TED Case Studies

US Wood Subsidies and Trade

          CASE NUMBER:          78 
          CASE MNEMONIC:      USWOOD
          CASE NAME:          US Below Cost Timber Sales


1.   The Issue

     The U.S. federal government actually reimburses states and
counties for using national forest lands.  However, decreased
logging on national forest lands would not necessarily reduce
local incomes because reductions would be offset by
compensation in other ways.  In the end, most counties would
not receive lower federal revenues in the event of a fall in
gross timber receipts.  Any decrease or increase in rebated
timber sales would be offset by an equivalent adjustment in tax
payments so that the overall revenue total would remain the
same.  There is, however, a loophole in the federal law which
allows states to exceed the program limits.  Nonetheless, these
programs constitute an indirect subsidy to the timber industry
and have international trade implications insofar as a large
amount of this wood is exported.  The United States is the
world's second largest wood exporter, slightly behind Canada.

2.   Description

     The U.S. Government has long encouraged logging on
national forest land.  One policy objective has been to create
jobs in rural areas where few industries exist.  The government
provides latent subsidies to the wood industry by reimbursing
contractors for costs incurred in building roads needed to get
to logging tracts (among other reasons) thereby encouraging
logging in remote, untouched areas.

     States and counties also complain that curtailing logging
would deprive them of a substantial revenue base.  However, if
states were to curtail logging they would be eligible for other
funding from the federal government.  Timber receipts are not
the only source of payments that the federal government makes
to states and counties to compensate them for the acquisition
or reservation of federal lands.  Payments are also made for
lands in the park and forest systems, Bureau of Land Management
areas (or those under their jurisdiction), Corps of Engineers
sites designated for dredging, reserved lands for fish and
wildlife, and lands in purgatory (semi-active or inactive army

     The first payment mechanism -- called Forest Service 25
percent payments -- is based on the receipts garnered from
logging on National Forest lands.  Sale of timber from national
forest lands began in 1897 with the Forest Service Organic Act
(which was superseded by the 1976 National Forest Management
Act, P.L. 94-588).  In 1907, federal payments for logging in
National Forests began by compensating counties with 10 percent
of gross receipts.  These federal funds were designated for use
on roads and schools in counties where national forests were
located.  The 1908 National Forest Revenue Act (NFRA) increased
the authorization for payments up to 25 percent, based on total
National Forest logging receipts and national forest acreage
(see the OPTION9 case for a review of current attempts to
revise timber policy).  

     The 25 percent rebate figure includes not only cash
receipts from the sale of timber but also cash equivalents
derived from road credits (which can be exchanged for timber in
lieu of cash payments) and deposits to the Knutson-Vandenberg
fund.  This fund, set up in 1930, authorizes the collection of
money from timber purchasers for reforestation and other
rehabilitative requirements that result from logging.  In
addition, 10 percent of the timber receipts are allocated to
the Road and Trails Fund.

     The amount of the logging payment may have little to do
with actual activities undertaken within the geographic
confines of the county.  Rather, payment is determined for all
operations in the forest, with county payments dispersed
according to the percent of the total forest land that lies
within the county.  It is possible that a county with no
logging activity could receive payments for logging which takes
place in other counties or even in other states that are part
of the same national forest area.

     The second payment mechanism -- called PILT payments --
compensates counties for a constant loss of taxes because of
the acquisition or reservation of the national forest.  The
Payment in Lieu of Taxes (PILT) provides a payment of not more
than $0.75 per acre nor less than $0.10 per acre whether or not
timber is cut on federal land.  In 1985, PILT program payments
totaled $105 million.

