help to bring tax policy and forestry policy into a consistent relation- ship with each other. ARE THERE ECONOMIC INEQUITIES UNDER THE PRESENT SYSTEM? Economic aspects of tax equalization are usually re- flected in the proportion of tax free value absorbed by taxes. Substantial variations in this proportion can be found among young-growth timber properties subject to taxation under Section 1234. Revised assessment procedures initiated in 1959 have eliminated some significant equalization problems. However, other problems remain which do not arise primarily from the nature of the present system of taxing young- Equalization growth. Rather, they reflect inherent characteristics problems TAXATION IN MENDOCINO COUNTY 11 of the general property tax when applied to any timber, young or old. These equalization problems arise because the owner of merchantable timber always has, in effect, the option of avoiding some timber taxes by cutting the timber. He can reduce, or enlarge, the proportion of timber value taken by taxes by his own action in determining cutting policy. Thus, mere re- vision of the guide-lines or administrative procedures applied to young-growth timber taxation is likely to do little or nothing toward eliminating present equaliza- tion problems. There is frequent criticism over the fact that some young timber is untaxed or that some is only subject to tax for a year or two before being removed from the rolls by cutting. This circumstance is cited by some as evidence of inequity. It should be clearly recognized that tax administrators are neither responsible for the situation nor do they have the power to correct it. So long as the State Constitution provides exemption for immature young-growth, and the landowner retains the option of deciding when he will cut his timber, the basis for unequalized tax burdens on different young- Bam for economic growth properties exists, and no changes in maturity inequities guide-lines or in tax administration can remove it. To illustrate the point, consider the effect on equali- zation of a drastic change in existing maturity guide- lines resulting in all young timber more than 40 years after harvest of the original growth being declared mature. Under such circumstances, all timber owners would undoubtedly try to accelerate their plans for cutting in order to avoid a prolonged period of tax paying. But owners of small or highly accessible tracts would find it considerably easier to do this than owners of large or remote tracts. Equalization would be as difficult to achieve under such a guide-line as under the present one because a key factor in determining the tax burden — the decision as to when to cut the tim- ber — is under control of the owner, not of the taxing authorities. Under these circumstances it becomes extremely difficult to apply the ordinary concepts of tax equaliza- tion to the question of the most appropriate guide- lines for use in determining timber maturity. ARE PRESENT TAX POLICIES AFFECTING THE FUTURE ECONOMY? As already indicated, there is no evidence that Sec- tion 12^4 a s presently interpreted is having an impact on the county's future economy by affecting the rate of 12 YOUNG-GROWTH TIMBER young-growth liquidation. There is some evidence that the uncertainty surrounding the present young-growth tax situation may be retarding more intensive manage- ment of certain ownerships. Removal of this uncer- tainty by clarification of the legal aspects of the ma- turity concept and by firm establishment of the guide- lines to be used for interpreting maturity should be sought as promptly as possible. This is a matter both of good tax policy and good forestry policy. Elimination of these uncertainties would remove one of the existing obstacles to more intensive young- growth management; but other important obstacles to such management would remain. In the case of some ownerships, tax considerations seem to be the principal existing impediment. In the case of others they are not. Thus, clarification of young-growth tax policy can be helpful in encouraging needed, economic development in timber growing but it is by no means a cure-all for future timber-supply problems. WOULD MORE INCLUSIVE TAXATION OF YOUNG-GROWTH JEOPARDIZE THE FUTURE ECONOMY? This question concerns the probable effects if the guide-lines were changed so as to bring a larger pro- portion of the existing young-growth onto the tax rolls. Present practice taxes young-growth only when it can be determined that a decision to cut the timber has been made. If policies were adopted which placed addi- tional timber under taxation, accelerated liquidation of young-growth and a curtailment of sustained yield forms of young-growth management would be ex- pected. There is no basis in experience for judging what the quantitative effects of this in terms of future timber supply would be. The management of small owner- ships and ownerships not integrated with timber-using plants would probably be more sharply affected than that of larger integrated ownerships. As more than 60 per cent of the forest land in the county is owned by such small or nonintegrated owners, the impact of broadened young-growth taxation on future timber supply might be substantial. The principal effect of extended taxation of young-growth would be to speed up cutting. If a change in policy resulted in the average owner cutting his timber two years sooner than under present tax policies the effect on marketable timber supply in the county 20 years hence would appear to be a 5 to 10 per cent reduction in supply. Needed: clarification of legal aspects of maturity concepts Extended taxation of young-growth would speed up cutting but not increase revenues TAXATION IN MENDOCINO COUNTY 13 In short: A broadening of the volume of young-growth subject to tax would be unlikely to produce a proportionate increase in tax revenues. The existing market for young-growth timber is limited in size, relatively new, and subject to certain problems which do not affect old-growth timber. If a change in tax policy induced more rapid liquidation of young-growth, the value of such timber would undoubtedly decline. Thus, gains in assessable volume obtained by such a policy would be offset in part by declines in unit values, at least dur- ing the years when accelerated liquidation was taking place. CONCLUSION Definitive conclusions on a matter as complex as the economic effects of a forest tax system can hardly be drawn on the basis of three years experience in a single county. But the preceding examination of operations under Section 12^4 in Mendocino County leads to the following preliminary evaluation. Reclassification of young timber has had little effect on management Extension of taxation would be unfavorable to forest management Certain economic inequities cannot be eliminated by further modifications 1. Reclassification of young timber has had relatively minor effects on the management of young-growth in Mendocino up to this time. This reflects the fact that the reclassification policies which have been applied virtually eliminated the possibility of effect on timber management decisions. Uncertainty as to the tax out- look appears to be the principal cause of such impacts on management as do exist. 2. A modification of policies for taxing young-growth which would subject such timber to taxation at an earlier age than is the case under present policies may be expected to have unfavorable impact on young- growth forest management. This impact would be of substantial economic importance to Mendocino County because the young-growth timber will be the key factor in determining the raw material supply on which the whole forest economy of the County will rest within the next 15 or 20 years. 3. Problems of equalization have arisen in the admin- istration of young-growth taxation. The cause of some of these appears to have been eliminated by changes in assessment practice introduced in 1959 and provided for in the recently published assessor's handbook "The Appraisal of Timber Property." Other causes remain, however. These are inherent in the nature of the general property tax applied to timber and cannot be eliminated by modification of the maturity guide lines. H YOUNG-GROWTH TIMBER Part I: The Importance of Timber to Mendocino County THE PLACE OF WOOD-USING INDUSTRIES Wood-using industries have been the largest primary economic activity in Mendocino County for many years, and probably will continue to dominate the county's economic future because of its forest resources, its nearness to major population centers, and other factors. Recreation, based to a substantial degree on the use of forest land, is likely to increase in importance. Such an increase could be a principal source of continued growth if its impact is not dulled by contraction in other segments of the economy. Mendocino County has large forests and its economy is predominantly dependent upon wood-using indus- tries. For a century, the growth of the forest industry and agriculture has been the major basis for growth in population, income, and other indicators of county wealth. Since World War II, economic expansion has been largely sustained by the sudden spectacular in- crease in lumber production which permitted continu- ing population and income increases despite the de- cline in agricultural output (figures 1 and 2). Spectacular postwar economic growth Fig. 1. Mendocino County lumber production outdistanced population increase in the postwar period. Lumber production — Million board feet (right scale) 1850 I860 1870 1880 1890 1900 1910 1920 1930 1940 1950 I960 YEAR TAXATION IN MENDOCINO COUNTY 15 60+ 50 40-- 30- 20 10 T *" ** hand pastured — Thousand acres (right scale) Cropland harvested — Thousand acres (left scale) Lumber production — Million b.f. (right scale) 1000 900 800 700 600 -500 400 - 300 200 | - 100 1925 YEAR 930 1935 1940 1945 1950 1955 I960 Fig. 2. Lumbering in Mendocino County increased steeply since the war while agriculture lev- eled off or decreased. The economy of Mendocino County is resource oriented Distribution of the labor force Sources of Employment The economy of Mendocino County is resource oriented. In 1950, 48 per cent of all persons employed in the county were in the basic agricultural, mining, and manufacturing industries (see table 1). For Cali- fornia as a whole, the figure was only 26 per cent. The county's agricultural and lumber industries alone employ 44 per cent of the labor force. The re- mainder is in service industries such as wholesale and retail trades, professional and personal services, con- struction, and utilities — sectors of the economy which depend heavily upon the basic industries. Three persons out of every ten employed in the county work in the forest industries. Wood-using in- dustries constitute by far the most important occupa- tional field within the basic-industry group, employing 60 per cent of the total. For each person employed in agriculture — the second ranking basic industry — two people are employed in the wood-using industry. As figure 3 shows, forest industry and agriculture together account for 92 per cent of the employment in basic industry. California Department of Employment data show that the pattern of employment today is not 16 YOUNG-GROWTH TIMBER Table 1 PERSONS GAINFULLY EMPLOYED IN MENDOCINO COUNTY, BY OCCUPATION, 1950 Number of Per cent of Occupation persons all persons employed employed Basic Industries Agriculture 2,147 15.2 Mining 15 1 Forestry and fisheries 189 1.3 Manufacturing: Lumber, wood products, and furniture 4,127 29.2 Food processing 134 0.9 Printing and publishing . . 66 0.5 All other manufacturing. . 148 1.0 Total, Basic Industries 6,826 48.2 Service Industries Wholesale, retail trade 2,064 14.6 Business, personal, profes- sional 2,511 17.8 1,115 7.9 Transportation, utilities. . . . 844 6.0 Finance, insurance, real estate 180 1.3 Public administration 381 2.7 Total, Service Industries 7,095 50.3 216 1.5 14,137 100 Table 2 PROPORTION OF PERSONS GAINFULLY EMPLOYED IN MENDOCINO COUNTY, BY INDUSTRY GROUPS, 1930, 1940, 1950 Industry group Per cent of all persons employed 1930 1940 1950 Basic Industries Agriculture 31.7 0.4 10.4 6.7 0.6 3.7 24.6 0.1 6 18.6 0.9 0.9 15.2 0.1 Forestry and fisheries Lumber and wood products Food processing All other manufactures 1.3 29.2 9 1.5 Total, basic industries Service Industries Trade, business, personal professional Transportation and utilities Construction Public administration 53.5 28.9 5 5 6.8 2.2 45.7 36.6 6.3 7.0 3.1 48.2 33 . 7 6.0 7.9 2.7 Total, service industries Industry not reported 43.4 3.1 53.0 1.3 50.3 1.5 100.0 100.0 100 Source: U.S. Bureau of Census, Population Census Source: U.S. Bureau of Census, Population Census of 1950. of 1930, 1940, 1950 greatly different from that indicated by the 1950 data in the tables. Mendocino County produces far more forest and agricultural products than it can market and consume Fig. 3. Forest industry and agriculture dominate employment in the county's basic industries. Lumber and wood products — 60% Forestry and fisheries- -3% Food processing — 2% All other basic industry — 3% Workers in wood- using industries outnumber those in agriculture almost two to one Agriculture— 32% Source: U. S. Bureau of Census, Population Census of 1950. TAXATION IN MENDOCINO COUNTY 17 Employment pattern 1930-1950 Employment in wood manufacturing increased sevenfold Employment in agriculture declined locally. Both industries export to intrastate, national, and international markets. Since Mendocino County has a resource-oriented economy, levels of employment and income depend heavily upon the availability of land resources which support timber and farm produc- tion and provide, in turn, the raw materials for the county's processing industries. In contrast, economic activity in many other parts of the state is based on distribution of goods and services to local market cen- ters with dense population. Trends in Primary Sources of Employment Mendocino's 1950 employment pattern was the result of two decades of rapid expansion and contraction in certain sectors of the economy. The period was marked by: • increasing dependence on the forest industries • reduction in land area cultivated and pastured • growing service industries. Between 1930 and 1950, total employment in the county increased by 59 per cent. Since total employ- ment declined between 1930 and 1940, all this growth occurred after 1940. Table 2 shows the shifts in em- ployment of which the change in the forest industry is the most striking. In 1930 the wood-using industries employed only 13 per cent of all workers in the basic industries; 20 years later they employed 60 per cent (figure 4). In absolute numbers, employment in wood manufacturing was seven times greater in 1950 than in 1930. Employment data exactly comparable to census figures are not available for the years following 1950, but lumber production continued to rise until 1957 and remains well above 1950. An estimate for 1956 places employment in lumber manufacturing at 6,539 (California Chamber of Commerce), a figure 11 times the 1930 level. Thus, the county since 1930 has grown primarily because its forest industry has grown, and today is more heavily dependent on this industry than it was on agriculture 30 years ago. Trends in Agriculture The county's wood-using industry became relatively more important as agriculture declined. In 1930, agri- culture employed 32 per cent of the county's total em- ployment; by 1950 only 15 per cent. Within the basic- industry group, agriculture fell from 59 per cent to 32 per cent. These relative changes were accompanied by an actual decline in the number of persons employed in agriculture; this took place over a period when gains 18 YOUNG-GROWTH TIMBER 00 Source: U. S. Bureau of Census. 90 80 70 60 50 40 30 20 10 t LUMBER AND WOOD PRODUCTS AGRICULTURE FORESTRY AND FISHERIES i ALL OTHER BASIC INDUSTRIES \0 1930 M. 1940 n 1950 a Fig. 4. The proportion of employment in the forest industries in- creased heavily between 1930 and 1950. were made by every other major sector of economy. The total number of farms in the county remained about the same, and the land in farms increased, but the total area of cropland harvested declined (figure 5). Increases in farm-land area resulted from a 30 per cent gain in pastured land, and the value of livestock and livestock products was 2.2 times greater in 1950 than in 1930. But 72 per cent of the increase was due to rising farm prices, and only 28 per cent to greater out- put. Value of crops such as fruits, nuts, and hay de- clined by 16 per cent when adjusted for rising prices. Considering the current agricultural outlook, there seems little reason to suppose that these trends will be reversed enough to affect markedly the county's present dependence on timber industries. Trends in Service Industries A third significant change in Mendocino's economy has been the rise of service industries as the county's major employer. Overall, there was a relative decline in basic industry employment and an increase in the service sector between 1930 and 1950 (see table 2). The service industries made greater relative gains in em- ployment than the basic industries. Three major reasons account for the rise of the service industries. As family income increased, a larger proportion of its purchasing Rise of the service industries TAXATION IN MENDOCINO COUNTY 19 Source: 1925-1959 U. S. Census of Agriculture reports. 1900 While every other major sector of economy gained, cropland declined Reasons for the growth of service industries 1800 1700~ 1600 1500 1400 1300 1200 400 300 200 100 Number of farms Farmland area (thousand acres) Land pastured (thousand acres)' Cropland harvested (thousand acres) 1925 1930 1935 1940 1945 1950 1954 1959 Fig. 5. Farmland tended to increase, cropland declined. power became available for service-type consumption. Secondly, servicing activity tends to be heavier in in- dustrialized communities than in agricultural ones, and thus was favored by the relative shift from farming to manufacturing. Thirdly, the growth of the service industry went hand in hand with the increase in recre- ational activity. In 1957, 14 per cent of all rural land owners in the county were nonresident, recreational- type owners (Casamajor et al., 1960). Their expendi- tures, and those of non-property holding recreationists and tourists represent income originating from outside the county and are chiefly directed toward service estab- lishments. In view of the role of industrialization and recreation in the growth of service industry, forests and their dependent economy appear likely to continue as a major determinant of service industry trends. 20 YOUNG-GROWTH TIMBER i Sources of Payrolls and Individual Incomes Analysis of income by source confirms the economic picture of Mendocino County as derived from the em- ployment data — the strength of the current economy rests primarily on the timber industries. One person in 3.3 is employed by the wood-using industries, and one out of every three dollars of income orginates from them. The level of income to county residents, along with increases in population and industrial activity, has been rising rapidly since the war (estimates of the State Chamber of Commerce): 1940 $17 million 1947 47 1950 62 1952 84 1953 89 1955 102 1956 108 Wood-using industries: leading source of income Figure 6 shows the proportion of county income originating from various sources, especially the increase of income from wages and salaries. Complete data are not available to show the exact distribution of county income according to industries, but the State Department of Employment reports pay- rolls, by industry groups, for employees covered by un- employment and compensation insurance (shown in table 3 for July-September, 1957). Although uninsured income, including much of the county's agricultural income is omitted, the data probably reflect with fair accuracy the origin of the wages and salaries shown in figure 6. On this basis it appears that about one-third of the county's income originates from wages and salaries paid by the wood-using industries. Fig. 6. Shifts in personal income, 1947-1957. 1947 Wages, salaries and other labor 53.4%63l2% 1957 Almost two-thirds of the county income comes from wages and salaries 8.6% 12.1% ^roperty income 3l7% Pr °P rie ^ 0rs '\7.2% Transfer payments Transfer payments Source: California State Chamber of Commerce, Economic Survey Series. TAXATION IN MENDOCINO COUNTY 21 Table 3 INSURED PAYROLLS IN MENDOCINO COUNTY BY INDUSTRY GROUP, JULY-SEPTEMBER, 1957 Industry group Payroll nearest $1,000 Per cent of total payroll Agriculture, forestry, and fishing. 