Taxing Texas Timber Barons

To look at Bill Hoffman, you probably wouldn’t suspect he is one of the most influential men in East Texas. 

You can see him at almost any meeting of the Jasper County commissioners court, sitting unobtrusively in a corner, clad in his customary outfit of sports shirt, slacks, white socks and loafers. You might take him for a local homeowner there to ask the county to open more garbage dumps, or maybe a construction contractor with a bid in on a county job. 

You might, that is, until the subject of the county’s finances came up. Then, you’d likely see him fish a small calculator out from his shirt pocket and start tapping out numbers authoritatively. 

At a commissioners court meeting in February, for example, Hoffman announced that, by his calculations, a $9,600 annual appropriation requested by the county’s three public libraries would require a $600,000 hike in property valuations on the county tax rolls. His tone of voice clearly indicated he thought such a course would be fiscal madness. 

And when Hoffman spoke, the commissioners listened. The one-room libraries in the piney woods towns of Jasper, Buna and Kirbyville are still scraping along without county assistance. 

Hoffman doesn’t hold elective office. He’s not the county auditor, treasurer or tax assessor-collector. But he has more influence on county finances than all three combined. He’s the tax man from Temple-Eastex. 

Hoffman manages the tax and title division of Temple-Eastex Industries, the state’s largest landowner. A division of Time Inc., Temple-Eastex owns more than a million acres of East Texas timber land, operates three massive mills in Diboll, Evadale and Pineland, and holds title to recreational developments on Sam Rayburn and Toledo Bend Lakes. Its production of paperboard, building materials and wood pulp last year made up about 25 percent of Time Inc.’s $1.2 billion in revenues. Hoffman’s assignment is to keep track of — and, where possible, to keep a lid on — the property taxes Temple-Eastex pays to 22 counties and about 1 50 school districts. 

By all accounts, he does an admirable job. The nearly 220,000 acres of Temple-Eastex timberland in Jasper County, for instance, are officially valued for tax purposes at $100 per acre. According to conservative estimates made by foresters and appraisers, that figure is about one-third of the land’s actual market value. 

 

I 

One might suspect that the recent wave of tax reform proposals have Texans clamoring for new laws to make timber companies like Temple-Eastex pay their fair share. But things don’t always work that way. This past November, Texas voters approved by a margin of seven to one a “tax relief” amendment to the state constitution which promises to make timber landowners among the biggest beneficiaries of the 1978 tax revolt. 

The amendment was the product of a special session of the legislature convened a few weeks after the passage of California’s Proposition 13, and it was, in legislative parlance, a “Christmas tree” — a package of proposals offering a little something for everyone. Unfortunately, most of the “tree’s” branches were weighted with tax exemptions and reductions for those who needed them least. True, homeowners received a $5,000 exemption on the market value of their homes for school tax purposes, and larger exemptions for the elderly and disabled were also included. But the amendment struck from the constitution the clause requiring the taxation of stocks, bonds and other forms of “intangible” property — a boon to wealthy investors. And the most controversial element of the “tax relief” package, the one opposed most stubbornly by progressives in the legislature, dealt with “productivity valuation” for agricultural land. Billed as a measure designed to grant tax relief to the state’s hard-pressed family farms and ranches, its profoundest effect will be to clamp a lid on the tax bill the state’s timber giants must pay to the already impoverished county governments and school districts of rural East Texas. 

With an eye toward protecting small farms and ranches, Texas voters had approved during the mid-1960s a state constitutional amendment permitting the assessment of agricultural land based on the income derived from that land during the previous five years. In almost all instances, such “productivity” assessments are considerably lower than those based on estimates of the market value of the land, especially when real estate speculation forces land prices well above their actual value as farm land. But the amendment was flawed. It failed to permit farms organized as corporations to qualify for productivity tax valuations, and many small farmers and ranchers had already begun to incorporate their holdings, with family members as stockholders, for income tax purposes. In every session since 1969, the legislature has considered proposals to correct this oversight. But the issue has been clouded by the timber lobby, which has adopted the idea of productivity valuation as its own. 

Because timber is “harvested” only once every 25 to 40 years, the five-year income formula used to assess crop and pasture land is not applicable. Instead, productivity value of timber land is measured by a complicated system of “site indices” foresters have developed to calculate timber growth rates. For example, site indices might show that an acre of timber has appreciated in value, after deduction of management costs, by $20 in one year. That figure is then divided by the anticipated rate of return from that timber, currently about 10 percent. The result: an estimated productivity value of $200 per acre. Current productivity valuations on most East Texas forest land range from about $100 to $275 per acre. 