     The PILT program ("Payment in Lieu of Taxes Act") is
authorized under 31 U.S.C. 6901-6907 and P.L. 97-258 as
amended.  It directs the Secretary of the Interior to make
payments to localities for use of Federal lands.  The Secretary
subsequently delegated responsibility for administration to the
Bureau of Land Management.  Forest Service payments are
deducted from PILT payments made to counties for logged timber,
based on 25 percent of gross sales.  As a general rule, the
following conditions are applied to the two payments:

     o    a county in which Forest Service revenue is
          less than $2.60 per acre is guaranteed a
          payment of $0.75 per acre of national
          forest land, and
     o    a county in which Forest Service revenue is
          equal to or greater than $2.60 per acre is
          guaranteed 25 percent of Forest Service
          revenue (pro-rated to the county), plus

     Forest Service 25 percent payments are subtracted from
PILT payments to determine total federal payments.  As long as
Forest Service revenue per acre is below $2.60, there is a 1:1
ratio between lower logging payments and higher PILT payments
(and vice-versa).  As long as timber receipts average less than
$2.60 per acre, any changes in logging activities are offset by
PILT payments so that total payments do not fall below $0.75
per acre.

     The establishment of the PILT payment level occurs in the
year following the Forest Service 25-percent payment.  This lag
often causes substantial fiscal problems for counties dependent
on logging receipts and where there are wide fluctuations in
industry trends.

     There are also ceilings on total federal payments.  The
ceiling is a sliding scale limit which ranges according to size
of population and per capita payments.  Counties with
populations under 5,000 are heavily favored over those above
20,000.  At a population of 5,000 and below, per capita
payments up to $50 are allowed; at 20,000 and above, payments
of only $20 per capita are allowed.  The ceiling sets maximum
payments to $1,000,000 per county. 

     Some states (particularly in the Northwest) have found a
loophole which allows them to garner payments above the $0.75
per acre maximum and receive no reduction in PILT payments. 
The enabling federal legislation is specified such that
payments are made to states who in turn pass them on to the
counties.   Forest Service 25 percent payments made directly to
county school boards and road maintenance programs are not,
however, counted against PILT payments.  States have enacted
legislation providing for direct county payments, in the
process exceeding the ceilings set in the federal legislation.

3.   Related Cases

     USCANADA case
     CHILE case
     OPTION9 case
     INDONES case
     MALAY case
     THAILOG case

     Keyword Clusters         

     (1): Trade Product            = WOOD
     (2): Bio-geography            = TEMPerate
     (3): Environmental Problem    = DEFORestation

4.        Draft Author:  Jim Lee

II.       LEGAL Clusters

5.        Discourse and Status:  DISagreement and INPROGress

     Several groups have also argued publicly that these
programs are in fact subsidies for deforestation.  This has
long been the position of groups such as the Wilderness Society
but was also taken up by the Reagan administration (see
USCANADA case).  

6.        Forum and Scope:  USA and UNILATeral

7.        Decision Breadth:  1 (USA)

8.        Legal Standing:  LAW

III.      GEOGRAPHIC Clusters

9.        Geographic Locations

     a.   Geographic Domain : North America [NAMER]
     b.   Geographic Site   : Western North America [WNAMER]
     c.   Geographic Impact : USA

10.       Sub-National Factors:  YES

     The area under issue is concentrated in the northwest
United States.  The program is strongly driven by the desire
the develop and support rural areas of the country.

11.       Type of Habitat:  TEMPerate

IV.       TRADE Clusters

12.       Type of Measure:  SUBSIDY

13.       Direct vs. Indirect Impacts:  INDirect

14.       Relation of Measure to Environmental Impact

     a.  Directly Related     : Yes  WOOD  
     b.  Indirectly Related   : Yes  WOOD Products 
     c.  Not Related          : No
     d.  Process Related      : Yes  DEFORestation 

15.       Trade Product Identification:  WOOD

16.       Economic Data

     Many below-cost timber sale forests average below $2.60
per acre in Forest Service revenues.  (Below-cost timber sales
occur when preparation and administration costs exceed the sale
receipts.)  Therefore, the phase-out of below-cost logging in
many areas would have no impact on total federal payments they

     Data on seven national forests are examined to determine
the possible federal payment impact in the event of reductions
in below-cost timber sales (see Table II-1).  Based on
calculations of average receipts per acre of forest land over
the 1983-89 period, only Colville and Willamette national
forests have average figures which exceed $2.60.  Therefore,
the other five forests would receive compensatory higher PILT
payments if there were any decline in logging payments (see
Table 78-1).