61 1,182 104 6,403 1,152 897 1,996 1,096 0.5 9.2 Manufacturing Food and kindred products Lumber and wood products 0.8 49.6 8.9 Transportation and utilities 7.0 15.5 Service, finance, and other 8.5 12,891 100.0 Source: State of California, Department of Em- ployment. Recreation based on use of forest lands grew more rapidly than other economic segments Recreation as a Source of Economic Activity Recreation is largely based on the use of forest lands in Mendocino County. In 1957, 6 per cent (110 thou- sand acres) of the county's rural land area was used specifically for recreation and undoubtedly much addi- tional land was used for the same purpose. A portion of the growth in service-industry activity has also been ascribed to recreation. Recreational growth is also indicated by the rapid rise in land values where recreation potential is high, and by the notable increase in such service-type accom- modations as motels. While recreation activity cannot be measured on the basis of available information, it is apparent that during the last decade it has grown more rapidly than any other economic segment of the county. Some qualitative aspects should be noted. To the extent that recreational use comes from people who derive their incomes from outside Mendocino County, recreation fulfills much the same economic role as basic industry; it is a source of in-county employment and income which is independent of other activities in the county. To the extent that recreation expenditures come from those who derive their income from within Mendocino County, recreation provides no economic benefits not already recognized in the preceding em- ployment and income analysis. Recreational activity, particularly by those from out- side the county, is highly seasonal, which reduces to some degree its economic contribution in comparison 22 YOUNG-GROWTH TIMBER with other less seasonal activities. It may also be noted that the recreational advantages of Mendocino County stem to a considerable degree from its forest land. How that land is managed will therefore affect future recre- ational potentials. There is little doubt that outdoor recreation in Cali- fornia will continue to increase rapidly because of the population expansion, the continued increases in lei- sure time and family income, and the accessibility of the county to the all-important non-resident recrea- tionist, particularly from the San Francisco Bay Area. Although any forecast is highly conjectural, well in- formed analysts have suggested that outdoor recreation in the forested areas of California may double within the next 10 or 15 years. The evidence suggests that Mendocino County will have at least its proportionate share of this increase. Recreation potential depends on forest management California outdoor recreation may double within 15 years, with Mendocino County receiving its share FOREST PRODUCTS INDUSTRIES OF MENDOCINO COUNTY The lumber industry dominates the numerous forest products industries existing in Mendocino County. The greatest promise for economic growth lies in further diversification, more exten- sive remanufacture of wood products, and introduction and fuller use of additional industries using low-grade wood. To encourage such growth, a sustained supply of timber must be assured and well-organized market-development programs will be needed, particularly to strengthen the market position of young-growth redwood. The forest-based wood-using industry of Mendocino County consists of manufacturing activities processing- some 16 different types of commodities. Lumber, ply- wood, hardboard, shingles, grape stakes, and Christmas trees are among the important products produced in the county. Lumber and veneer and plywood comprise the biggest part of the industry and together utilize 98 per cent of the timber cut (figure 7). Table 4 shows the trends in output of these products since 1948. The Lumber Industry Lumber manufacturing is Mendocino's oldest major industry. In 1852, the county's first sawmill was estab- lished at the mouth of Big River. Within two decades, 19 mills were in operation. Sawmills were built on all major coastal streams and, after 1856, in the interior (May, 1954). During this early period production was largely centered in the coastal forests with the industry depending on water-borne transport to reach its mar- Of 16 forest products in the county, lumber, veneer and plywood are most important TAXATION IN MENDOCINO COUNTY 23 Table 4 FOREST PRODUCTS OUTPUT IN MENDOCINO COUNTY Operators reporting Products Year Sawlogs* Veneer logs* Pulpwood Split products Piling & poles Fence posts Fuel- wood Total Number Thousand b.f. Pieces Cords Thousand b.f. 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 81 130 139 172 220 263 273 277 263 216 255 314 356 483 689 727 886 957 961,700 926,816 741,998 742,006 ,991 ,181 ,612 ,106 ,090 ,028 618 36,583 41,098 36,327 38,972 * 24,037 57,517 74,378 40,786 29,436 23,449 11,636 5,048 5,148 524 8,541 2,216 5,627 3,270 6,258 7,520 7,389 5,930 8,254 1,167 500 500 6,499 5,660 3,426 3,214 9,123 30,260 22,597 12,070 1,100 4,750 100 2,700 300 300 128 265 45 98 312 125 195 85 315,632 364,922 509,915 752.964 805,437 927,191 993.734 1,030,321 990,027 791,690 795,632 Total Volume Cut: 8,277,465 * Sawlog, veneer log and pulplog production were combined prior to 1950; sawlog and veneer log production were combined through 1954. Source: Annual reports of California Division of forestry. Fig. 7. Lumber and veneer use 98 per cent of the timber cut. r Total log volume 1,049 million feet A Lumber dominates the total log volume -Sawlogs — for lumber manufacture 91% Veneer logs y0/ and bolts Pulpwood and others 2% 100 200 400 ' 600 ' 800 1000 300 500 700 900 Source Forest Survey Release No. 35 ; California Division of Forestry compilation of production reported by timber operators, 1956. 24 YOUNG-GROWTH TIMBER kets in San Francisco, other California coastal points, and overseas areas. As figure 1 indicates, output between 1860 and 1880 averaged about 50 million b.f. per year and by the latter year something like 1.1 billion b.f. of timber had been cut (Palmer, 1880). By the turn of the century, technological changes in the industry plus expanding markets brought production up to about 100 million b.f. per year. The total number of mills had increased to 27. Production generally continued to move upward and by 1922 reached its pre-World War II peak. Then followed a period of decline and a disastrous fall after 1929 when the depression forced nearly all the mills in the county to close. In 1932, production was below that of any year of record since 1862, a period of 70 years. 1932 marked a turning point for Mendocino's lum- ber industry. With the establishment of new mills and re-activation of old ones, output continued to climb rather steadily until 1946, when the pent-up demand for housing and other consumer goods was released. With a readily available supply of timber, Mendocino felt this impact immediately. In one year, 1946 to 1947, production doubled although the number of mills operating remained the same. During the following year, output was up another 100 million board feet, and the number of mills was increased by 36 to 129. Expansion in the industry continued at this rapid rate. The 1951 production was four times greater than 1946; the 1956 production was six times greater than 1946 and half again as large as 1951 (table 5). Increases over the 1951-56 period were made in spite of a net loss in number of operating mills. Because of sketchy records and an unmeasurable amount of home-use consumption of forest products, the exact amount of timber cut in the county since 1852 cannot be determined. The estimated volume cut from 1852 to 1958 is about 25 billion b.f. This compares with an estimated 20 billion b.f. of old-growth remaining in the county in 1958. An estimated 9.4 billion, or 38 per cent of the total, was cut in the decade 1949 to 1958. Clearly, further forest industry expansion, or even maintenance of existing industry output, cannot be sustained indefinitely by old-growth timber. Establishment of Douglas-fir industry. The prewar Mendocino County forest industry almost entirely cen- tered on redwood lumber. Although Douglas-fir tim- ber was present in large volumes, comparatively small amounts were cut, mostly in conjunction with redwood Lumber output averaged 50 million b.f. during the early years rose to a peak in 1922, but dropped sharply in 1929 started to climb again in 1932 rose steeply in 1946 and continued to climb rapidly until 1956 Rate of timber volume cut in the past indicates that industry output cannot be maintained on old-growth timber alone Prewar industry of the county was based on redwood lumber TAXATION IN MENDOCINO COUNTY 25 Table 5 THE INCEEASE OF MILLS AND LUMBEE PEODUCTION, MENDOCINO COUNTY, 1940-57 Year Number of mills Total lumber production Redwood Douglas-fir Pine True fir Other Million b.f. 1940 25 28 26 33 42 47 93 93 129 126 105 123.7 148.2 161.6 173.8 188.0 194.7 144.7 283.7 386.9 376.0 440.0 585.6 610.0 698.0 791.7 774.0 874.4 759.0 67.4* 242.3 321.5 360.5 361.2 63.2 119.6 237.2 310.2 463.5 11.4 5.3 24.4 50.1 37.3 1.7 0.3 2.3 48.0 12.3 1941 1942 1943 1944. 1945 1946 0.9 1947 . 1948 0.2 1949 1950 1951 0.1 1952 1953 1954 3.2 1955 1956 1957 0.1 * Redwood production in 1946 was abnormally low due to a labor dispute. Sources: California Forest & Range Experiment Station, Forest Survey Releases Nos. 10, 17, and 30; and Forest Research Note No. 55; Census of Manufactures; Estimates by R. H. May, U.S. Forest Service, for years 1949, 1950, 1952, 1953, 1955, 1957. Postwar demand encouraged cutting of Douglas-fir By 1956 Douglas-fir surpassed redwood as leading species operations in mixed stands. In contrast to redwood, most Douglas-fir stands were held by owners who were not timber operators. Fifty-two per cent of such acreage was owned by ranchers. Many were converting their stands to grass for grazing uses because they considered Douglas-fir timber a liability rather than an asset. Douglas-fir timber had little or no commercial value and most such land was carried on the tax rolls at a nominal assessment. The great postwar increase in demand for building materials coincided with the ready availability of this Douglas-fir timber. Before they discovered the new commercial value of their stands, many ranch owners had virtually given their timber away in exchange for having the land cleared. Since Douglas-fir occurs mainly in the eastern half of the county where an estab- lished road system made it accessible, its utilization re- quired comparatively modest capital investment in plant and road facilities. Large numbers of small mills sprang up. By 1951 production of Douglas-fir was four times greater than in 1945, while redwood had risen only about two and a half fold. By 1956 Douglas-fir surpassed redwood as the leading species, accounting 26 YOUNG-GROWTH TIMBER Source: Division of Forest Economics, Pacific Southwest Forest and Range Experiment Station, table 10. 1941 1945 1946 1951 Fig. 8. Douglas-fir is now the leading lumber species in Mendocino County for 53 per cent of the lumber produced (figure 8). In the period 1946-56, output of Douglas-fir jumped from 63 million b.f. annually to 463 million. Lumber pro- duction from the mixed conifer species (mainly pines and white fir) also increased, but their output remains relatively unimportant compared to that of redwood and Douglas-fir. Growth of small and medium-size mills. The sudden emergence of the Douglas-fir industry quickly altered the overall structure of the county's lumber industry. Pre-war production was centered in a few, large red- wood mills. Between 1940 and 1948, more than 100 new sawmills went into operation. By 1948, 94 per cent of the mills were very small or small-size plants, pro- ducing 51 per cent of the output (table 6). Since then additional medium and large mills have been built, small ones were enlarged or shut down, thus the trend of the industry has again been towards larger plants. As shown in figure 9 the small mills are characteristic of Douglas-fir production while redwood lumber is produced mainly in large and medium-sized plants. Postwar ownership of sawmills changed extensively. Only 9 of 93 mills operating in 1946 were still oper- ating or were under the same ownership in 1956. Seventy-two per cent of the production was by mills that had been built or had new owners since 1946. 1956 Use of Douglas-fir encourages development of small mills Mills change oivnership frequently TAXATION IN MENDOCINO COUNTY 27 Table 6 LUMBER PRODUCTION BY MILL SIZE: THE TREND IS TOWARD LARGER PLANTS 1948 1951 1956 Mill-size class (by annual production, million b.f.) Active sawmills Lumber production Active sawmills Lumber production Active sawmills Lumber production Num- ber Per cent MMb.f. Per cent Num- ber Per cent MMb.f. Per cent Num- ber Per cent MMb.f. Per cent Large (25.0 or more) .... Medium (10.0-24.9) Small (1.0-9.9) 1 6 46 71 0.81 4.8/ 37.1 57.3 180.8 152.8 34.0 49.2 41.6 9.2 {J 70 34 1.6) 9.5/ 55.6 27.0 294.4 273.2 10.6 50.3 46.7 1.8 ( 7 \ 25 51 18 6.7 23.8 48.6 17.1 277.8 352.5 231.9 6.2 31.8 40 3 26.5 Very small (less than 1 .0) 0.7 124 124 100.0 100.0 367.6 367.6 100.0 100.0 118 8 126 93.7 6.3 100.0 578.2 7.4 585.6 98.8 1.2 100.0 101 4 105 96.2 3.8 100.0 868.4 5.9 874.3 99.3 Estimated 0.7 100.0 Source: Division of Forest Economics, California Forest and Range Experiment Station, U.S. Forest Service. These structural features of the lumber industry and the changes in them are significant because, taken to- gether with the forest ownership situation to be dis- cussed later, they influence the markets for standing timber, the degree of utilization of such timber, and the way in which the industry will adapt itself to a young-growth raw material supply. Utilization of young-growth timber. The build-up of lumber manufacturing in Mendocino has been based from earliest times on the utilization of its large old- 28 Fig. 9. Lumber production by species and mill-size class, 1948. Redwood 4.3% Douglas-fn Mill-class size (annual production — million b.f.) \Large and Medium \(10 million b.f. or more) Small (1-99 million b.f. or more) Very small (less than 1 million b.f.) Source: Division of Forest Economics, California Forest and Range Ex- periment Station. YOUNG-GROWTH TIMBER growth timber resources. It was the magnificent stands of old-growth redwood that originally attracted lum- bermen to Mendocino County. The great postwar boom was based largely on the previously untapped stands of old-growth Douglas-fir (table 5). Today the lumber industry is still largely based on the utilization of old-growth timber, but the use of young-growth in lumber manufacturing is increasing rapidly. Detailed information tying lumber production to the timber age-class utilized is not available. Small amounts of young-growth appear to have been cut during the early 1950's and by 1956 such cutting was active. Data provided by the County Assessor's office and the Cali- fornia Division of Forestry indicate that the cut of young-growth in 1958 was roughly 100 million b.f. mostly redwood. This represents 12.5 per cent of the total 1958 cut reported by timber operators. The number of mills operating either entirely or partly on young-growth in 1958 was estimated to be about 23. Most of them were small mills producing less than 10 million b.f. annually. The market for Mendocino lumber. Mendocino lum- ber is distributed throughout the United States and exported abroad. Since the county produces about 2 per cent of the national lumber output (in 1956) and 15 per cent of the state total, it shares markets with other producing areas. The ability of the county to compete in these markets has an important bearing on the strength of its lumber industry. In considering market economics, redwood must be distinguished from Douglas-fir and old-growth from young-growth because of the different qualities of each of these classes of lumber. Markets for old-growth redwood are those requiring durability, straightness of grain, availability in large sizes, and pleasing appearance. Such markets stress spe- cial manufacturing uses such as tanks, cooling towers, caskets, and furniture. About 75 per cent of the lumber goes into construction, where it is used for special pur- poses such as sills, siding, and interior work. The spe- cial properties of old-growth redwood are the principal basis for redwood sales promotion. As a result, in 1953 about half of the redwood shipments were to markets outside of California (chiefly to the Central, Southern, and Plains States). In these markets Mendocino's pri- mary competition comes from the nine other California redwood counties (see figure 10). Lumber industry has been based on old- growth timber, but use of young-growth is increasing Cut of young-growth probably near 12V2 per cent of total now Mendocino lumber amounts to 2 per cent of all U. S. lumber and 15 per cent of the California output Old-growth redwood has a high-value specialty market, much of it outside California TAXATION IN MENDOCINO COUNTY 29 Source: U. S. Forest Survey Release No. 30. Per cent of production Production — Million b.f. County Del Norte Humboldt Mendocino Sonoma Santa Cruz Five others Santa Clara • Marin San Mateo • Monterey Contra Costa TOTAL I 25.5 45 I .6 36 1.2 109.5 2 7.4 3.9 1,079.1 I 1.6 4 1.8 33.6 10. I 2.5 0.4 100% Fig. 10. California redwood lumber production by counties, 1956. Old-growth Douglas- fir is sold for general construction uses, mostly in California Old-growth Douglas-fir markets emphasize general- construction uses. Because of its strength, nail-holding ability, and related qualities, Douglas-fir is used for structural members, flooring, and framing. Since Cali- fornia Douglas-fir is in direct competition with pro- ducers in the Pacific Northwest and also close to the large California building construction market, out-of- state markets are relatively unimportant. Young-growth redwood differs substantially from old-growth lumber. Some differences are inherent — young-growth logs are smaller, have considerably wider annual rings, and a much smaller proportion of knot- free material. Other differences reflect the fact that, as a comparatively low-value product, such lumber is 30 YOUNG-GROWTH TIMBER frequently manufactured with less care and thorough- ness than old-growth material. For these reasons, young-growth redwood lumber is not produced in the large sizes characteristic of old- growth, yields a much higher percentage of common grade boards, may include more sapwood with a lower decay resistance, and may be less pleasing in appearance (according to present market preferences) because of coarser grain and lighter color. As a result young- growth redwood lumber has not entered the high-value specialty markets which characterize old-growth. It goes mainly into general construction uses for many of the same purposes as Douglas-fir and directly competes with several other species in these markets. The effects on log and stumpage value of these qual- ity differences between young-growth and old-growth redwood are quite variable, depending on the nature of the timber itself and on the means which the manu- facturer has available for dealing with the special prob- lems of young-growth marketing. Reported differences in log values (f.o.b. mill pond) range from $1 to $21.50 per M.b.f. In most cases, however, the value differen- tial between young-growth and camp-run old-growth redwood logs is between $10 and $15 per thousand. Although important market differences are creating a substantial value differential between old-growth and young-growth redwood, some of these underlying mar- keting problems can be solved with proper programs. Such programs include management of the young- growth to improve its quality by cultural measures; lumber manufacturing techniques to minimize unfa- vorable characteristics such as shrinking and warping; and market promotion to get the material into uses for which it has natural advantages and to keep it from uses for which it is not well suited. Without a concerted effort to improve the market position of redwood young-growth, existing market preferences for other material will continue and young redwood will remain a relatively poor competitor. In the history of lumber marketing many materials once subject to similar mar- ket disadvantages now enjoy strong market positions as a result of the kind of market development program described above. To be effective, such a program re- quires sustained efforts over many years by a strongly organized marketing group. Young-growth Douglas-fir lumber also lacks some of the attributes of old-growth. It yields smaller sizes and generally knottier lumber, although for many char- acteristic uses of this species small, tight knots are pref- Young-growth red- wood goes mostly into general construction, similar to Douglas-fir but a program of management, manufacturing techniques, and promotion could improve its market potential Young-growth Douglas-fir can compete with old- groivth Douglas-fir in the markets TAXATION IN MENDOCINO COUNTY 31 Plywood and veneer industry is new in Mendocino Only Douglas-fir is used erable to the larger knots of old-growth. But unlike redwood, these characteristics do not disqualify young- growth Douglas-fir from effective competition in many markets that characterize old-growth. As a result, cur- rent value differentials are less, ranging from $2 to $10. Experience in the Pacific Northwest indicates that adaptation of the Douglas-fir market to young-growth timber supply is a simpler problem than that of red- wood. The Plywood and Veneer Industry. The manufacturing of plywood and veneer is a com- paratively new industry in Mendocino County. The first plywood plant was built at Calpella in 1948, and by 1956 two plywood and four green-veneer plants were in operation. One of the veneer plants has since closed down. Although its output and raw material needs are small compared to lumber, plywood is Mendocino's second ranking wood-using industry. In 1956, production of veneer logs and bolts was 70 million board feet, or 7 per cent of the total timber output (figure 7). Of this amount, 51 million was received by county plants, the rest was exported to neighboring counties and to Ore- gon (May, 1957). The economic importance of the plywood industry is greater than its size, measured in raw materials, sug- gests. Plywood production requires more labor per unit of wood than does lumber. A given amount of timber supports more workers if utilized for plywood than for lumber. Only Douglas-fir is used in the county for veneer and plywood, although some redwood, pine, spruce and hardwoods are utilized in other coastal counties. The plywood industry competes directly with lum- ber for the supply of high-grade logs, and recent changes in plywood markets and utilization have inten- sified this competition. When plywood manufacturing began, only sanded plywood with at least one good face was marketable. Knots and similar defects could be included in plywood cores, but face veneers had to be of clear material obtainable only from high-grade logs. Automatic patching equipment has made use of lower- quality material possible. At the same time, unsanded plywood sheathing, in which knot holes on the outside faces are acceptable, has found its use in home con- struction. These changes in technology and markets meant that plywood manufacturers could use lower- quality logs which previously had gone into lumber. 