Timber company representatives say that productivity valuation is the only fair way to tax forest land. “Our timber land is not available for a housing subdivision,” said Bill Hoffman of Temple-Eastex Forests. “No one is going to build a factory on it. The only thing it is good for is growing trees.” Therefore, he maintains, attempts to tax timber land at market value are “confiscatory.” 

While Hoffman’s arguments have a certain validity, they ignore some basic realities. In the piney woods of East Texas, the timber companies are the last taxpayers in need of tax relief. In most jurisdictions, homeowners and other businesses pay a much higher share, proportionally, of the tax loads than do the timber giants. And the timber industry already enjoys virtually unchecked power to keep its property tax bills down. “The timber companies own 85 percent of the land in this county,” said Newton County Tax Assessor-Collector Buster Daniels. “They tell us what they’re going to pay.” 

Table 1 shows that Daniels exaggerated the extent of timber company holdings in Newton County, but not by much. The industry-dominated Texas Forestry Association is fond of distributing studies which show that about two-thirds of the state’s more than 10 million acres of commercial forest land is owned by individuals or families. A closer look at the figures, however, reveals that most of these small holdings are in relatively sparsely forested Northeast Texas. In the more thickly wooded and commercially productive counties of Southeast Texas, corporations own virtually all the land. More than 80 percent of Temple- Eastex’s 1.1 million acre timber domain lies in the seven southeastern counties listed in Table 1. The state’s other timber giants (Table 2) are also firmly entrenched in Southeast Texas. “I keep hearing about the small timber farmer, but I have never been contacted by one,” said State Senator Roy Blake of Nacogdoches. “Frankly, it’s hard to believe (the TFA’s) statistics on the subject.”¹ 

 

II 

Students of the South are familiar with the paradox of Appalachia — the phenomenon of a poor people subsisting in a land rich in natural resources. The same paradox can be found in East Texas. Considerable wealth has been drawn from the piney woods since railroads opened the region for exploitation at the turn of the century, although the timber barons of that era have given way to today’s diversified corporations. Time Inc.’s 1977 annual report shows pre-tax profits of $52.9 million for Temple-Eastex’s operations, or 30 percent of the corporation’s total pre-tax earnings. Kirby Forest Industries, a division of the Santa Fe Railroad Co., reported 1977 pre-tax profits of $21.9 million. Southland Paper Mills, acquired by the multinational St. Regis Paper Co. in 1977, is the second largest producer of newsprint in the United States thanks to its East Texas holdings. 

But little of this wealth is reflected in the circumstances of the Texans who live in the timber country. The 12 counties that comprise the heart of the region2 had a higher percentage of white families living in poverty (19.4 percent) than any other part of the state, according to a 1973 report of the Texas Department of Community Affairs, Poverty in Texas. Over 49 percent of the black families in the region stood below the poverty level of $3,500 per year for a family of four and more than 54 percent of the elderly were officially living in poverty in Sabine County, which has a population of about 7,500 people, two doctors and no hospitals. 

“All of these counties around here,” Jasper County Commissioner Corbit Whitehead once explained to a visiting outsider, “are poorer than Job’s turkey.” The government services available to East Texas residents reflect that poverty. East Texas jails are nightmarishly antiquated and run-down, and criminal trials are still presided over by circuit-riding judges. “In this area,” said Ron Wiliis, criminal justice planner for the Deep East Texas Council of Governments, “we are still paying full-time law enforcement officers $600 per month and expecting them to work 60-hour weeks and do a good job.” Schoolteachers in East Texas uniformly receive the minimum wage set by — and paid by — the state. 

The timber industry contends it is more than paying its share of the tax load for local services. Another study circulated by the Texas Forestry Association shows that the average com bined county and school district tax on East Texas timber land is $1.43 per acre, the second highest such figure in the South. (Taxes on timber land in the region range from 23 cents per acre in Alabama to $1.60 per acre in Georgia.) When local governments reappraise land to produce more tax revenue, said Hoffman, “we wind up paying our share and a little bit extra.” 

The figures in Table 3, however, tell a different story. They are drawn from a 1977 report by the Texas Research League and are based on data compiled in the statewide study of local tax assessment prepared by the Governor’s Office of Education Resources (GOER) in 1975. 