                          Table 78-1
          National Forest Timber Receipts and Acreage
                 (Dollars, 1983-1989 average)

                         Average                       Receipts
National Forest          Receipts       Acreage        Per Acre

Gallatin (Montana)       1,738,056        527,053          0.30
Beaverhead (Montana)     2,128,798        613,641          0.29
Arapaho (Col.)             347,404      1,813,248          0.19
Rio Grande (Col.)          607,429      1,851,296          0.33
Santa Fe (New Mex.)      1,430,222      1,567,389          0.91
Colville (Wash.)         5,001,745        945,120          5.29
Willamette (Oregon)       104,671,528   1,675,470         62.47

17.       Impact of Measure on Trade Competitiveness: BAN

     The subsidy is reimbursement for any infrastructural
activities firms might undertake while logging.  For example,
logging companies are reimbursed for the cost of installing or
maintaining roadways into the forest.  It is impossible to know
the equivalent rate of assistance but if one broadly estimated
capital cost spending by logging companies and took a share of
it, it might be in the range of 10-20 percent.  "The system
used by the Forest Service to establish fair market value
virtually ensures that timber will be sold below cost."(1)

18.       Industry Sector:  WOOD

19.       Exporter and Importer:  USA and MANY

     Much of U.S. wood exports go to Asia, especially Japan.

V.        ENVIRONMENT Clusters

20.       Environmental Problem Type:  DEFORestation

21.       Name, Type and Diversity of Species

     Name:          Softwoods and Hardwoods
     Type:          Plant/Angiospermae/Dicot
     Diversity:     2,036 higher plants per
                    10,000 km/sq (united

22.       Resource Impact and Effect:  LOW and SCALE

23.       Urgency and Lifetime:  LONG and 50-100 years

     The problem relates to entire forest eco-systems in the
Pacific Northwest.

24.       Substitutes:  RECYCling

VI.       OTHER Factors

25.       Culture:  NO

26.       Trans-Boundary Issues:  NO

     However, the case is essentially dealing with an eco-
system that extends into Canada.

27.       Rights:  NO

28.       Relevant Literature

Clary, David A,  Timber and the Forest Service.  Lawrence, KS:
     University of Kansas Press, 1986.
Congressional Research Service, Library of Congress.  "Greater 
     Yellowstone Ecosystem: An Analysis of Data Submitted
     by Federal and State Agencies."  Subcommittee on
     Public Lands and Subcommittee on National Parks and
     Recreation, Committee on Interior and Insular
     Affairs, U.S. House of Representatives, 99th
     Congress, 2nd session, December 1986.
Gorte, Ross W..  Congressional Research Service, Library of 
     Congress.  "National Forest Receipts: Sources and
     Dispositions" 89-284 (May 5, 1989).
Gorte, Ross W. and Corn, M. Lynne.  Congressional Research 
     Service, Library of Congress.  "The Forest Service:
     Budget: Trust Funds and Special Accounts" 89-75
     (January 27, 1989).
"National Forests: Policies for the Future, Volume 5, 
     The Uncounted Costs of Logging."  Washington, DC:
     Wilderness Society, 1989.
O'Toole, Randall.  Reforming the Forest Service.  Washington,
     DC:  Island Press, 1988.
Subcommittee on Forests, Family Homes, and Energy, Committee on
     Agriculture.  U.S. House of Representatives,
     statement of Michael A. Francis, Counsel for the
     National Forest Issues for the Wilderness Society,
     March 1, 1990.
U.S. Department of Interior.  Budget Justifications, F.Y. 1989 
     Bureau of Land Management, 1989.


1.   National Forests: Policies for the Future, Volume 5, The
Uncounted Costs of Logging", (Washington, DC: Wilderness
Society, 1989), 6.

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