32 YOUNG-GROWTH TIMBER As a result, the economic base of the plywood industry widened, and competition with the lumber industry for the same type of log increased. Large, clear logs are still most desirable for rotary- cut veneer. On logs or stumpage of high quality, the plywood plant can generally outbid the sawmill be- cause of the higher realization value of its product per unit of wood used. In effect, the plywood plants absorb a more than proportionate share of high-quality logs, leaving an increased proportion of the lower grades to sawmills. In contrast to lumber, very little young-growth tim- ber is utilized in plywood manufacture. Most young- growth, because of size and quality limitations, does not meet the log-grade requirements for plywood. In general, specifications require a minimum diameter of 18 inches, providing knots are not larger than two inches. Very little young-growth meets these standards. The Pulp and Hardboard Industry Pulpwood production began in Mendocino County in 1948 and increased rapidly for a few years, particu- larly after a masonite hardboard plant began operating in 1950 (table 4). By 1952, production of pulpwood reached a peak of 74 million b.f. Pulp and hardboard mills then shifted to chipped sawmill residues as their principal raw material and pulpwood utilization began a steady decline. In 1957, only 5 million feet of pulp- wood was cut. As shown on page 35, over-all U. S. demand for pulp is expected to expand. Young-growth timber, thinnings, logging residues and low-quality logs from Mendocino County forests have already been shown to be suitable as raw material for pulping operations. However, little or no increase in this market for timber is to be expected until the potential supply of chipped mill residues available in the area is fully exploited. In 1952, the estimated volume of unused residues suitable for pulping in Mendocino, Lake, and northern Sonoma counties was 15 times greater than what was used in the pulp and hardboard industries (figure 11). Since 1954, utilization of mill residues has increased greatly while closer utilization in many mills and re- duced forest-products output have curtailed somewhat the potential supply. But substantial volumes of un- used mill residues are still available in the county. Pulp production could be expanded considerably by using such residues, before additional primary pulpwood pro- duction would be needed. Therefore, young-growth Plywood requires high-quality logs, mostly old-growth timber Pulp production is new and of modest size Unused mill residues available to meet potential pulp industry needs TAXATION IN MENDOCINO COUNTY 33 Source: May and Erickson, 1955, tables 3 and 4. Used residue 8.9 million cu. ft. Unused residue 29.7 million cu. ft. Used for fiber U umer uses 1.7 ma. cu. ft. T Ul.2 mil. cu. ft. Other uses Fig. 11. Use of sawmill residue in Mendocino County area, 1952 (Mendocino, Lake, northern Sonoma counties). Various uses of dead, salvaged, and small- size materials probably will not be used for a number of years even if additional capacity for pulping should be installed. Other Wood-Using Industries Other types of forest industries in Mendocino in- clude the manufacturing of poles and piling, shingles and shakes, other split products, and such miscellaneous products as greenery, fuelwood, and Christmas trees. Poles and piling have been produced in small quan- tities for many years. Output has varied widely, and increased sharply in 1956 when a pole yard was estab- lished in the county. However, the volume — all of it in Douglas-fir — is still less than 1 per cent of the total amount used by all wood-using industries. Though small, the industry is significant to young- growth forestry because it provides a potential market for thinnings and small-size material which are unsuit- able for lumber or veneer. Shingle and shake manufacturing is an old, estab- lished industry in Mendocino. In 1956, the county led all other areas in production — accounting for 62 per cent of the state total. Its 9 plants used only 2.2 million feet of timber. The industry depends entirely on a supply of old-growth redwood which is straight-grained and easily split. Much of its raw material is salvaged from logging operations and dead material. The in- dustry reached a post-war peak in 1947 and its output has been declining since. Split products, such as grape stakes, fence posts, palings and pickets, fence rails, and split shakes are manufactured in the county by small, independent 34 YOUNG-GROWTH TIMBER operators who work primarily with hand tools. In 1956, 37 such operators used 8 million feet of timber. Grape stakes are the leading products (accounting for over half the output), followed by palings and pickets. Most of the small splitters operate on a part-time basis, and output varies considerably from year to year. Old- growth redwood is the only raw material used — with about half of the industry's wood supply coming from dead or salvaged material. Miscellaneous products include greenery, fuelwood, and Christmas trees. Prospective Trends in Markets Output of forest products in Mendocino County reached an all time high between 1954 and 1956 (table 4) and has dropped to about 80 per cent of that peak. This drop does not appear to reflect any permanent change in the outlook for demand for Mendocino for- est products. But certain features of prospective de- mand may modify the county's present position and affect the character of future development. Aggregate demand for wood. Although the distri- bution of certain Mendocino products such as Douglas- fir lumber tends to concentrate in California, the mar- kets in which most Mendocino forest products are sold are generally determined by nation-wide influences. Two studies of long-term trends in the U.S. demand for wood products, by the Stanford Research Institute (1954) and by the U.S. Forest Service (1958), largely confirm each other on the broad outlines of the future Forest-products outlook in Mendocino County depends on nation-wide demands Table 7 U. S. CONSUMPTION OF CEETAIN FOEEST PRODUCTS IN 1952 AND PROJECTED CONSUMPTION IN 1975 Consumption Per cent of total U. S. wood Commodity Estimated Projected products consumption 1952 1975 1952 1975 Lumber: (billion b.f.) 40.7 41.5 35.2 35.4 5.4 5.4 44.7 47.6 to 55.5 62.5 65.0 to 72.0 9.2 9.6 62 62 27 27 4 4 51 52 to 54 Pulpwood: (million cords) 36 36 to 35 Plywood: (billion sq. ft.) %" 5 5 Source: Stanford Research Institute, 1954. TJ. S. Forest Service Timber Resources for America's Future, 1958. TAXATION IN MENDOCINO COUNTY 35 Greatest increase is seen in pulp production which is weak in Mendocino The two Mendocino species are little used in pulpwood market. Pertinent details of the two projections are shown in table 7. Although experience since 1952 suggests some sig- nificant revision in the detail of these projections, the major future market trend still seems valid. This is for over-all growth in the demand for forest products with pulpwood and plywood markets showing significantly greater strength than the lumber market. The two right-hand columns of table 7 show that much of the expected expansion in the demand for wood will be in the form of pulpwood. Even though both projections anticipate a significant rise in lumber consumption, both expect the relative share of lumber in the wood-products market to diminish from 62 per cent of the total in 1952 to only 51 to 54 per cent by 1975. The relative importance of plywood is expected to remain about as it is, while pulpwood may expand its share from 27 per cent in 1952 to over 35 per cent by 1975. Thus, the strongest markets of the future are forecast for the forest product which has been least important in Mendocino County. The development of an expanded pulp industry may be necessary if Mendocino is to maintain its present relative market position in the face of these prospective changes. It is worth noting that Mendocino's two most im- portant timber species — redwood and Douglas-fir — have never occupied an important place in total pulp- wood consumption. Figure 12 shows the relative im- portance of the several major tree species as suppliers of pulpwood. Both redwood and Douglas-fir are tech- nically usable for pulp, and redwood has been exten- sively used for hardboard in Mendocino County. PERCENT OF PULPWOOD CONSUMED •22% 36 Fig. 12. Douglas-fir and redwood are only minor sources of the U. S. pulp supply (1952 figures). SPECIES GROUP Pines (southern) Spruce and true firs Hemlock All other soft- woods (includes Douglas-fir and redwood) Hardwoods mmmmmmmm ( 4 o/ o Source: American Forest Products Industries, 1955. YOUNG-GROWTH TIMBER 17% 4% Douglas-fir is now recognized in the industry as an important and satisfactory source of raw material, but a well organized and sustained development program is needed if Mendocino County is to share broadly in the potential future expansion of the pulp and hard- board market. Diversification of output. The total economic sig- nificance of wood resources to a community depends in part on the kind of forest industries using the resource. Figure 13 shows comparative labor requirements for producing various finished products from a million board feet of logs, Rough lumber, the predominant forest product of Mendocino County, ranks lowest in labor requirements. In other words, conversion of raw material into lumber generates fewer jobs and less in- come than conversion of the same material into ply- wood, paper, or hardboard. The discussion of timber supply on pages 38 to 46 suggests that Mendocino is unlikely to experience further growth in its forest economy as a result of expanded timber cut. Thus, the Needed: a develop- ment program to share in the expan- sion of the pulp market Source: Marquis, 1948. PRODUCT Lumber Rough Dressed Pulp Paper products Plywood Millwork MAN YEARS OF LABOR PER MILLION B.F. OF WOOD CONSUMED 6.2 18.O 15.9 15.9 23.0 Fig. 13. Mendocino County's major wood product, rough lumber, generates fewer jobs and less income than the other products. future of the economy may depend heavily on the abil- ity of the county to diversify its wood manufactures. Greater employment and income can be sustained with- out an enlarged rate of wood use if the pulping and plywood industries can be built up and if the manu- facture and fabrication of lumber can be expanded. This development will require well-organized market- ing activities and substantial capital investments in new manufacturing facilities. To insure the security of such investments a stable supply of raw materials is of course essential. Needed: diversifica- tion of output, well- organized marketing activities, and capital investments based on a stable supply of timber TAXATION IN MENDOCINO COUNTY 37 Mendocino's commer- cial forest comprises 60 per cent of its wildland, most of it in private ownership Timber on private forest estimated at 24 billion board feet TIMBER SUPPLY: THE RESOURCE BASE FOR WOOD-USING INDUSTRIES Analysis of Mendocino timber supply indicates that: the private timber resource base of the county cannot perma- nently sustain expansion beyond the 800 million b.f. level of annual cut. maintenance of present-level cutting will result by 1978 in a serious shortage of private large young-growth stands which by then will be the most important source of merchantable timber in the county. to maintain the county's forest economy at about the present scale, measures must be taken to secure the fullest and most intensive possible management and utilization of large young- growth stands. Mendocino County contains 2,246,000 acres of land. As shown in figure 14, 3.3 per cent is cultivated, urban, or industrial. The remainder is wildland, of which 60 per cent is classified as commercial forest. Of the 1,305,000 acres of commercial forest land, 1,056,000 (81 per cent) was in private ownership in 1952. Some 154,000 acres was in National or State for- ests, Indian Reservations or other types of permanent public reservation. The remaining 95,000 acres was in the public domain, subject to private entry, or had been sold to the state for taxes. Little significant change in the aggregate area of private commercial forest owner- ship is believed to have occurred since 1952. Timber Inventory On Private Land No comprehensive inventory of timber volumes has ever been made in Mendocino County. In 1948 the California Forest and Range Experiment Station made a systematic study of forest areas by ownership and by timber-stand characteristics. 3 Using these data, the total timber inventory on private forest land in 1948 was estimated at 29.6 billion board feet (International \/ A " rule, including all trees 12" d.b.h. and larger). (Table 8.) During the decade 1948-1958, this inventory was re- duced by harvesting and other sources of drain by at least an estimated 9 billion board feet. During the same period, inventory was being augmented by growth, with the net result that timber inventory on private forest 3 A 1945 estimate by the California Forest and Range Experi- ment Station showed 1,075,000 acres of commercial forest land and 19.7 billion b.f. of timber in Mendocino County, of which 958,000 acres and 17.9 billion b.f. were in private ownership. (Wieslander and Jensen, 1946, tables 20 and 22.) 38 YOUNG-GROWTH TIMBER Table 8 ESTIMATED VOLUME OF TIMBEE ON COMMERCIAL FOKEST LAND IN MENDOCINO COUNTY (All volumes in billion b.f ., International %"rule) Ownership and age 1948 1958 Private : 29.6* 24.2* Old-growth areasf 22.6 15.1 Young-growth areas 7.0 9.1 Public: 6.1 6.0 Old-growth areasf 5.2 5.0 Young-growth areas 0.9 1.0 Total: 35.7 30.2 Old-growth areasf 27.8 20.1 Young-growth areas 7.9 10.1 Almost two-thirds of private forest is old-growth * Redwood accounted for 57 per cent of the total volume in private ownership in 1948 and for 61 per cent in 1958. f "Old-growth areas " include the following Forest Survey classifications: Old-growth; old-growth — young- growth; and young-growth — old-growth. land was reduced to an estimated 24 billion board feet (International \/ A " rule) by 1958. This estimated inventory exceeds, of course, the as- sessable timber volume (text table, page 56). It includes the volume of all trees 12 inches d.b.h. or larger, many of which are too small to be considered merchantable for assessment purpose. It includes all young-growth volumes exempted from assessment under Section 1234 Fig. 14. Land distribution in Mendocino County, 1948. KIND % OF OF LAND TOTAL AREA, THOUSAND ACRES Cultivated, urban, or industrial Grassland and woodland grass Woodland and chapparal Commercial forest Other TOTAL TAXATION IN MENDOCINO COUNTY 75 3.3 460 20.5 380 16.5 1,3 5 58.2 26 2,2 4 6 I.I IOO Source: Baker and Poli, 1951, table 2. 39 Two-thirds of private forest is redwood, one-third Douglas-fir Between 1948 and 1958 cutting was concentrated on old- growth areas, reducing them from 64 to 39 per cent of all private lands of the Constitution. Measurement, in terms of Inter- national 14" log rule, gives larger volume estimates than the Spaulding Log Rule employed in most cruises used by the assessor. When these differences between inventory volume and assessable volume are adjusted, the 1958 inventory estimate is consistent with the 1958 assessed volume, within the limits of error of the estimate. About two-thirds of the private inventory is redwood and about one-third Douglas-fir and other species. In 1958 an estimated 62 per cent of the total inventory volume was in old-growth forests and 38 per cent in young-growth forests. Age Class and Stocking of Timber The composition of Mendocino's private forest re- sources has undergone a highly significant change. Between 1948 and 1958 the forest changed from pre- dominantly old-growth to predominantly young- growth. As shown in figure 15, 64 per cent of the private area in 1948 was in forests containing a significant amount of old-growth timber. Between 1948 and 1958, timber harvesting was heavily concentrated on these old- Fig. 15. Old-growth and young-growth stands in private forests reversed their balance between 1948 and 1958. 1 100 1 100 1000 - v_ 164% 36% Total private forests -s Old-growth areas I 6|0/ °. \ 39%- ^** Young-growth areas 1000 900 900 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 1 00 1948 1958 Source: Baker and Poli, 1951; estimate for 1958 projected from 1948 areas as modified by subsequent cutting. 40 YOUNG-GROWTH TIMBER growth areas — an estimated quarter million acres of old-growth land was logged in that period. As a result, the balance between young-growth and old-growth for- ests in the county has been roughly reversed, and in 1958 young-growth areas accounted for an estimated 61 per cent of all private forest lands. This change in age class structure is of the greatest importance. Old-growth timber is no longer the key to the county's long-term raw material supply. While harvesting operations will rely heavily on old-growth for another decade or so, the critical element in the long-term timber resource situation is what happens to the young-growth forests. These young-growth for- ests now dominate the private forest area and their dominance is increasing with each passing year. In 1948 the privately owned cutover land was stocked with commercial timber as shown in table 9. A substantial proportion of the area cut during the last decade would now be classified as "unstocked" be- cause there has not yet been enough time for new stock- ing to develop. On the other hand, young trees have emerged on many areas classified as "unstocked" in 1948, shifting this acreage to other timber density classes. Analysis of the various factors affecting the den- sity of the young-growth stands suggests that, in 1958, the distribution of young stands was not markedly different from that of 1948. Old-growth timber is no longer the key to the county's raw material supply. Young-growth dominates the private forest area Timber Growth and Prospective Timber Supplies Between 1948 and 1958, the private timber inventory of Mendocino County has grown, on an average, an estimated 340 million b.f. (net) annually. Almost 60 per cent of the total growth was on young-growth stands although these stands accounted for only 36 per cent of the productive forest area at the beginning of the period. This reflects the relative low rate of net Present average annual net growth of private timber inven- tory: 340 million board feet, 60 per cent of it young- growth Table 9 DENSITY OF TIMBER STOCKING ON PRIVATE YOUNG-GROWTH LAND IN MENDOCINO COUNTY, 1948 Redwood zone Other forest type zones All j'oung-growth Density of timber Thousand acres Per cent Thousand acres Per cent Thousand acres Per cent 21 48 58 59 186 11 26 31 32 44 17 23 26 40 15 21 24 100 65 65 81 85 22 22 27 29 Total 100 110 296 100 TAXATION IN MENDOCINO COUNTY 41 Table 10 AVERAGE KATES OF TIMBER GROWTH IN THE REDWOOD DOUGLAS-FIR SUBREGION, BY STAND CONDITION CLASSES Stand class Net Annual Growth per acre, b. f. Int. M" negligible* Young growth 730 390 250 Except in well-stocked old growth redwood stands, where annual net growth may reach 400 b. f. per acre. growth on old-growth stands in comparison with the growth of young stands, even where the latter are openly stocked. Estimated average rates of growth on various classes of young forest in the redwood-Douglas-fir subregion are shown in table 10. Both site quality and density of stocking strongly influence rates of timber growth. As shown in figure 16, the distribution of site classes in Mendocino County closely parallels that for the red- wood-Douglas-fir region as a whole, and the 1948 pat- tern of stocking was roughly comparable. The growth Fig. 16. Stocking and site classes in Mendocino County are similar to those in the entire red- wood-Douglas fir subregion. MENDOCINO STOCKING ( as of 1948): REDWOOD-DOUGLAS-FIR SUB REGION 42 Source: Baker and Poli, 1951 ; Forest Survey Release No. 19. YOUNG-GROWTH TIMBER rates of table 10 therefore appear applicable to Mendo- cino County. These growth data show that conversion of old- growth stands into well-stocked young forests will re- sult in some additional contributions to growth. The extent to which future growth increases above the 340 million b.f. current estimate will depend on (1) on the rate of cutting of old growth stands, (2) the success with which newly cutover areas are restocked, and (3) the efforts made to increase growth on young stands by more intensive management. Assuming that cutting of old-growth stands continues at the average 1948-58 rate (800 million b.f.) and that the rate of restocking will be the same as in the past, county-wide growth would increase to an annual 360 million b.f. by 1968 and an annual 380 million b.f. by 1978. The combination of cutting old-growth stands and the growth of young ones will continue to cause rapid changes in the character