The first column shows the fraction of GOER-estimated actual market value at which 28 school districts in East Texas appraised their real property. In the Hudson Independent School District in Angelina County, for example, the official valuation of real property was about 19.9 percent of its estimated market value. The second and third columns show the ratio of official to actual market values for single-family residences and for agricultural land — including timber.³ 

In all but five school districts, homeowners paid a proportionally higher share of the school tax bill than did the timber companies. In 12 school districts, homeowners were taxed on the basis of valuations at least twice as high as those for timber lands. 

Table 4 shows the economic effects on county governments of undervaluing timber land. Because large tracts of timber land rarely change hands, their market value cannot be accurately determined from sale prices. But appraisers in the GOER study estimated market values for East Texas timber land between $350 and $450 per acre. But even if the counties appraised timber land at only $200 per acre, as shown on Table 4, the additional tax revenue would be substantial. The total tax payment to those counties from Temple-Eastex alone would increase by about $275,000 per year — or about 35 cents more per acre. 

One reason why homes are assessed at a higher rate is that it’s easier to determine their market value than to find the market value of timber land. But some local officials admit that timber companies actively discourage attempts to revalue their holdings. “It’s always the same story,” said one school tax assessor-collector who asked not to be named. “If you decide to revalue their property they’ll bury you. They’ll take you to court and bankrupt you.” 

The threat of a lengthy, costly lawsuit hangs over virtually every local government that considers revaluing timber land, and it is a threat that has been carried out more than once. “As a rule, counties and school districts in East Texas are taken to court whenever they make a mass tax reappraisal,” said W. R. Owens, an independent appraiser and an expert witness in many such tax challenges. 

Major property owners challenging revaluations in concert strengthen their hand by withholding the disputed tax payments. Although delinquent tax charges mount up, it may take several years for a taxing authority to win court orders to collect those fines. Even a few months without tax revenue from the timber companies can put considerable pressure on a school district or county at loggerheads with its largest taxpayers. Often, as with the Spurger Independent School District in 1972, and the San Augustine Independent School District in 1975, school boards simply buckle under and sign out-of-court settlements that roll back the controversial reappraisals. It’s a process one Angelina County school official referred to, with considerable understatement, as “reaching a mediocre agreement with your landowners.” 

According to Bill Hoffman, the timber companies have played only a minor role in such tax reappraisal suits. “Where you have those lawsuits is where a lot of landowners get disgusted with a revaluation, not just the timber companies. It’s like a small California,” he said, alluding to the ferment that led to Proposition 13. 

However, Jack McCreary, president of Southwestern Appraisal Co. of Austin, has a different opinion; individual landowners may join such suits, “but that’s because the timber companies play Darrell Royal football and get someone else to carry the ball.” When tax challenges are heard before boards of equalization or in court, he reports, the lead counsel for the complaining landowners is most often from one of the firms on retainer to the timber companies. 

McCreary took part in one of the bitterest reappraisal battles in East Texas in recent years, in the San Augustine Independent School District. About 180 landowners, including the timber companies and such local notables as former Lieutenant Governor Ben Ramsey and US District Judge Joe Fisher, challenged reappraisals by McCreary’s firm that raised the valuations on timber land in the district from $ 18 an acre to between $ 190 and $350 an acre. While the court battle over the reappraisal went on, conservatives in the district took control of the school board and negotiated an out-of-court settlement that pushed timber valuations back to $36 per acre. 

Since then, the district has nearly gone bankrupt. Plans for the construction of a new high school to replace the one built in 1927 have been scrapped, and in 1977 the district was forced to borrow more than $100,000 from local banks to meet its July and August payrolls. The San Augustine case, McCreary said, “was a vicious thing.” But it is not unusual. 

 

III

Legislating a statewide change in the valuation or tax assessment on timber land has proved equally frustrating. Demand for tax reform of rural land seems to only play into the timber companies’ hands. In fact, they seized on the debate over productivity valuation of farm and ranch land as an opportunity to cement into the state constitution the favorable treatment they already receive in property tax matters. They claim the productivity valuation of timber land would actually increase tax revenues for many local governments in East Texas, and, in the short run, they are right. In half of the school districts in Table 3, for example, the GOER study determined that productivity value appraisals of timber land would be higher than currently appraised values. 

One of the staunchest foes to the productivity valuation of timber land, former State Senator Don Adams of Jasper, agrees that it would “raise the basement” on timber taxation. But, he adds, it would also impose a tax ceiling that would grow more restrictive as market values on timber — and other property — increased. 

