When President Donald Trump was asked a question about the biggest winners from his proposed tax cuts being the wealthiest Americans during a conversation with The Economist last month, he pointed to how that might not be the case because those at the top may lose several tax deductions. Musing on the number of deductions currently available, he remarked that “they have deductions for birds flying across America.”
At first glance, this seemed outlandish. But it turned out that President Trump was referring to a 2009 case involving Alabama’s Kiva Dunes resort and golf course, migratory birds, and the resulting conservation easement used to claim a charitable deduction.
Conservations easements, in theory, have good, environmentally oriented intentions. Created in the 1970s, conservation easements are voluntary legal agreements by which the landowner donates his or her land—or a piece of the land—to a public charity, trust, or government agency in order to restrict further development and protect it for conservation or historical preservation purposes. By donating the easement, the landowner can claim the value of the easement as a charitable deduction. This tax deduction for donations of conservation easements, in practice, has kindled significant abuse, according to a new report by Adam Looney at the Urban-Brookings Tax Policy Center.
Looney relies on administrative data from the Internal Revenue Service to explore the increasing use of conservation easements in charitable deductions by taxpayers and real estate developers and expose how they are misusing them. Between 2010 and 2012, he finds that taxpayers claimed an average of $1.05 billion in charitable deductions on conservation easement donations. By 2014, this value reached $3.2 billion.
Along with the rise in charitable deductions claimed, the data show that deductions for conservation easement donations are taken by taxpayers in states that have small shares of conserved land. What’s more, the donated easement land is concentrated in places with large real estate developments, including golf and country clubs, and high-cost resort areas, such as Martha’s Vineyard in Massachusetts and Jackson Hole in Wyoming. In many ways, this indicates that conservation easements are not being used for the purposes for which they were established.
To make matters worse, some landowners may be illegally abusing the provision. Some donate their conservation easements and get highly inflated appraisals for their easement land, which allows them to take a larger deduction. Others donate land that may not qualify for conservation status in the first place.
Donors aren’t the only ones taking advantage of the conservation easement loophole, though. Recipient organizations—the donees—are equally responsible for utilizing it. Looney spotlights two important trends about the donees. First, there are very few donee organizations that handle the majority of the donations, and second, many fail to report these donations as gifts on their tax returns.
Misusing or even scamming the conservation easement provision has cost the federal government several billions of dollars in revenue and may not even be effectively providing conservation benefits. To address these issues, Looney offers some policy solutions that could help ensure that illegal abuses do not persist. In the short term, he argues for increasing the transparency by making easement donations be “listed transactions” at the Internal Revenue Service, requiring donees to include the value of the donation on their tax returns, and creating a more rigorous standard for conservation purposes and who qualifies as a donee organization. To close the loophole altogether, Looney suggest employing an allocated tax credit for donee organizations, where organizations would approach landowners about potential land for conservation or historic preservation.
Conservation easements are just another example of the inequities inherent in the federal tax deduction for charitable contributions. Finding ways to limit the abuse of conservation easements can not only preserve the progressive federal tax system but also more honestly create safe habitats for those migrating birds across America.