of the timber inventory in the decades ahead. These changes are likely to have impor- tant impacts on timber supply. To foresee prospective changes, one must visualize what would happen to the timber inventory under specified assumptions. Projected future annual increase, 360 million board feet by 1968; 380 million by 1978 T OLE 11 ESTIMATED PEIVATE TIMBERLAND AREA AND TIMBER VOLUME, BY AGE CLASSES, 1958 Age class Old-growth Large young-growth . Small young-growth. Unstocked Total . Thousand acres 407.8 244.1 111.7 292.8 1,056.4 Per cent 23.1 10.6 27.7 100.0 Billion b.f. 15.1 1.0 1.3 24.2 Per cent 62.4 28.1 4.1 5.4 100.0 Table 12 PROJECTED TREND OF PRIVATE TIMBER VOLUME BY AGE CLASSES, 1958-1978 (Trees 12" d.b.h. and larger; International *4" rule) Age class Estimated 1958 vol. billion b.f. Projected volume: 800 million b.f. annual drain Projected volume: 650 million b.f. annual drain 1968 1978 1968 1978 15.1 6.8 1.0 1.3 9.1 6.2 2.5 1.6 2.9 6.6 3.8 1.7 9.9 7.1 2.7 1.4 5 5 7 9 Small young-growth 3.6 1 4 Total 24.2 19.4 15.0 21.1 18 4 TAXATION IN MENDOCINO COUNTY 43 Assumptions for future projections If present cutting level is continued, drastic curtailment of industry would be inevitable In 1958 (table 11), 62 per cent of the total inventory volume was on the 39 per cent of the private area re- maining in old-growth. If recent levels of growth and drain are used as the basis for projecting the trend of volumes, old-growth will represent less than 50 per cent of the volume by 1968 and only 20 to 30 per cent by 1978. The outlook on this basis may be judged from table 12. It should be emphasized that the data in table 12 do not represent a forecast of what will happen to timber inventory. Rather, they show what would hap- pen to inventory if drain from cutting continues at recent levels (about 800 million b.f. per year) and, alternatively, what would happen if the drain were curtailed to about % of the present level (about 650 million b.f. per year). On the further assumption that 80 per cent of the drain is from old-growth areas and 20 per cent from large young-growth (the apparent 1960 level), private old-growth timber volumes in the county in 1978 would amount to only 19 per cent of the 1958 level. The volume of young-growth timber inventory is likely to increase over the next twenty years. It is esti- mated that it may amount to 12 billion b.f. by 1978 (up 33 per cent from 1958) if intervening drain is at the 800 million foot level. However, most of this in- crease would be in "small young-growth" stands. These stands are generally smaller in average size of tree than the young-growth areas now being cut. Most "small young-growth" would not present an economical oper- ating chance under utilization standards and forest practice rules similar to those now in effect. The volume of "large young-growth" (young-growth stands similar in size to those now being cut) projected for 1978 is the same as the present volume in this size class. If such a timber inventory situation actually de- velops, it would present a critical raw material supply situation. The projected 1978 inventory in old-growth (2.9 billion b.f.) and large young-growth (6.6 billion b.f.) stands would be substantially below that needed to sustain the 800 million foot level of annual cutting (16 billion b.f.). Drastic curtailment of forest products industry output would appear inevitable. If drain from cutting were reduced to an average of 650 million b.f. between now and 1978 (table 13), pros- pects for sustaining raw material supply would be sub- stantially improved. The old-growth and large young- growth volumes then available in 1978 would be ade- quate for perhaps another 15 years of cutting at the 44 YOUNG-GROWTH TIMBER Table 13 PROJECTED AREA AND VOLUME OF PRIVATE LARGE YOUNG-GROWTH IN MENDOCINO COUNTY (Trees 12" d.b.h. and larger; International x /±" rule) At 800 million b.f. annual drain At 650 million b.f. annual drain Year Area (thousand acres) Volume (billion b.f.) Area (thousand acres) Volume (billion b.f.) 1958 244.1 227.9 259.6 6.8 6.2 6.6 244.1 239.3 294.7 6 8 1968 7 1 1978 7 9 reduced rate, by which time many additional young stands would have reached harvestable size. As a further aid in visualizing the timber supply out- look, figure 17 projects the probable distribution of timber age classes by 1978, if drain continues at 800 million b.f., with 20 per cent of the annual cut being taken from large young-growth stands. The bar headed "Normal" indicates the precent- age distribution of land among the different age classes which would provide a uniformly sustained flow of timber on a rotation of 55 years. Comparison of this bar with 1958 conditions indicates that there is cur- rently a deficiency of "small young-growth" age classes. By 1978 this will be reflected in a deficiency of "large young-growth," the type of stand that will be urgently needed to supply the timber then required to sustain Mendocino's industries. // present cutting level is continued, a serious shortage of large young- growth would develop by 1978 Fig. 17. Projected distribution of timber age classes by 1978. 1958 1978 if drain ^ continues at 800 million b.f. annually NORMAL based on assumed rota- tion of 55 years Old growth Large young Small young Restocking TAXATION IN MENDOCINO COUNTY 45 Private timber supply not to be affected much by increased cuts on public lands Key factor: manage- ment of large young- growth stands during next 15 years Three management aims The preceding analyses have dealt with timber in- ventories on private land and the growth and drain conditions which seem likely to affect private holdings. Public holdings account for 19 per cent of the com- mercial forest in the county and for about 20 per cent of the estimated 1958 inventory. These lands will con- tinue to provide a resource base for a number of forest industries in the county on a sustained yield basis. Al- though some expansion of cut from National Forest land may be expected, there is no reason to expect that it will be large enough to modify significantly the gen- eral picture of prospective private timber supply. The Importance of Young-Growth Stands If well managed, the growth potential of the county's forest land is sufficient to provide a perpetual wood supply close to present levels of drain. But this fact does not assure the future stability of the county's tim- ber economy. Much more intensive management is needed if growth is to be increased from the present level to one approaching full potential. Sufficient young-growth timber must reach maturity during the decades after 1968 to provide merchantable sized tim- ber in sufficient quantities to meet industry's raw mate- rial needs. The way existing young-growth forests are handled during the next decade or two will therefore largely determine whether or not forest industries are faced with a critical raw material shortage by 1970 or 1975. The key factor in minimizing this potential disrup- tion to the future forest economy is the management given to large young-growth stands during the next fifteen years. If their liquidation continues at the pres- ent estimated rate of about 160 million board feet per year (or, as seems probable, at an even higher rate) drastic curtailment of forest products output during the decades following 1975 appears inevitable. On the other hand, timber supply can be maintained by care- ful management of the young-growth stands, aimed (1) at maintaining the maximum possible volume for har- vesting during the period after 1975, (2) salvaging the normal mortality which will occur in such stands dur- ing the interim, and (3) increasing the net growth and quality of those stands by judicious thinning oper- ations. OWNERSHIP OF TIMBERLAND Although two-thirds of the private forest land is owned either by large forest industries or by the larger ranchers, there are more than 3,000 ownerships of less than 180 acres. These small owner- 46 YOUNG-GROWTH TIMBER ships are thus a major factor in the administration of rural property taxation. The small ownerships also suffer important disadvantages from the standpoint of forest management because larger ownership units are often much better equipped to deal with timber marketing problems, to secure and apply technical forest management advice, and to utilize fully the wood raw material through diversified manufacturing. In 1957 Mendocino County had an estimated 1,056,- 000 acres of privately owned forest land. Most of the 3,900 rural landowners in the county (Casamajor, 1958) had some forest land on their holdings. The sizes and kinds of timberland owners were very diverse. As the objectives, size, and other characteristics of forest ownership may often be related to the impact of taxa- tion on forest management practices, attention must be given to the nature of private ownership in evaluat- ing the outlook for the timber-based economy. Size of Ownership The large range in size of ownership is shown in table 14. The 3,050 individual ownerships of less than 180 acres average 58 acres each, account for only 10 per cent of the land area, but comprise 78 per cent of all rural land ownerships; thus they are a major factor in the administration of rural property taxation. In contrast, 70 per cent of the rural land area is included in only 212 ownerships of 1,300 acres or more — 10 of them exceeding 20,000 acres apiece. Clearly, what hap- pens on these 212 relatively large ownerships is of great importance to the future of the county's natural resources. Table 14 shows all land area included in the various rural ownerships. The concentration of forest land in Small ownerships — a major factor in the administration of rural property taxation Table 14 NUMBER OF RURAL PRIVATE LANDOWNERS AND AREA OWNED BY SIZE OF LAND OWNERSHIP, 1957 Size of ownership Ownership Total area owned Number Per cent Thousand acres Per cent 3,050 78 176.2 10 655 17 371.3 20 160 4 436.6 24 42 1 377.5 21 10 * 455.6 25 3,917 100 1,817.2 100 0-179 acres 180-1,299 acres 1,300-4,999 acres... . 5,000-19,999 acres... 20,000 acres or more Total * Less than X A oi \ per cent. Source: Casamajor, 1958. TAXATION IN MENDOCINO COUNTY 47 Timber enterprises account for 11 per cent of the owners Table 15 EATIO OF COMMERCIAL FOREST LAND TO ALL LAND BY SIZE OF OWNERSHIP Size of ownership Per cent of total land area that is com- mercial forest 57 180 4 999 acres 52 5 000-49 999 acres 61 98 Source: Casamajor, I960. the larger sized holdings is somewhat greater than that of all land; that is, the larger ownerships tend to have a greater ratio of forest land to all land than do medium and small ownerships, as indicated in table 15. Thus, the 212 ownerships of 1,300 acres or larger (total land area) account for three-fourths of the privately owned forest land in the county. Type of Ownership There are also great differences among owners in respect to the kind of owning organization, the pur- poses of ownership, and related factors such as financial strength, liquidity, access to technical advice on land management problems, and the like. Table 16 indicates the extent of this diversity. Sixty-one per cent of the ownerships were held in 1957 by persons whose primary objective in ownership was either recreational use or some other goal not re- lated to agriculture or forestry. Farmers and ranchers accounted for 28 per cent of the owners, and timber enterprises for 1 1 per cent. More than four-fifths of the total land area is owned by ranching or timber enter- Table 16 NUMBER OF RURAL PRIVATE LAND OWNERS AND AREA OWNED, BY TYPE OF OWNEK , 1957 Type of owner Ownerships Total area owned Number Per cent Thousand acres Per cent Timber company Timber owning individual 85 360 541 541 2,390 2 9 14 14 61 488.6 214.1 793.6 108.4 212.5 27 12 Range livestock enterprise 43 Other farmers 6 Recreational and other 12 Total 3,917 100 1,817.2 100 Source: Casamajor, 48 YOUNG-GROWTH TIMBER prises. On the basis of area owned, about one-third of these ownerships were controlled by corporations and two-thirds by private individuals. Approximately 65 per cent of the ownerships and of the privately owned rural area are in the hands of residents* of the county. The remaining ownerships were held principally by people living in northern California outside Mendocino County. About 4 per cent of the owners live in the southern part of the state and only 1 per cent live outside California. Changes in Ownership The ownership of rural land in Mendocino County has experienced many changes since World War II. Between 1947 and 1957 only 11 per cent of the rural area remained in unchanged ownerships; two-thirds of the properties, covering 48 per cent of the rural area, changed hands at least once. Other property owners enlarged their holdings so that one-third of the area was in larger ownerships in 1957 than in 1947 (Casa- major, 1958). The net effects of these changes were: some increase in the amount of land in holdings of 20,000 acres or more (from 22.4 per cent of rural area in 1947 to 25.0 per cent in 1957); a roughly comparable decrease in the area in small holdings of less than 180 acres; and an increase in the numbers of these small holdings and, hence, a decrease in their average size from 88 acres in 1947 to 58 acres in 1957. The decade also saw significant reduction in both the number and acreage of ranching and other farming enterprises and increases in the number and area of timber ownerships. Changes in the type of ownership are presented in table 17. 4 A resident is here defined as a party whose address as listed with the County Tax Collector is within Mendocino County. The land is not necessarily occupied. Almost two-thirds of land owned by resi- dents of the county Almost half the rural area changed owners during 1947-1957 Timber ownerships increased in number and area Table 17 CHANGES IN OWNERSHIP, 1947-1957 Type of owner Number of ownerships Area owned (thousand acres) 1947 1957 1947 1957 55 298 548 669 1,663 85 360 541 541 2,390 407 129 844 127 278 489 214 794 108 212 Total 3,233 3,917 1,785 1,817 TAXATION IN MENDOCINO COUNTY 49 Four main kinds of timberland ownership Thus, the two major trends in the ownership of rural land in the county were: (1) a tendency for the block- ing up of relatively large holdings with the principal goal of timber production, and (2) the breaking down of ownerships into smaller and more numerous hold- ings used for recreation, rural residence, or other essen- tially nontimber and nonfarm purposes. Typical Kinds of Forest Ownership Four different kinds of timberland ownership can be identified from the data presented above: • Timber industry holdings of 20,000 acres or more, oriented toward timber growing. • Timber industry holdings of less than 5,000 acres. • Range livestock enterprises, 700 acres or larger. • Small nonindustrial holdings, under 700 acres. All four contain physically similar kinds of forest land. But the economic conditions affecting the management of the different classes of owners are quite different. These economic differences have a bearing both on timber resource utilization and timber taxation. Table 18 shows the total rural area and the estimated commercial forest area included in such ownerships in 1957. Over 90 per cent of the forest land is in one of the four types of ownership listed above. In the economics of forest resource use, the four kinds of ownership have different characteristics. A large for- est ownership, for example, has several economic ad- vantages over a small one. The more important ones, summarized here, concern marketing, management, and timber utilization. Marketing advantages. Selling timber is a highly technical business. Standing timber is not standardized to the same degree as most other agricultural and industrial materials. Timber is subject to wide varia- Table 18 DISTRIBUTION OF FOREST LAND BY TYPE OF OWNER Type of owner Rural land Owned Thousand Commercial forest owned Thousand acres Per cent Timber industry (over 20,000 acres) Timber industry (under 5,000 acres) . . Range-livestock owner (over 700 acres) Small nonindustrial (under 700 acres). All other Total 410.9 184.7 712.6 337.5 171.5 1,817.2 385 130 320 145 76 1,056 100 50 YOUNG-GROWTH TIMBER tion in quality; location, topography, and other factors affect the extraction cost; accurate estimation or meas- urement of the timber volume sold is a complex task requiring experience and proper technique; market prices for standing timber and its products have under- gone relatively large changes in recent years. These various factors make timber selling a task which de- mands skilled judgment and close attention to a wide range of technical considerations. An inexperienced seller who lacks knowledge of mar- keting is clearly at a disadvantage in securing the full market value for his timber and in protecting values in residual timber, land, and physical improvements. The large land owner is able to sell timber relatively fre- quently and thereby remains in contact with buyers and market conditions. Through repeated sales, he is able to develop marketing experience and skills. The size of sale may warrant employment of professional assistance in legal and technical fields. Most small-forest owners (those with less than 5,000 acres), experience marketing disadvantages because their sales are infre- quent and the volumes offered relatively small. A re- cent study of timber sales from small ownerships in Mendocino County showed that a majority of small owners had had no previous experience with selling standing timber. Most of the owners lacked knowledge essential to careful planning and administration of a timber sale. Although the average price in 41 such sales was $9,300, only one seller in six had sought sales ad- vice from a consulting or service forester. Management advantages. The small-forest owner also is at a disadvantage with respect to securing and applying the technical forest management information needed for the most effective use of his land. In a re- cently examined sample of Mendocino County owners, all owners of 20,000 acres or more of forest land em- ployed one or more trained foresters. Owners of 5,000 to 20,000 acres sometimes employed forestry consult- ants, but usually managed without technical assistance. Small owners (less than 5,000 acres) very rarely secured technical forest management counsel from any source. Small owners thus cannot plan the management of their properties in the light of the best available infor- mation and technique. Additional evidence of the land management advan- tages of larger ownerships is provided by an analysis of cutting practices. Among a sample of owners of 20,000 acres or more, owners of more than 39 per cent of the acreage mark Advantages of large forest ownership: 1. More experience and knowledge of marketing 2. More technical management information TAXATION IN MENDOCINO COUNTY 51 the timber for cutting on the basis of some sort of silvi- cultural guides. Owners of an additional 52 per cent of the acreage harvest on the basis of diameter limits significantly above those provided by law. In contrast, on 57 sales from small ownerships, timber was marked in only 3 per cent of the cases and minimum diameter limits were used in only 26 per cent. In almost half the sales, timber was harvested on the basis of the buyer's choice of merchantable timber. Either the marking of timber or the establishment of a minimum diameter limit will normally result in more productive cutover land than will cutting in accordance with the buyer's choice. 