“Whenever you put a tax ceiling on any type of land, you’re adding to the tax burden on everyone else,” said Adams. “The average man would have to pick up the difference.” Adams opposed the extension of productivity valuation to timber land when the idea first surfaced in 1969, during his first term in the legislature. “The timber companies kept pressuring me to support it,” he said, “but after a while, they found out that dog just wouldn’t hunt with me.” 

Despite his opposition, the legislature approved the amendment extending coverage of the productivity system of valuation to corporate farm and timber land and placed it on the November, 1970, ballot. Adams campaigned against it throughout East Texas, while statewide opposition was led by the Texas State Teachers Association, which claimed that the measure would erode the tax bases of rural school districts. The amendment went down to defeat by a 53 to 47 percent margin. (In East Texas, only about 30 percent of the voters approved it, and the Hardin County electorate rejected it by a vote of 4,006 to 818.) 

Undiscouraged, proponents of the amendment reintroduced it in the next four sessions of the state legislature. It was defeated each time, although in 1977 it cleared the Senate and fell short of the necessary two-thirds majority in the House by just one vote. Lobbying by the timber companies for the amendment was intense, and when the special tax session of the state legislature was called in July, 1978, the battle was joined again. 

Moderate and liberal legislators fought hard to keep productivity valuation for timber land out of the “relief” package. In the Senate, an attempt to exclude corporate timber holdings from the measure failed by just one vote. But in the House, the amendment’s backers made two modifications which assured its passage. The amendment was reworded so that only productivity valuation for corporate farm and ranch land could become effective immediately after voter approval; even if the amendment passed, productivity valuation for timber land would require further enabling legislation. “What that did was make it harder for people like me to go around the state and get the voters to turn it down,” said State Representative John Bryant of Dallas, one of the leading opponents of the “tax relief” package. And the House leadership adopted the “Christmas tree” strategy, forcing the membership to vote on the entire “tax relief” amendment rather than on its component parts. Many legislators shared the emotions of State Representative Jimmy Allred of Wichita Falls when, on the final day of the session, he raised his right hand to signify an “aye” vote for the amendment while placing his left hand over his nose in disgust. 

Once it was out of the legislature, there was little chance of preventing passage of the amendment. Democratic gubernatorial candidate John Hill, anxious to prevent any disruptions of party unity, prevailed on the politically influential state teachers association to remain silent on the amendment during the fall campaign. Don Adams, who had helped defeat the proposal in 1970, and had by this time become a legal advisor to Governor Dolph Briscoe, also remained silent on the issue. The state AFL-CIO and Texas Consumer Association denounced the amendment as a “fraud” that would set back the cause of true tax reform in the state. But the homeowner tax exemptions included in the amendment made it highly attractive to voters. On November 7, 1978, they voted 85 percent to 1 5 percent for its enactment. 

Bryant sees little hope of defeating the enabling legislation which will permit the productivity valuation of timber land. Now, instead of a two-thirds vote of both houses, all that will be required for the measure’s passage are simple majorities. 

One way to salvage some of the revenue that will be lost from the amendment might be to add to it a severance tax on timber. Louisiana taxes timber that way, and last year its timber severance tax produced nearly $4 million in tax revenue, 75 percent of which was returned to the local jurisdictions where the timber was harvested. Adams said he once proposed to timber company representatives coupling the productivity tax with a severance tax as a compromise measure. They responded “with horror,” he said. But it is far from a radical idea. Indeed, it is based on one of the oldest concepts in government: those who profit by the extraction of the land’s resources should pay for that privilege. 

It is a concept that many parts of the South, including Texas, have yet to take seriously. 

 

1 . Even in northeastern counties where the majority of the land is in small holdings, a major timber company is usually the county’s largest landowner. In Cass County, for example, it’s International Paper Co.; in Anderson County, Temple-Eastex. 

2. They are Angelina, Houston, Jasper, Nacogdoches, Newton, Polk, Sabine, San Augustine, San Jacinto, Shelby, Trinity and Tyler counties. 

3. Only about 10 percent of the “agricultural” land in the seven counties listed in Table 3 is used for growing crops or grazing stock. The rest is timber. The amount of crop and pasture land ranges from about 34 percent in Angelina County to about six percent in Tyler County. (Source: Texas Soil Conservation Service, Conservation Needs Inventory, 1970.)