3. Better utilization Utilization advantages. Full utilization of the stand- of the whole tree ing tree is a major goal of both good forest management and good industrial practice. Before 1950, only about 50 per cent of the cubic content of timber removed from growing stock in the Mendocino County area was actually converted into usable products. Since then con- siderable progress has been made in fuller wood use, such as the development of chipped mill residues as a raw material for pulp and hardboard. Broadening of the end product base to include not only lumber but also veneer, plywood, hardboard, and other products is helping to achieve fuller utilization. Such diversified utilization is much more difficult to achieve where the manufacturer must rely for his wood supply on a large number of small tracts. Because it is difficult to insure several years' supply from such sources, operators dependent on them may not be able to risk the capital investment needed for diversified wood use. Evidence of this is shown below. Six owners of All other of over 20,000 owners and acres each plants Assessed value of manufacturing plant per thousand forest acres $17,000 $6,910 Assessed value of manufacturing plant per dollar of assessed timber value. . . $ 2.04 $ 1.44 Assessed value of manufacturing plant per million b.f. of logs used per year. $26,200 $8,580 Using assessed value as a measure of the investment in plant and utilization facilities, the larger forest ownerships have significantly heavier plant investments per acre of forest owned, per dollar of timber invest- ment, and per million board feet of raw material used than do conversion operations based on smaller land ownerships. Another factor related to size of ownership concerns the use to which the owner desires to put his land. In 52 YOUNG-GROWTH TIMBER a study of 126 owners of tracts smaller than 5,000 acres it was found that only about half had sold any timber for cutting between 1950 and 1957 (Casamajor, 1960). Of those who had not harvested any timber, almost two-thirds gave as their reason the belief that timber harvesting would conflict with other uses of the land (usually recreation or residence) which were more im- portant to them than timber harvesting or the income therefrom. In 1957 there was an estimated 150,000 acres of commercial forest land in this kind of ownership, much of it in parcels of less than 180 acres. Thus, 15 per cent of the privately owned timber growing land of the county is in a kind of ownership which at present effectively removes the land from the economic timber supply. Evidence suggests that the proportion of forest land in these small recreational and residential-type ownerships will increase as time goes on. Such shifts may not always work to the over-all economic advan- tage of the county. They may serve to reduce the effec- tive future supply of timber. To the extent that they result in an increased rural population, costs of the services rendered by local government may go up by more than the amount of increased tax revenue ac- companying the changed land use. In addition, recre- ational and residential use of an area may sometimes provide less employment and income than the harvest- ing and utilizing of the timber produced on the same area. Owners of 15 per cent of timber land do not wish to cut their timber Part II: The Taxation of Young-Growth Timber FORESTS IN MENDOCINO COUNTY'S TAX BASE Timber, and the plants and equipment dependent on timber for their value, accounted for about 25 per cent of the total assessed valuation in the county in 1959. But timber and timberland alone comprised only 10 per cent of total assessment. This reflects a major decline in the importance of timber in the tax base, as timber and timberland assessments accounted for 35 per cent of the value of all real estate in 1932. The total taxable timber vol- ume appears likely to decline by a further 70 per cent during the next 20 years. Thus, the importance of timber to the tax base is likely to be increasingly in terms of the value of the plant and equipment which the timber resource can support. Already assess- ments on such timber-dependent property exceed those on timber itself by 70 per cent. TAXATION IN MENDOCINO COUNTY 53 Taxes and assess- ments have declined as a source of county revenue Current revenue to finance local government in Mendocino County is derived from taxes and assess- ments levied locally, from subventions and grants made by other units of government and from a variety of miscellaneous sources such as receipts from licenses, fines, permits, and trust funds. In 1956-57 35 per cent of the county's current receipts came from local taxes and assessments; almost half came from federal and state subventions or grants; and about 15 per cent was from miscellaneous sources. Since the end of World War II, federal and state grants have tended to increase more rapidly than revenues derived from local sources. Thus, as shown in figure 18, the relative importance of taxes and assessments as a source of county revenue has declined somewhat. But they remain by far the most important single source of revenue subject to local gov- ernment's control. Trends in Taxes Levied The history of annual tax levies in the county from 1920 to 1959 is shown in figure 19. Over this forty-year period, the levy has increased almost eight-fold. In terms of purchasing power (based on wholesale price levels), the 1959 levy was 4% times that of 1921. Be- tween 1940 and 1953 the levy increased a little less than four-fold; during the same period estimated per- sonal incomes increased a little over five-fold. The aver- age total tax levy for the three-year period 1955-57 was 4.9 times its 1940 level; over the same period, estimated personal income in the county had risen 6.3 times. Fig. 18. Sources of Mendocino County revenue. 1936-37 1946-47 Current revenue $1,532 $3,180 (nearest $1,000) 1956-57 $1 1,546 7.9% C-17.6% J Taxes and assessments I I State and federal grants and subventions I ] Miscellaneous (licenses, fines, trust funds, etc.) Source: Annual financial statements, receipts, disbursements, and statis- tics, Mendocino County, compiled under supervision of the county auditor. 54 YOUNG-GROWTH TIMBER Figure 20 shows comparative trends of the tax levy, total assessed valuation, and the county tax rate outside urban areas for 1940-58, the period of greatest tax in- crease. Over these years, the general county tax rate rose less than 15 per cent. Up to 1947 the increase in assessed value was slow and well below the rate of in- crease in tax levies. Since 1947, the rise in assessed Fig. 19. Trend of tax levies in general and special county taxes levied in Mendocino County, 1920-1959. Taxes levied — Million dollars -t-7 1920 1924 1928 1932 1936 1940 1944 1948 YEAR 1956 I960 Fig. 20. Trends of tax levy, assessed valuations, and county tax rates outside urban areas, Men- docino County, 1940-1958. 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 YEAR TAXATION IN MENDOCINO COUNTY 55 The assessed timber volume was cut in half within 26 years 5ft values has been much more rapid. The average assessed value for the years 1955-57 was almost three times the comparable average for 1940-42. Sources of Assessed Value In 1958, total assessed valuation of all property in Mendocino County was $79,953,760. During recent years, property in urban communities has accounted for about one fourth of this total assessed value. Prop- erty assessed by the State Board of Equalization con- sisting mainly of railroads and public utilities has accounted for about 15 per cent of the total. Timber, plus the plants and equipment dependent on timber supply for their operation, accounted for another one fourth of the total. Obviously, the trend in assessed valuation of timber and associated plants is of great significance to the maintenance of the present tax base and to the level of tax burden on the various other classes of property in the county. Total assessments against timber and timberland have experienced a relatively small net change over the past 25 years as shown below. 1932 1958 Total assessed value, all real estate $16,342,383 $64,395,750 Assessed value of timber and timberlands 5,767,609 6,299,1 15 Timber assessment as per cent of total 35.3 9.8 Assessed timber volume (Million b.f.) 8,928 4,657 Source: Schofield, 1932; Office of the Assessor, 1958. Between 1932 and 1958, the dollar value of such assessments increased by about 10 per cent. During these same 26 years, aggregate output of the forest products industries of the county has exceeded an estimated 8 billion board feet. The raw material re- quired for this output is approximately equal in vol- ume to the total assessed timber inventory in 1932. Thus, timber assessments between 1932 and 1958 are higher partly because in 1958 a large volume of timber was included which had been of no value in 1932, and partly because of the increase in the value per thousand b.f. at which timber is assessed. The most important feature of the tabulation above is the decline over the 26 year period in both assessed timber volume and in timber assessment as a percentage of all assessed real estate. The assessed timber volume in 1958 was only 52 per cent of what it had been in 1932. Timber assessments as a per cent of all real estate assessments in the county had fallen from more than a YOUNG-GROWTH TIMBER Plants and equipment dependent on timber increased substantially third to less than one tenth of the total. These trends emerged despite vigorous efforts to extend assessment to all old-growth as it acquired an economic value, and despite several significant increases in the assessed value per thousand bi. applied to old-growth timber. Also of great importance is the substantial increase over the years in plants and equipment dependent on timber as a source of assessed value. Table 19 shows that in recent years the assessed value of such timber- dependent plants and equipment has exceeded the as- sessed value of the timber itself. This is in sharp con- trast to earlier conditions. Although comparable data are not available in detail, it is estimated that in 1932 the assessed value of all wood-using plants and equip- ment in Mendocino County was considerably less than $1 million. Using this as a measure of the situation in 1932, there was about $110 of timber-dependent plant value on the assessment rolls per million b.f. of assessed timber. By 1958, the value of dependent plants had risen to over $2,460 per million b.f. of assessed timber. Thus the indirect contribution which the timber inventory makes to the county's tax base is now many times more important than in the past. As table 19 shows, this indirect contribution is now a more impor- tant source of county revenue than the taxes paid di- rectly on the timber. For the three year period 1957-59, timber-dependent plant and equipment assessments averaged 1.7 times the assessment against timber itself. Thus, in considering timber tax problems, the rela- tionship of direct timber taxation to timber supply and hence to the value of timber-dependent plants has become a major consideration in the economics of Men- docino County. Table 19 ASSESSED VALUE OF TIMBER AND WOOD USING PLANTS AND EQUIPMENT IN RELATION TO TOTAL ASSESSED VALUE: MENDOCINO COUNTY, 1957-1959 1959 1958 1957 Kind of property Thousand dollars Per cent Thousand dollars Per cent Thousand dollars Per cent 85,665 100 79,954 100 79,298 100 All timber and timberland Logging equipment 8,905 1,439 10,831 10.4 1.7 12.6 6,299 1,986 9,569 7.9 2.5 12.0 6,608 2,035 11,509 8.4 2.5 14.5 Total timber-based property Property assessed by State Board 21,175 13,074 51,416 24.7 15.3 60.0 17,854 12,217 49,883 22.4 15.2 62,4 20,152 10,488 48,658 25.4 13.2 All other assessed property 61.4 Source: Office of the Assessor. TAXATION IN MENDOCINO COUNTY 57 Future trend of timber in the tax base: a sharp decline By 1978 taxable old- growth will be 20 per cent of the 1959 level Second-growth timber will not offset the declines in old-growth 58 The Outlook for Timber in the Tax Base The preceding analysis, coupled with the projections of future timber inventory made in Part I, provide a basis for outlining the future role of timber in the tax base. As noted, during the past 15 years the aggregate assessed value of timber in the county has been main- tained in part by the addition to the rolls of old-growth timber which previously had little or no economic value. Changed economic circumstances have left little or no submarginal private old-growth timber in Men- docino County. Thus, further accretions of old-growth to the tax roll from this source are likely to be negli- gible. The second factor which has prevented a decline in the dollar value of timber assessments has been the increase in assessed value per thousand. This increase accompanied and reflected the rise in market values of timber in the county. Although some further increase of stumpage prices may be expected over the years, the dramatic price rises of the decade following World War II are unlikely to be experienced again. Thus, both factors that have helped maintain the absolute value of timber assessments over the past 25 years seem to have largely run their course. In their absence, the future trend of timber assessed valuation in Mendocino County seems likely to decline sharply. If assessed values per thousand remain at present levels, if there are no further additions to assessed old-growth inventory, and if output of forest products requires 800 million b.f. per year, the total value of assessed old- growth in the county would be expected to decline at the rate of 4 per cent annually over the next two dec- ades. By 1978 old-growth assessments would be reduced to $1.7 million, compared with the $8.6 million of 1959, or 20 per cent of the 1959 level. When similar assumptions are used to project trends of young-growth timber volumes from 1958 to 1978, it is apparent that increases in taxable second-growth tim- ber will not offset the declines in old-growth. Timber- land classified as small young-growth and unstocked supports timber that is generally less than 40 years old and therefore not subject to tax. The total increase in volume to be expected in such stands between 1958 and 1978 is only about one fourth of the volume of deple- tion to be expected in old-growth. Much of the timber in large young-growth stands is over 40 years old. Its taxability depends on the question of its legal maturity. The 1958-59 tax roll included 275 million b.f. of second-growth timber on an estimated 22,100 acres of young-growth land. Analysis of acreages YOUNG-GROWTH TIMBER classified as taxable and of the relationship between inventory volumes and assessable volumes indicates that about 12 per cent of the large young-growth area was considered legally mature for tax purposes in 1958. The total area and volume of large young-growth are likely to decline somewhat during the next decade and to increase again by 1978 as shown in table 13. But the net change in volume of large young-growth between now and 1978 will be relatively small. Thus, there is no prospect during the next 20 years that a great amount of young-growth will grow into the large young-growth class which, to a significant extent, would offset the dwindling old-growth tax base. On the other hand, the proportion of timber in the large young-growth category which exceeds 40 years of age is likely to increase somewhat in future years. As a result, the ratio of mature second-growth to all large young-growth will rise from its 1958 level of 12 per cent perhaps to as high as 20 per cent. In summary, the outlook for timber inventory be- tween now and 1978 suggests that the old-growth in- ventory, now the principal element in the timber tax base, will dwindle to relatively insignificant propor- tions. This decrease will be partly offset by compara- tively small increases in taxable young-growth. But an over-all decline of over 70 per cent in total taxable timber by 1978 is to be expected. Bases of the projections YOUNG-GROWTH TAXATION AND ASSESSMENT Ninety-six ownerships including 56,000 acres of young-growth forest were declared mature for purposes of taxation between 1957 and 1960. In general such property has been declared mature in accordance with a "guideline" adopted by the State Board of Forestry which proposes that young timber be mature for assess- ment purposes when an owner initiates cutting thereon except for stand improvement or sanitation purposes. Assessment practices were revised in 1959. Determination of fair market value is based on recognition of the kind of management unit of which the young-growth timber is a part. Some 478 million b.f. of young- growth had been reclassified by 1960, amounting in the latter year to IVi per cent of all timber on the roll. Young-growth timber assessments have never exceeded 1 per cent of the tax base. Pros- pective trends of timber growth and value suggest that the total assessed value of young-growth is unlikely to exceed $1 million in the future. Section 1234, Article XIII of the California Consti- tution, as amended in 1926, (see Appendix), exempts Legal basis for taxation TAXATION IN MENDOCINO COUNTY 59 Actions of the Timber Maturity Board State Board of Forestry guidelines from taxation all immature forest trees planted or growing naturally on lands from which the original merchantable growth has been removed to the extent of 70 per cent of all trees over 16 inches in diameter. The amendment further provides that timber shall be considered mature at such time after 40 years from planting or removal of the original timber as a ma- turity board shall determine. The intent of the measure is indicated in published arguments favoring the constitutional amendment. The argument of Senator A. B.Johnson stated: ". . . The young, growing timber, like wheat, corn, hay, and fruit, will be exempt from taxation. . . ." That of Senator Fred C. Handy stated: ". . . The California Constitu- tion now exempts growing crops from taxation. . . . This amendment places the taxation of crops of tim- ber on the same basis with taxation of other crops. . . . It places no taxation upon the trees until they are mature." For more than 25 years following adoption of this amendment, lands from which 70 per cent or more of the old-growth had been removed were carried on as- sessors' roles as young-growth areas, and timber on these lands was not assessed. During this period, the physical character of the young timber was for the most part such that it was unacceptable in the log markets of the time. Consequently, little or no cutting of young- growth took place on such areas prior to 1950. By 1952, however, as a result of increasing average size of the timber in young stands, changed standards of merchantability, and keen competition for logs, some young-growth timber had acquired economic value for current utilization. Cutting of such stands was under way and tax officials were faced with the necessity of administering the phase of Section 123/£, Article XIII, concerned with the determination of timber maturity. In Mendocino County, the Timber Maturity Board, consisting of the county assessor, a representative of the State Board of Equalization, and a representative of the State Board of Forestry, first met on May 8, 1957. By mid-1960 four more Maturity Board meetings had been held in the county. At each meeting additional young-growth timber was declared mature for taxation purposes. The results of these actions in terms of acre- age and timber volumes declared mature are shown in table 20. These actions of the Mendocino Maturity Board were taken in accordance with certain "guide lines" adopted by the State Board of Forestry on May 14, 60 YOUNG-GROWTH TIMBER Table 20 SUMMARY OF MATURITY BOARD ACTIONS ON TIMBER IN MENDOCINO COUNTY, 1957 TO JULY 1, 1960 Property declared mature Year of action Number of owner- ships Gross area Area of young-growth Acres 1957 1958 23 40 13 20 96 43,226 27,439 7,879 16,779 19,232 20,095 1959 1960 6,377 10,243 Total 95,323 55,947 1953, for the interpretation of Section 12^4, Article XIII. These guide lines were restated by the Board of Forestry in a policy resolution adopted December 7, 1954. They provide that timber which has been ex- empted from taxation for 40 or more years shall be ma- ture for assessment purposes (a) when "an owner ini- tiates cutting thereon except for stand improvement or sanitation purposes," or (b) when "70 per cent by vol- ume of the trees 16 inches d.b.h. and larger on the land is of a class which is generally and substantially dealt in and sold or operated within the County as commer- cial saw timber." (See Appendix.) Assessment Practice Under present practice, young-growth timber which has been declared mature is assessed in accordance with the principles which are applied to old-growth timber in the county. Assessment practice recognizes three gen- eral cases: (1) Properties (usually of limited acreage) which are managed as units by themselves and where the assess- able young-growth timber will ordinarily be cut in its entirety within a few years. (2) Properties which are part of a larger operating unit such as a ranch or forest management unit and where young-growth timber cutting extends over sev- eral years or is being deferred. (3) Properties being cut under a plan for sustained- yield and which will therefore retain assessable young- growth values indefinitely. The basis for assessing short-term liquidation prop- erties is the current market value for stumpage of com- parable quality. The basis for long-term liquidation Principles used in assessment practice Basis for assessing TAXATION IN MENDOCINO COUNTY 61 Assessment practices revised in 1959 Tax rolls on second- growth timber for 1958-59 and 1959-60 Reasons for changes 62 properties is the market value for the timber at the anticipated time of cutting, discounted for the interest foregone and the taxes paid during the period until income is received, and for the risk involved in holding some of the timber over a period of years. The basis for assessing properties on sustained yield is the present worth of a perpetual series of annual incomes equal to the current market value of the estimated net annual timber growth from the land and discounted for risk. Prior to 1959-60, the practice was to assess second- growth properties on the basis of estimated volumes, valued at $1.55/M for redwood and $1.25/M for other species. Tax rolls on second-growth timber for 1958-59 and 1959-60 are summarized below. 1958-59 1959-60 Number of owners assessed 65 66 Acres assessed 38,741 47,246 Average assessed value of land (per acre) $ 4.25 $ 4.67* Reported timber volume assessed (million b.f.) 274.6 164.9f Average assessed value of timber (per M) $ 1.31 $ 1.87f Total assessment, land and timber $525,235 $647,830 In the interval between the two rolls, 12 properties had been removed from the second-growth roll by logging and 13 had been added by Maturity Board action. The total area on the tax rolls increased by 22 per cent and the total assessment against young-growth timber and the land on which it stood rose by 23 per cent. Of the 66 second-growth properties on the 1959-60 tax roll, 49 had been listed under the same ownership on the 1958-59 roll. Of these 27, (55 per cent) carried the same assessment in 1959-60 as they had a year earlier; 15 properties had been reassessed on the basis of their operating status and discounted market values of timber; and assessments on 7 properties had been changed because of changes in the estimated volume owned or in other appraisal factors. The principal reasons for changes between the 1958-59 and 1959-60 rolls were as follows: * Does not include land assessed on a flat per M rate in 1958-59 but assessed as part of sustained yield operating units in 1959-60. f Does not include 133.7 million board feet assessed at a flat per M rate in 1958-59, but assessed as part of sustained yield operating units in 1959-60. Source: Office of County Assessor. YOUNG-GROWTH TIMBER Total assessed value, 1958-59 roll $525,235 Value added: By property declared mature $94,270 By reappraisal 56,560 By all other changes 8,565 159,395 $684,630 Value removed: By cutting of timber 36,800 Total assessed value, 1959-60 roll $647,830 The average assessed value of all second-growth prop- erty on the 1959-60 roll was $15.80 per acre. Average value of the land was $4.67 per acre, or 29.6 per cent of the total. The range of assessment for land and timber was from $5.19 per acre to $33.31 per acre. The distribu- tion of assessments within this range is shown below. Assessed value dollars per acre Number of properties Less than $8 4 $8-$12 17 $12-$16 17 $16-$20 11 $20-$24 8 Over $24 7 Total 64 Present appraisal practice does not recognize annual carrying charges other than taxes on properties where cutting of some or all of the young-growth is to be deferred. In the case of a sustained-yield property, ex- isting appraisal procedures involve capitalizing esti- mated annual growth in value of the timber at an interest rate chosen to make an allowance for the prop- erty tax. No allowance is made for other costs of carry- ing the property. If costs such as annual administration, protection, and management charges are in fact in- curred, the appraisal under this practice would be too high. For example, assume a young-growth property where growth is estimated to be 500 b.f. per acre per year and stumpage market value is $6 per thousand b.f. At a 5 per cent interest rate (which includes the tax rate), such a property would have net annual income of $3 per acre, an appraised value of $60 per acre, and an assessed value of $15 (using a 25 per cent assessment ratio), 5 if no annual costs other than taxes were in- volved. But if significant annual carrying charges other than taxes do exist, and if they are ignored in appraisal 5 For convenience, risk allowance is ignored but this does not affect the analysis. TAXATION IN MENDOCINO COUNTY Present appraisal practice 63 Ignoring manage- ment costs in ap- praisals discourages needed manage- ment practices practice, serious inequities in assessment may arise. If in our example annual carrying charges of $1 per acre were actually incurred but were ignored in the ap- praisal, the indicated $60 valuation would be 50 per cent above the true value. Analogous errors would occur if carrying charges are ignored on deferred- income properties other than those on sustained yield. There is evidence that carrying charges of the order of $1 per acre may be incurred in the operation of cer- tain properties in Mendocino County. Therefore, this aspect of appraisal practice is important. The matter is seriously complicated by the difficulties of determin- ing levels of annual carrying costs appropriate for ap- praisal purposes. These difficulties include the fact (discussed below) that the level of carrying costs may be influenced by the kind of ownership, and the ac- counting problem of determining for an integrated management unit what share of certain types of cost may properly be attributed to particular units of the property. An additional consideration with respect to this practice is its possible effect on the management pro- grams of owners. More intensive management of second-growth stands is needed (and needed now) if these stands are to make their maximum contribution to the future economy of Mendocino County. Such intensive management will require additional annual outlays by the owners for protection, stand improve- ment, salvage of mortality and the like. If expenditures of this kind are ignored in arriving at taxable value, it tends to discourage the owner from making expendi- tures of the needed kinds. 478 million board feet of young-growth reclassified by 1960 Young-Growth in the Tax Base In the three-year period from the intial reclassifica- tion of young-growth in Mendocino County to July 1, 1960, 478 million b.f. of young timber was designated as mature by Maturity Board action. 6 Of the 320 mil- lion b.f. so reclassified in 1957, 1958, and 1959, there were 126 million b.f. (39 per cent) remaining on the roll in 1960. The relative importance of these young-growth volumes in the total timber tax base may be judged from figure 21. In 1959-60 young-growth accounted for 7.3 per cent of the total volume of timber on the rolls and for 7.3 per cent of the total value assessed against timber and timberland. After allowing for land assess- 6 Of this, some 158 million b.f. reclassified in 1960 will not be placed on the roll until 1961, by action of the County Board of Equalization. 64 YOUNG-GROWTH TIMBER Source : 5000 County Assessor's Office. 4500 4000 • 3500 3000 2500 2000 1500 1000 500 400 300 200 5.9% 7.3% 7.6% 100 24% 35% 1957-58 YEAR 1958-59 1959-60 1960-61 1960-61 reclassified on rolls □ YOUNG GROWTH ALL TIMBER Fig. 21. The place of young-growth timber in the total timber tax base, Mendocino County. ments on the basis of the $4.67/acre average, the appar- ent average valuation of young-growth timber on the 1959-60 roll was $1.46 per thousand. In table 13 (page 45) the area of "large young-growth" in private ownership was estimated at about 245,000 acres. Although the "large young-growth" classification is not based directly on age of stand, it includes those stands in which more than 20 per cent of the immature trees are larger than 1 1 inches d.b.h. (Baker and Poli, 1951). The proportion of trees in a young-growth stand which are larger than 1 1 inches varies with the age of the stand and also with site quality, stand density, and species. Under representative Mendocino County con- ditions "large young-growth" appears to correspond to amounting to about 7 2 /2 per cent of all timber on the roll TAXATION IN MENDOCINO COUNTY 65 Young-growth timber never exceeded 1 per cent of the tax base Assessed value of young-growth unlikely to exceed $1 million a minimum age of stand ranging from 35 to 45 years. The 35,947 acres of young-growth declared mature to date is equal to 23 per cent of the estimated total "large young-growth" acreage in the county in 1958. Under the reclassification and assessment practices which have been followed to date, the aggregate assess- ments on young-growth timber have increased from year to year but have never exceeded 1 per cent of the total tax base of Mendocino County. Unless the rate of cutting of second-growth timber accelerates substan- itally, the amount of young-growth annually subject to reclassification and assessment under present practices appears unlikely to increase greatly above the levels already experienced. A normal future expectation under such conditions (and assuming stable stumpage values in the future) might thus be aggregate annual assessments on young-growth timber of the order of $750,000 to $1 million. ECONOMIC EFFECTS OF YOUNG-GROWTH TAXATION Taxation of young-growth timber appears to have had little effect on the management of small tracts. Such tracts are ordi- narily not declared mature until after the owner has decided to cut them and, on the average, the timber on small tracts remains on the tax rolls for only a year or two. On larger tracts, some of the timber remains subject to tax for considerably longer periods. It is probable that uncertainty as to the effect of stand improve- ment cutting on taxability of timber is deterring the adoption of this essential management practice on large holdings. In addition, young-growth taxation encourages liquidation cutting in prefer- ence to sustained yield management wherever financial factors other than taxation are not strongly in favor of sustained yield. Full evaluation of the effects of the taxation of young-growth timber is an exceedingly complex task- Some of the questions raised by such an evaluation, (for example those dealing with the legal meaning of maturity or with the responsibilities of assessors with respect to timber) involve questions of law or of public policy beyond the scope of this study. Emphasis here will be placed on three important questions: What effects, if any, does young-growth taxation have on the management of young-growth stands and, hence, on the raw material supply for wood-using in- dustries? Does young-growth taxation involve inequities in taxation, as between different forest owners? What effects does young-growth taxation have on the tax base of the county? 66 YOUNG-GROWTH TIMBER Effects of Taxation on Young-Growth Management The importance of young-growth stands and the eco- nomic reasons for much more intensive management of such stands have been outlined earlier in this bulle- tin. In view of these circumstances, it is important to ask: Does the taxation of young-growth have a signifi- cant effect on such key questions as the time when an owner will cut his timber, whether or not he will under- take stand improvement measures, or whether he will acquire property for sustained yield management? The cutting history of young-growth timber subject to taxation in Mendocino County is summarized in table 21. Ninety-three per cent of the reclassified young- growth area is in tracts which had been subject to some kind of timber harvesting by mid- 1960. Ten per cent of the tracts, accounting for 34 per cent of the reclassi- fied acreage, were under sustained-yield type harvest- ing. Only four of these tracts were under 2,000 acres in size and of these only two were under 600 acres. For tracts smaller than 600 acres, sustained-yield har- vesting was a negligible factor, being applied to only 0.4 per cent of the area. On 70 of the 96 reclassified parcels (59 per cent of the reclassified acreage), liquidation cutting took place. On small tracts of 100 acres or less the young-growth area had been logged off by 1960 in 22 out of 23 cases. As figure 22 indicates, on larger tracts more of the re- classified timber remained uncut as of 1960. Of 70 re- classified tracts subject to liquidation cutting, 53 tracts Key questions of management: time of cutting, sustained yield management, improvement measures Table 21 NUMBER OF PROPERTIES AND AREA OF YOUNG-GROWTH CLASSIFIED AS MATURE, AND 1960 STATUS OF CUTTING ON SUCH AREAS Cutting status 1957 1958 1959 1960* Total Young-growth declared mature 23 19,232 2 1,242 17 6,044 4,198 4 11,946 40 20,095 9 1,466 30 18,552 10,043 1 77 13 6,377 3 1,194 10 5,183 1,806 20 10,243 2 80 13 3,089 1,206 5 7.074 96 55,947 1960 status: No cutting: Number of ownerships 16 3,982 Liquidation cutting: Number of ownerships 70 32,868 17,253 Sustained-yield cutting : 10 19,097 The County Board of Equalization has ruled that certain timber declared mature in 1960 is not taxable until 1961. Source: Office of the Assessor. TAXATION IN MENDOCINO COUNTY 67 (accounting for more than half the reclassified acreage) had had all taxable young-growth timber removed by 1960. The average length of time during which reclassified timber was left standing may be judged from table 22. Most tracts under 250 acres were logged off during, or before, the year of classification. On most larger tracts, logging began during the year of classification, but in many of these only a fraction of the reclassified timber was removed during the first year. Thus, on medium- sized tracts reclassified in 1957, one-third of the reclassi- fied acreage had not been logged three years later. To simplify understanding the relationships between reclassification, size of tract, date of logging and rate of timber removal, the average experience over the period 1957-1960 with lands reclassified in Mendocino County may be used to develop figure 23. This shows the area of unlogged young-growth which would remain, year by year, following the reclassification of 10,000 acres. Fig. 22. More reclassified timber remains on larger tracts. 0-100 251-600 | OVER 2000 I 101-250 601-2000 TOTAL Size of ownership-acres 68 YOUNG-GROWTH TIMBER Table 22 RECLASSIFIED LAND UNDEE LIQUIDATION BUT UNCUT IN 1960, BY DATE OF RECLASSIFICATION (Includes lands reclassified 1957 through 1959 only) Size acres Number of tracts Per cent of area which re- mained uncut in June 1960. Lands reclassified in: 1957 1958 1959 0-250 251-2,000. . Over 2,000... 31 23 3 13 33 * 4 40 65 15 66 86 Total Average . . . 57 29 44 64 * No tracts reclassified in 1957 were over 2,000 acres and under liquidation. The bars indicate the differences in "life expectancy" of the reclassified timber depending on size of ownership. Under these conditions, 8 per cent of the acreage in small tracts, 20 per cent of the medium tracts, and 40 per cent of the larger tracts would remain unlogged (or be on "sustained yield") five years after the date of reclassification. On the average, only 29 per cent of the reclassified area would remain unlogged at the end of five years. Except for the sustained-yield parcels, all the reclassified young-growth would be logged off dur- ing the seventh year following reclassification. Thus, under Mendocino County conditions of 1957-1960, the average expectancy was that reclassified young- growth would remain on the tax roll for about three years before being removed from taxation by cutting. Effect of Tax on Time of Cutting — Small Holdings It has been the usual practice of the assessor to re- quest classification of young-growth as mature on those tracts where logging has begun or where there is con- tractual or other evidence that logging is contemplated. Wherever this policy is applied and is clearly under- stood by landowners, reclassification of timber under Section 1234 can hardly determine directly the time of logging of young-growth timber — such timber is taxed only after the decision to log at least a portion of the tract has already been made. However, if owners are not aware of the policy or if they believe it may be changed, the fear of reclassification may stimulate early logging. A study of "life expectancy" for reclassified young- growth in Mendocino County Under present con- ditions, young-growth would remain on the tax rolls for three years before being cut Decision for small tracts: When to cut young-growth TAXATION IN MENDOCINO COUNTY 69 1000 a) Small owner shi p: 0-250 acres 109 500 50 J 0> o 4000 b) Medium ownership: 251 -2000 acres 100 3000 2000 05 5Q 1000 to «*3 c) Large ownership: over 2000 acres 100 5000 4000 T* 3000 0) 50 2000 1000 0) <3 is. 12 3 4 5 Years since reclassification Fig. 23. Effect of taxation on young-growth management: reclassification of timber as mature would reduce the "life expectancy" of the timber most in small, least in large tracts. Taxation of young- growth has little effect on the manage- ment of small tracts Of 71 ownerships classified as mature during 1957-59, 40 ownerships were subjected to logging either before or during the year of reclassification and, as of 1960, an additional 14 were unlogged. Thus, for more than three-fourths of the reclassified ownerships, the time of cutting has clearly been independent of the reclassifi- cation action and there is no evidence to indicate that it was important in the other cases. In a study of timber sales made from small holdings between 1950 and 1958 (Casamajor, 1960) no seller gave the tax burden as a reason for the sale of his timber. Among the small owners sampled in the present study, none cited tax considerations as important in determining how he handled his timber. 70 YOUNG-GROWTH TIMBER Analysis of the financial aspects of managing young- growth timber suggests the further conclusion that, for small ownerships, even the prospect of reclassification, at the time that logging begins, of young-growth and subsequent imposition of general property taxes on the timber is not an important factor in speeding up the logging date of such timber. The financial details vary widely with individual cases, but here is a representa- tive situation for a 120-acre tract of Douglas-fir young growth (for Site II land, 80 per cent stocked). If the stumpage Then the most profitable cutting age price expected 5 years hence shows With rate of return 4i/£ per cent With rate of return 6 per cent No tax Tax No tax Tax No increase 56 yrs. 61 yrs. 56 yrs. 61 yrs. 50 yrs. 55 yrs. 50 yrs. 55 yrs. $1/M increase It is assumed that the owner may either sell the tim- ber this year or hold it and sell at the end of five more years. In accordance with the situation on most small properties, annual carrying charges other than interest and taxes are assumed to be nominal. The comparative financial advantage of the two alternatives will depend mainly on (1) the expected rate of growth of the timber, (2) the rate of return the owner wishes to receive on his timber investment, and (3) his expectations as to future stumpage price trends. The values above show the max- imum age at which it would pay the owner to hold the tract for another five years, rather than selling the tim- ber now. For example, if he wishes 4i/2 per cent return on his investment and expects no increase in stumpage prices, it will pay him to hold his timber for another five years at all ages up to age 56. But beyond that age, he would be better off to cut the timber immediately rather than to hold it another five years. As the text table above indicates, both the rate of return required by the owner and his expectations as to future stumpage price trends have a substantial effect on the most profitable cutting age. A shift in required rate of return from 4i/2 per cent to 6 per cent reduces the most profitable age by roughly five years, and a change in price expectations of $1 per thousand b.f. has a similar effect. In the left column of each pair, the analysis has as- sumed no tax on the timber. In the right column it is assumed that the timber will be classified as mature in the year of cutting and that (in accordance with aver- Even the prospect of reclassification need not speed up logging time TAXATION IN MENDOCINO COUNTY 71 Decision for large holdings: liquidation or sustained yield age Mendocino County experience with small tracts) property taxes will be assessed against the timber for two years following the date of reclassification. Com- parison of the "No tax" column with the "Taxed" column shows that imposition of the tax has no signifi- cant effect on the most profitable date of cutting. 7 Liquidation Versus Sustained Yield — Larger Holdings For larger ownerships the most important decision affecting time of cutting is whether the young-growth will be liquidated or managed on a sustained-yield basis. The choice made by owners between these two alternatives has an important effect on the tax base, and the taxation of young-growth may have an impor- tant effect on the choice the owners make. The effect of the choice on the tax base results from the fact that young-growth managed for liquidation remains in the tax base for a variable period which in the past has averaged three years, while young-growth handled on a sustained yield basis yields a tax revenue over an indefinitely long period of years. The impor- tance of this may be judged from the following ex- ample. 7 In theory, imposition of the tax lowers the age of most profit- able cutting by a fraction of a year, but the practical effect of this is not significant. Fig. 24. Assessed value benefits from sustained yield over liquida- tion cutting. $700,000 600,000 500,000 400,000 300,000 — 200,000 l50,00Ot^ 100,000— 5 0,000-- I960 Sustained yield Liquidation cutting ' — : „ ir 72 1961 1962 19631 1964 YOUNG-GROWTH TIMBER In figure 24 it is assumed that 10,000 acres of average Mendocino County young-growth is declared mature in 1960 and that it is assessed in accordance with prac- tices and rates which prevailed in the county in 1959. If the entire acreage is managed on sustained yield, it would be assessed in 1960 at $127,000 and an equal assessment would remain in effect each subsequent year (assuming no change in stumpage values). In con- trast, if the entire acreage is to be liquidated, it would be assessed at $149,300 in 1960 but the total assessment in subsequent years would decline as the taxable tim- ber was removed. On the basis of the average condi- tions of liquidation which have been experienced in Mendocino County, assessments would decline as shown in figure 24 (broken line). In the first year of assessment the young-growth will contribute more to the tax base if managed for liquida- tion. This reflects the fact that the average deferral of income is less under liquidation than under sustained yield, and a smaller discount factor is therefore appro- priate. But in the second year this effect is more than offset by liquidation of taxable timber. As a result, for that year the young-growth will contribute more to assessed value if managed for sustained yield than if managed for liquidation. This advantage from the standpoint of the tax base gets larger with each suc- ceeding year. For the initial five-year period, the aggre- gate contribution to the tax base if the timber is handled on sustained yield will be 25 per cent greater than if it is handled on a liquidation basis. Thus, even in the short run, there would be substantial benefits to the tax base if owners choose sustained-yield man- agement rather than liquidation. By 1965, under existing liquidation practices, all assessable young-growth would have been removed and the contribution of the property to the tax base would drop to $54,500 and remain there. Thus, from that date on, the property would contribute 2.33 times as much taxes to the county if managed on sustained yield as it would if liquidated. Innumerable factors may influence the choice of the landowner between liquidating his young-growth and managing it for a perpetual yield. For many, economic factors will exercise a predominant influence; for some, extra-economic considerations such as compatibility with recreation use may be involved. Among the most important economic factors are: • Rate of growth of the forest • Expectations as to future stumpage price trends Even in the short run, sustained-yield management would bring substantial benefits to the tax base In the long run, benefits to the tax base are even greater TAXATION IN MENDOCINO COUNTY 73 Factors that will influence manage- ment decision of owner • Comparative costs of management, other than taxes • Whether or not the owner holds conversion plants whose raw material supply must be assured • Comparative risks of loss • Financial liquidity of the ownership • Income tax aspects • Comparative burden of property taxes Growth rates and stumpage price favor sustained yield Prospective growth rates on much Mendocino County forest land are high when compared to other timber- producing areas. Except on the poorer sites or in inade- quately stocked stands, growth rates are sufficient to support satisfactory earnings on the capital invested, provided factors other than growth are not adverse. As noted, there may be some future moderate increase in stumpage values, and to the extent that land owners concur in this judgment the long-term price trend favors sustained yield rather than liquidation. The costs, other than taxes, of managing young- growth for sustained yield are higher than those for liquidation management. The various parts of the property must be kept continuously accessible, year after year, for both protection and utilization. Greater expenditures for protection of the growing stock against fire, insects, and disease are needed. Technical supervision and forest management become more costly. But the magnitude of these additional costs will vary greatly among owners, depending on the intensity of management, the size of the property, and the meth- ods of accounting used. In a survey of representative Mendocino County owners, reported costs of forest management varied all the way from nothing to more than $1.50 per acre per year. Certain costs vary with different types of owners. The resident ranch owner, for example, may be able to provide fire protection (in addition to State protec- tion) for his property without any significant additional cash outlay, while the nonresident owner would incur substantial out-of-pocket expense to accomplish the same thing. The large owner can ordinarily secure technical forest counsel needed for sutained-yield planning at less cost per acre than the small owner. Thus, the magnitude of additional costs of sutained- yield management varies with the particular property and cannot be generalized. A group of large Mendocino owners who are cutting in accordance with plans for permanent production reported forest-management costs which averaged about $1.00 per acre per year higher than those reported by a comparable group of 74 YOUNG-GROWTH TIMBER owners who are liquidating. In the light of the costs of sustained-yield management in areas such as the Pacific Northwest this appears to be close to the minimum extra cost to be expected. If the intensity of sustained- yield forest management in Mendocino County is to increase, it will require additional cast outlays for for- estry expenses above the apparent present $1.00 acre average. Sustained-yield operation exposes the timber invest- ment to risk of destruction by fire or other physical dangers for a longer period than does liquidation. This is particularly true for small ownerships, since large forest holdings are in part "self-insuring" against physi- cal loss. This aspect of increased risk may be offset in part by greater accessability of the timber and by more intensive protection efforts, but the net result suggests a somewhat higher rate of risk to the investment in sustained yield for small or medium-sized ownerships. The factors already mentioned suggest that strong financing is usually essential for sustained-yield oper- ations. The ownership must maintain its investment in growing stock indefinitely and, to meet out-of-pocket costs for forestry, taxes, and related outlays, has a con- siderably higher ratio of annual expenses to gross re- ceipts than has liquidation. Ownerships which are not well financed often regard the timber holding as a source of cash to meet emergency needs. For example, 14 per cent of a sample of recent timber sales in Mendo- cino County were made to meet emergency cash needs of the owner. With growth rates and stumpage price trends favor- able to sustained yield, and with lower costs of man- agement, comparative risks, and financial liquidity favoring liquidation, the property tax may often be a very substantial factor influencing the owner's choice between sustained yield and liquidation. If all other circumstances are the same, any annual tax on standing timber takes a bigger proportion of the before-tax value of the property if the property is on sustained yield than if it is on liquidation. Thus, if after analyzing all factors except property taxes an owner concludes his property is of equal value for either liquidation or sus- tained yield, the existence of the property tax will shift the financial advantage in favor of liquidation. The operation of this principle under Section 1234 is shown in table 23. The tax ratios shown indicate the proportion of the present worth of the property before taxes which would be taken by the general property tax under current practices. Thus, in the case shown, Risks and costs of sustained-yield operations favor liquidation With most factors balanced, property tax may be a deciding factor TAXATION IN MENDOCINO COUNTY 75 Table 23 TAX EATIOS FOR A REPRESENTATIVE YOUNG-GROWTH STAND IN MENDOCINO COUNTY FOR ALTERNATIVE LENGTHS OF CUTTING PERIOD Length of cutting Present volume per acre Assessed timber value acre Tax ratio period Thousand b. f. Dollars Per cent 1 year 5 years Sustained yield 8.5 8.5 8.5 14.90* 9.40f 9.70} 1.25 3.46 16.70 * Assessed on basis of immediate cutting. t Assessed on basis of discounted income from future cutting. t Timber and land assessed on basis of 500 b.f. sus- tained annual growth; $3.10 per acre is attributed to land value and the remainder to timber. In any case, young-growth taxation encourages liquidation taxes take 16.7 per cent of the value before taxes if the property is managed on sustained yield, but only 1.25 per cent of the value before taxes if it is liquidated in one year. This illustrates the fact that, wherever the value of a timber tract is about the same for either sustained yield or liquidation, the existence of a gen- eral property tax on the timber makes liquidation the more attractive financial alternative. Whether or not the property tax is the determining factor in the choice of management alternatives in any particular case will depend on the relative strength of the other economic factors discussed above. But in any case, a general property tax such as that imposed under Section 12^4 tends to favor liquidation cutting. Assessment practices may also be a factor in deter- mining how heavily the tax on young-growth favors liquidation. Assessment of liquidation properties is currently based on the merchantable timber volume present at the expected time of cutting. Assessment of property on sustained yield is based on an estimate of expected average annual growth. Due to this difference in basis of appraisal, an error of equal magnitude in basic appraisal data will have more effect on the tax ratio under sustained-yield management than on that under liquidation. For example, in the case shown in table 22, an error of 20 per cent in the timber-volume estimate will change the tax ratio under liquidation by 24 per cent. An error of 20 per cent in the timber growth estimate will change the tax ratio under sus- tained yield by 32 per cent. As a result, great care must 76 YOUNG-GROWTH TIMBER be used in securing the growth information on which assessment of sustained yield properties is based. As- sessments based on an overestimate of the growth may serve to encourage liquidation in circumstances where sustained yield would otherwise be the more attractive financial alternative. Similarly, the practice of ignoring in appraisals any annual carrying charges other than taxes (discussed on page 74) bears more heavily against sustained-yield properties than against liquidation properties. Under sustained yield the costs which are ignored are likely to be higher than on liquidation properties, and they may well continue indefinitely. Thus, the present worth of the unrecognized costs is likely to be much larger for a tract on sustained yield than for one on liquida- tion, and the owner who analyzes the financial aspects of the sustained-yield versus liquidation alternatives for his property will find the tax burden significantly heavier under sustained yield. Impact on Stand Improvement Cutting Under intensive forest management, carefully planned partial cutting of young-growth stands is often undertaken as a stand-improvement measure. Stand- improvement cutting includes all cuttings, not a part of a final harvest operation, made during the life of a forest stand. The advantages sought from stand- improvement cutting usually fall in one of the follow- ing categories: • Harvest of trees that would die from supression if Advantages of natural development of the stand were allowed to improvement cutting continue. In effect, this means use of trees that, without stand-improvement cutting, would not persist to become part of the final crop. • Removal of low-quality, or poor-species trees so that future growth will be of higher ultimate value than growth in the unimproved stand. • Acceleration of the growth per acre on the residual stand as a result of the reduction in competition among individual trees. There is presently no conclusive evidence that the redwood and Douglas-fir stands characteristic of pri- vate land in Mendocino County will show accelerated growth per acre as a result of stand-improvement cut- ting. But research in Europe and the Pacific Northwest indicates that within certain limits the same amount of annual growth per acre can be expected on both heavily and moderately stocked stands. Thus, even if growth TAXATION IN MENDOCINO COUNTY 77 Disadvantage of improvement cutting: extra costs Experiments with stand improvement Summary of effect on tax burden of improvement cutting in a heavily stocked 40-year old Douglas-fir stand per acre is not increased, thinning may permit a re- duction in the growing stock needed to produce a given level of growth. Although these advantages can be secured by prop- erly applied improvement cuts in young-growth stands, the financial aspects of improvement cutting are com- plicated. These aspects become even more complex and uncertain as a result of the existing uncertain outlook with respect to young-growth taxation. Stand-improvement cutting involves extra costs to the owner. Trees must be marked for cutting by a qualified man, and logging costs are generally higher than for ordinary logging because the volume of tim- ber cut per acre is relatively small. The range of such additional costs is normally from $2 to $4.50 per thou- sand b.f. cut. Experimental stand-improvement cuttings have been undertaken by some Mendocino owners and some others are attempting to employ stand-improvement principles in the course of regular young-growth oper- ations. There is evidence, however, that some owners have been deterred from initiating stand-improvement cutting through fear of the tax consequences. Th problem arises because of uncertainty as to the effect c initiating stand improvement cutting on the taxability of young-growth stands. If a maturity board, acting in accordance with existing guide lines, should interpret a stand-improvement cutting as evidence of maturity for tax purposes, an owner might have all his young- growth of the same class placed on the tax rolls for the entire period between initiation of improvement cut- ting and the year of final harvest. He would then be subject to a much heavier tax burden directly as a result of undertaking the improvement cutting. The prospect of this additional burden may more than off- set any economic gains which the improvement cutting offers, and thus result in discouraging a desirable prac- tice. Some examples will illustrate these considerations. Summarized below is an analysis (Staebler, 1955) of the effect on the tax burden of improvement cutting to remove expected mortality in the case of a heavily stocked 40-year-old Douglas-fir stand on a small prop- erty. The interest rate is 3 per cent, the tax rate 5 per cent. Compared are present values of yields from an acre of timber under three different assumptions as to management and taxation; and the differences in optimum-harvest age and in tax ratio are shown. 78 YOUNG-GROWTH TIMBER Case 1: Present net worth of yields Dollars Optimum harvest age Years Tax ratio Per cent No improvement cut- ting and no tax until year of final harvest. . . . 317.50 50 1.25 Case 2: Improvement cutting at age 40, no tax until year of final harvest. . . . 348.00 70 1.25 Case 3: Improvement cutting at age 40, annual tax from year of improve- ment cut 309.50 50 9.20 Case 1 assumes no improvement cutting, and taxa- tion of the stand only in the year of final harvest. Under these conditions it will pay the owner to hold the timber to age 50, and the tax imposed at that time will take 1.25 per cent of the tax-free value of the property. Case 2 assumes that an improvement cut is made at ge 40 and at 10 year intervals thereafter, and that the nber is not declared mature for tax purposes until ■e year of harvest cutting. Under these conditions, it ill pay the owner to hold the timber until age 70 rather than to age 50 as in case 1) because the im- provement cut has improved the rate of earnings on the stand. Case 3 assumes that improvement cuts are made as in case 2, and that this results in declaration of maturity for the entire property which is then taxed annually until final harvest. Under these circumstances the property is worth less than if no improvement cut- ting had taken place (case 1) because the increased tax burden more than offsets the increases in yield obtain- able in case 2. The total harvest from the property under case 2 exceeds that obtainable without improvement cutting by 11 per cent. Thus, the policy of taxing when im- provement cutting begins reduces the potential timber supply which the property could provide by the 1 1 per cent derived from thinning yields. In addition, the policy would discourage the owner from deferring the harvest until age 70, a management practice that would be advantageous to the county in the light of the pro- jected timber-supply situation 20 years from now. In the cases just considered, improvement cuttings were confined to salvage of expected mortality. Where young stands are heavily stocked, stand-improvement cutting can be made more practical by judicious re- T axing at the beginning of the improvement cut reduces timber supply, and dis- courages owner from deferring harvest TAXATION IN MENDOCINO COUNTY 79 Effects of stand improvement on timber taxability are too uncertain to encourage owners of large holdings to try this essential management practice moval of some of the timber growing stock. As noted earlier, where stocking is heavy such cutting can often improve timber quality without impairing the volume of final yield. The situation is illustrated by the case presented here for a 320-acre tract of 45-year-old red- wood, heavily stocked. Interest rate is 3 per cent, tax rate is 5 per cent. The present value of yields, at age 45, is shown for two alternatives as to management and taxation. Present worth of yields per acre Case 1 : No thinning 10 per cent thinning 25 per cent thinning No improvement cutting; no tax until year of harvest . $218.40 Case 2: Improvement cuttings; no tax until year of harvest. . . $235.70 $257.70 Case 3: Improvement cutting; an- nual tax from date of ini- tial cut $209.50 $230.50 Note: Yield of 52 M b.f. per acre at age 55; annual mortality estimated at 150 b.f. per acre. Final yields valued at $6 per M; intermediate yields at $3.50 per M. By removing a portion of the growing stock in addi- tion to the expected mortality, the intermediate yields may be sufficient to offset the increased tax burden arising from classification of the young-growth as ma- ture. This is shown by case 3, where the present worth of the property, thinned by 25 per cent and placed under annual taxation, is greater than the present worth if all cutting and taxation is deferred until final harvest 10 years from now. However, as case 3 shows, taxation of the thinned stands tends to discourage light thinnings as compared with heavy ones. The 10 per cent thinning is of less value than no improvement cutting at all, if the tim- ber is taxed annually, even though the 25 per cent thinning showed a profit. This is of importance for two reasons. In the present state of knowledge, heavier thinnings bring greater silvicultural risks than light ones, and the heavier the thinning the greater the chance of reducing current growth and final yield. Neither of these factors is recognized in the figures above. A further aspect of the stand-improvement problem arises because neither harvesting techniques nor mar- kets for products have been developed for thinnings 80 YOUNG-GROWTH TIMBER on much more than an experimental scale. Until more has been learned about harvesting techniques, and until markets for the class of products harvested have been developed, initiation of a stand improvement pro- gram should be started on a relatively small scale with- out committing the entire young-growth acreage in the ownership to such a program. If initiation of the stand- improvement cutting on a part of the ownership results in declaration of maturity on all other timber of like class held by the owner, it may well raise tax costs to the point where the stand-improvement program is un- economic. For example in the case of the 320 acre redwood tract of the text table on page 80, the owner contemplates starting his stand improvement program on an 80-acre portion of the tract so as to learn more about his silvi- cultural, logging, and marketing problems before com- mitting the whole property to this plan of management. This may result in classification of the entire 320 acres as mature for tax purposes. If this happens, the present worth of his prospective yields from a 25 per cent thin- ning program on the property will be only $201 per acre — considerably less than if no improvement cutting at all were undertaken. More experiments are needed to explore this field Tax Instability Forest-tax problems and the impact of taxation on timber management are more severe during a period when taxes are unstable than during a period when they are relatively constant or even rising at a fairly uniform but moderate rate. A principal reason is that, unlike certain other kinds of costs of holding timber investments, annual taxes are an out-of-pocket expense. As noted, in most timber investments interest costs are likely to represent a much larger proportion of total cost than do taxes. But this may be more than offset in its effect on owners' decisions by the fact that property taxes are an out-of-pocket expense while in- terest on investment in most cases is not. The need to provide cash each year to meet taxes on standing timber may create special problems. If the timber property is not being cut and therefore is yield- ing no current income, the owner may be in a position to finance his timber taxes out of net income from some nontimber investment. But if he has no such source of cash, he may have to cut his timber to raise the cash needed to meet timber-tax obligations. Such problems are likely to arise more frequently if tax levies against the timber are increased sharply at a particular time, Periods of tax instability affect timber management TAXATION IN MENDOCINO COUNTY 81 Tax rate instability is not a major problem affecting owners of Mendocino young-growth with a consequent increase in the owner's need for cash. Tax increases may be due either to an increase in the * tax rate or to an increase in assessed value. In Mendo- cino County the latter factor has been more important than the former as a cause of tax instability. 4 The apparent average tax rate 8 in Mendocino County rose by 76 per cent between 1940 and 1958, or at the*' rate of 4.2 per cent per year. Between 1945 and 1946 the apparent rate rose by 35 per cent and an annual increase of 10 to 13 per cent has been experienced in several years since the war. But except for the 1945-46 rise, annual changes in tax rates on timber properties do not appear to have been large enough to cause financial problems to most owners. Analysis of apparent tax rates on 12 sample forest - properties for the period 1950 to 1958 showed that the maximum increase in tax rate on any of the properties in any year was 18 per cent. Over the eight-year period the largest average annual increase on any of the sample properties was 3.5 per cent and the average annual increase in rate for all the properties in the sample was 2.1 per cent per year. These data reinforce the conclusion that tax rate instability is not a major problem affecting owners of Mendocino young-growth. Because young-growth timber has been taxed in Men- docino County only since 1957, a comparatively small number of young-growth properties have been reap- praised. The 1959-60 roll showed 13 young-growth . properties which had been reappraised by discount methods. In two of these cases, the volume or land area assessed was sufficiently different from that carried on the 1958-59 roll as to make comparison meaningless. The changes in valuation resulting from reassessment of the remaining 11 properties are shown in table 24. The impact on an owner of an increase of 50 per cent or more in timber taxes in a single year obviously » may be severe. The foregoing data on reappraisals oc- curred in a transition period in the appraisal of young- growth, and therefore may not be representative of what is to be expected from future reappraisal practice. But the magnitude of the changes in taxes accompany- - ing these reappraisals suggests that careful attention should be given to maintaining continuity of appraisal " practice, to a frequency of reappraisal sufficient to keep assessments continually in line with market values, and of other measures helpful in avoiding large per- centage increases in valuation between any two succes- sive tax years. 8 Total tax levy divided by total assessed value. 82 YOUNG-GROWTH TIMBER Table 24 PERCENTAGE CHANGE IN ASSESSMENT ACCOMPANYING REAPPRAISAL OF 11 YOUNG-GROWTH TIMBER PROPERTIES ON THE 1959-60 MENDOCINO COUNTY TAX ROLL Percentage change from 1958-59 assessment Number of properties 2 50-100 per cent increase 0-50 per cent increase 2 2 4 Over 50 per cent decrease 1 Total number of properties 11 Average increase (per cent) 23 Tax Uncertainty Uncertainty as to future taxes is also a factor influ- encing the relative financial attractiveness of sustained yield versus liquidation cutting. The more uncertain the outlook, the more desirable is a relatively short- term timber investment which automatically limits the uncertainty. From this standpoint, clarification of the guidelines governing young-growth timber taxation so as to remove existing uncertainties as to tax questions would help to favor long-term timber-management programs. There is evidence to indicate that the cur- rent uncertainties in this respect have discouraged some acquisitions of young-growth timber which would have placed the timber on a sustained-yield basis. In other cases, uncertainty over the young-growth tax out- look appears to have discouraged adoption of more in- tensive management of young-growth stands already being handled on a long term production basis. Equity Aspects Many of the aspects of young-growth timber taxes which were discussed in the preceding pages from the standpoint of their impact on owners' management decisions are equally important from the standpoint of equalization of taxes among different taxpayers. The lower ratios of taxes to tax free value provided by short- term cutting programs as compared with long-term ones mean (other things being equal) relatively lighter tax burdens on owners who liquidate timber rapidly than on those who adopt longer term management plans. The situation reflects a serious defect in the na- Tax uncertainties discourage long-term management programs Inequities under the present tax system? TAXATION IN MENDOCINO COUNTY 83 Differences between timber and non- timber properties ture of the general property tax when it is applied to standing timber. Property tax problems. For most types of real prop- erty subject to the general property tax, the tax tends to prompt owners to keep the property in productive use. The only other alternatives are either to let it lie idle, and lose potential income, or to liquidate it phys- ically, thereby taking it off the tax roll and realizing a salvage value. 9 But so long as such property is not com- pletely obsolete, the owner can gain nothing (and would usually lose) by tearing the property down. The spread between the value of the property for future in- come production and the salvage value if the property is dismantled is great enough to more than offset any tax saving that might result from physical liquidation of the property. But timber owners are in a different position. As soon as timber reaches marketable size, such owners can choose between (1) keeping it as a productive asset and (2) cutting it for current products and thereby destroy- ing its capital value. Unlike the case of salvage of an obsolescent building, the value of the timber for cur- rent products is usually not too different from that of the timber as productive capital. Moreover, liquidation of the timber serves to relieve the owner of taxes on the timber. The significant point here is that the timber owner can influence the extent of the tax burden he has to bear by the management decision he makes about his property. Thus, because of the nature of timber as an economic good, the timber owner can influence his tax burden through management deci- sions to a far greater degree than can owners of non- timber property. This may result in inequities in tax burden between different timber owners and between timber owning and nontimber owning taxpayers. Even theoretically perfect tax administration and assessment practice can- not avoid the difficulty which is illustrated by the tax ratios presented on page 76 in table 23. As a result, assessors face an unusual equity problem in appraising timber for general property tax purposes; the means for resolving it do not appear to be available to tax officials. The recent change in appraisal practice which shifted the basis of appraisal from present physical volume to a basis which recognizes the relationship of a particular tract of timber to the operating unit of which it is a This second alternative is of course not available in the case of land. 84 YOUNG-GROWTH TIMBER part has removed one of the potential causes of in- equity. The new basis in effect permits the assessor to recognize that the alternative of immediate sale for cutting may not represent the "highest use" of the tim- ber and to take into account in the appraisal some of the factors which influence the owners' management decisions. But so long as different owners have different viewpoints on satisfactory rates of earnings, different re- quirements as to their cash position, and different approaches to annual expenses for forest management, ample room for variation in tax ratios on second- growth timber properties will remain. Maturity problems. Equity problems peculiar to op- erations under Section 12^4 arise from the nature of the existing maturity guidelines. They are connected with the criterion that timber (40 years or more after removal of the old growth) shall be considered mature when "70 per cent by volume of the trees 16 inch d.b.h. and larger on the land is of a class which is generally and substantially dealt in and sold or operated within the county as commercial saw timber." The difficulty of obtaining at reasonable cost the detailed inventory in- formation on second-growth stands needed for accurate application of this guideline is apparent. A cruise snowing some classification of volumes by tree diameter would be required and such cruises are ordinarily made only for the most intensively managed young-growth properties. Thus, uniformly accurate application of this guideline to all taxpayers would appear to be impractical at present. A further difficulty involves the meaning of the term "class (of timber) which is generally and substantially dealt in." If this phrase is interpreted in strictly physi- cal terms, say as timber which meets certain require- ments as to minimum size and maximum defect, literal application of the guideline would often result in de- claring mature some timber which is currently inac- cessible, or which is so related to the rest of the operat- ing ownership that cutting is almost certain to be de- ferred for a number of years. Classification of such in- accessible or deferred cutting timber as mature subjects it to taxation for a number of years with a tax burden perhaps several times heavier than that on timber of the same physical class located on a road and operated without reference to other units. On the other hand, the term "class" might be inter- preted in economic rather than physical terms, allow- ing the maturity boards to take account of accessibility, relation to the operating unit and possibly other factors New appraisal guides removed one cause of inequity but still left room for variations Existing maturity guidelines difficult to apply equitably TAXATION IN MENDOCINO COUNTY 85 Needed: legal interpretation of "class" of timber Administrative cost a third major source of inequity in applying the guideline. This interpretation could result in one tract of timber being declared mature at the same time that an adjacent tract exactly similar in physical appearance was considered not mature. Under either interpretation of the guide-line, the taxpayers receiving the heavier tax burden would be likely to contend that there is inequity, in effect argu- ing for application of the alternative definition of the term "class." Revision of the guide-line in order to make clear whether "class" refers only to physical char- acteristics or whether it includes economic ones as well would resolve the administrative aspects of the prob- lem. But to determine whether the physical or eco- nomic definition of "class" is the appropriate, one probably requires that the same issues of legal interpre- tation that are involved in the concept of "maturity" be definitively settled. Administrative cost. A further problem bearing on equity is the cost of getting the information needed to determine maturity. Timber is a highly variable com- modity. Like its value, its maturity is determined by a considerable range of factors. To estimate and apply each of these factors to a large number of individual properties is an administrative task of the same order of complexity as the appraisal of timber. If adminis- trative costs of determining maturity are to be reason- able in relation to the tax revenues involved — the av- erage tax on the 1958-59 Mendocino County roll was about $0.55 per acre of young-growth timber — simple procedures which can be quickly applied with a mini- mum amount of field work are required. In the face of the kinds of variability inherent in the large areas of young-growth timber in Mendocino County, proce- dures which are simple enough to be economically justified seem unlikely to eliminate problems of equalization. 86 YOUNG-GROWTH TIMBER Appendix Constitutional Provision and Policy Guide Lines A. Section 12Y4, Article XIII, California Constitution (As Revised, November 1926) Exemption of Certain Trees and Vines Fruit and nut-bearing trees under the age of four years from the time of planting in orchard form, and grapevines under the age of three years from the time of planting in vineyard form, and all immature forest trees which have been planted on lands not previously bearing merchantable timber or planted or of natural growth, upon lands from which the merchantable orig- inal growth timber stand to the extent of 70 percent of all trees over 16 inches in diameter has been removed, shall be exempt from taxation, and nothing in this article shall be construed as subjecting such trees and grapevines and forest trees to taxation; provided, that forest trees or timber shall be considered mature for the purpose of this act at such time, after 40 years from the time of planting or removal of the original timber as above provided, as a board consisting of a representative from the State Board of Forestry, a representative from the State Board of Equalization and the County assessor of the county in which the timber is located, shall by a majority thereof so determine. B. California Board of Forestry Policy on Timber Taxation (Adopted December 7, 1954) Section 1234, Article XIII of the State Constitution was adopted in 1926 by the people of California as a forest conservation measure for the purpose of encouraging perpetual regeneration of the forest resource in California by providing tax relief for immature and growing crops of timber. This Section of the Constitution provides that "all immature forest trees which have been planted on lands not previously bearing merchantable timber, or planted or of natural growth, upon lands from which the merchantable original growth tim- ber stand to the extent of 70 percent of all trees over 16 inches in diameter has been removed, shall be exempt from taxation, and nothing in this article shall be construed as subjecting such trees . . . and forest trees to taxation; provided, that forest trees or timber shall be considered mature for the purpose of this act at such time, after 40 years from the time of planting or removal of the original timber as above provided, as a board consisting of a representative from the State Board of Forestry, a representative from the State Board of Equalization and the County Assessor of the county in which the timber is located, shall by majority thereof so determine." In order to establish guide lines for uniform application of this Section of the Constitution, and to discharge its interests and TAXATION IN MENDOCINO COUNTY 87 responsibilities thereunder, the State Board of Forestry con- ducted public hearings, appointed, and received the recom- mendations of, a Timber Taxation Study Committee composed of two representatives each from the State Board of Equaliza- tion, County Assessors Association, County Supervisors Associa- tion, Board of Forestry, and four representatives of the forest industry, and one representative of the University of California School of Forestry, and conducted other studies in regard to timber taxation. NOW, THEREFORE, BE IT RESOLVED, that the Board of Forestry hereby declares in the public interest and concern for the future economy of the State of California and in accordance with the established forest conservation policy of the Board of Forestry and the State of California that: 1. Timber which has been exempted from county taxes under the provisions of Section 12%, Article XIII of the California State Constitution for 40 or more years may be returned to the tax rolls whenever the board consisting of a representative from the Board of Forestry, a representative from the Board of Equalization, and the County Assessor of the county in which the timber is located declare that: a. Timber shall be mature for assessment purposes after the 40 years when an owner initiates cutting thereon except for stand improvement or sanitation purposes, or b. Timber shall be mature for assessment purposes after the 40 years when 70% by volume of the trees 16" d.b.h. and larger on the land is of a class which is generally and sub- stantially dealt in and sold or operated within the county as commercial saw timber, and 2. In its judgment, the provisions of Section 12-%, of the Constitution should be administered under the interpretation that: a. The statement "70% of all trees over 16 inches in diam- eter" is a collective term meaning 70% of the volume of merchantable timber in trees over 16 inches in diameter, and b. It was the legislative intent that the 30% or less of timber remaining on a logged off area was to be exempt from taxa- tion for a period of 40 years, as a seed source, from the time of removal of the 70% by volume of the stand, and there- after, until the Constitutional board had declared the tim- ber reestablished and growing on the area to be mature for taxation purposes, and 3. In presenting the above recommendations, the Board of Forestry also goes on record in urging the Constitutional board and taxing authorities to bear in mind at all times that the future economy of the timbered counties and the timber industry shall be dependent upon maintaining a 88 YOUNG-GROWTH TIMBER large and vigorous stand of second growth timber; and that the growing of a crop of timber involves many years of high risks against fire, insects and disease. The Board of Forestry further points out that Section 12.%, Article XIII of the Con- stitution was passed by the people of California in recognition of these and other factors peculiar to growing timber as a crop. Therefore, the Board of Forestry emphasizes that every consideration be given to the retention of timber during its years of maximum growth by conservatively applying the provisions of the law and thereby not forcing premature cut- ting because of high or premature assessment, and BE IT FURTHER RESOLVED, that this restatement of policy by the Board of Forestry revokes all previous resolutions adopted by the Board in regard to timber taxation, and BE IT FURTHER RESOLVED, that copies of this Resolution be sent to the Board of Equalization, to County Assessors of the State, and to other interested persons or organizations. TAXATION IN MENDOCINO COUNTY 89 Literature Cited American Forest Products Industries 1955. Pulp wood industry facts. Baker, Harold L., and Poli, Adon 1951. Area and ownership of land in Mendocino County, California. California Forest and Range Experiment Station, Berkeley. Forest Survey Release No. 10, 23 pp.. California Chamber of Commerce 1958. Economic survey of California and its Counties. Reprinted from California Blue Book, 1958, pp. 801-1136. California Forest and Range Experiment Station 1953. Forest statistics for the Redwood-Douglas-fir Subregion in California, Berkeley. Forest Survey Release No. 19, 54 pp. Casamajor, Paul 1958. Changes in the ownership of rural private land in Mendocino County, 1947-1957. Mimeo, U. C. School of Forestry, Pp. 1-64. Casamajor, Paul; Teeguarden, Dennis E.; Zivnuska, John A. 1960. Timber marketing and land ownership in Mendocino County. California Agricultural Experiment Station Bulletin No. 772. Berkeley, Calif. 55 pp. Joint Timber Taxation Study Committee 1958. Reports on Joint Timber Taxation Study Outline (Section I), Unpublished report. 28 pp. Marquis, R. W. 1948. Employment opportunities in full forest utilization. Journal of Forestry 46(5): 334-339. May, Richard H. 1952. Lumber production in California and Nevada — 1951. California Forest and Range Experiment Station, Berkeley. Forest Survey Release No. 17. 14 pp. 1953. A century of lumber production in California and Nevada. California Forest and Range Experiment Station, Berkeley. Forest Survey Release No. 20. 33 pp. 1954. The lumber production and forest resources of Mendocino County. California Forest and Range Experiment Station, Berkeley. Unpublished paper. 12 pp. 1957. Production and plant receipts of veneer logs in California — 1956. California Forest and Range Experiment Station, Berkeley. Forest Survey Release No. 27. 7 pp. May, Richard H., and Baker, Harold L. 1957. Lumber production in California — 1956. California Forest and Range Experiment Sta- tion, Berkeley. Forest Survey Release No. 30. 15 pp. 1958. Output of timber products in California, 1956. California Forest and Range Experiment Station, Berkeley. Forest Survey Release No. 35. 35 pp. May, Richard H., and Ericksen, L. N. 1955. Wood residue from primary wood-using industries in California. California Forest and Range Experiment Station, Berkeley. Technical Paper No. 13. 15 pp. May, Richard H., and Simontacchi, Alexander 1947. Production of lumber and other sawed products in California and Nevada, 1946. Cali- fornia Forest and Range Experiment Station, Berkeley. Forest Research Note No. 55 8 pp. SCHOI 1ELD, W. R. 1932. Report on timber taxation in the State of California. Report submitted to California Tax Research Bureau. Staebler, George 1955. Yield and mortality tables for fully stocked stands of Douglas-fir. Pacific Northwest Forest and Range Experiment Station Research Paper No. 14. 20 pp. Stanford Research Institute 1954. America's demand for wood: 1929-1975. Stanford, California. 95 pp. U.S. Forest Service 1958. Timber resources for America's future. Forest Resources Report No. 14. 713 pp. Wieslander, A. E., and Jensen, H. A. 1946. Forest areas, timber volumes, and vegetative types in California. California Forest and Range Experiment Station, Berkeley. Forest Survey Release No. 4. 25 pp. 10w-e),'61 (B8649)Jb' t KNOWLEDGE GAINED BY RESEARCH CAN HELP CONSERVE CALIFORNIA'S WILDLAND RESOURCES CALI THE FORNIA WILDLANDS... < 65 million acres of mountains, foothills, canyons, rivers, lakes, and sea coasts. a giant "farm" for timber and forage. a vital source of California's water supply. an "outdoor playground" for millions of vacationers. THREAT: the onslaught of... population growth. 4 urban and industrial expansion. increasing demand for water, lumber, forage. wildfires. insects and plant and animal diseases. waste. THE SOLUTION: coordinated research on using wildland resources to realize their full potential . . . • present rate of timber growth could be doubled. • usefulness of timber cut could be doubled by new products made from current waste. • forage production for livestock and game could be tripled, watersheds could be made to yieid more usable water and cause fewer floods, tens of millions of dollars lost to fire, insects, diseases could be saved, timber, forage, and recreation uses need not exclude each other. THE WILDLAND RESEARCH CENTER at the University of California was established to help conserve California wildland resources through research. It operates within the University's state-wide Agricultural Experiment Station, with administrative headquarters on the Berkeley Campus. THE CENTER... • coordinates and supports research in more than a dozen fields. • integrates studies of complex wildland problems. • strengthens cooperation between University and other research workers. • promotes the exchange of information between research workers and wildland managers and policy makers. • collects and disseminates scientific data on wildland studies. TO KNOW IS TO LIVE IN ABUNDANCE