B. Tax Policy

While many aspects of tax policy may influence farming or ranching decisions, most are too complicated, indirect, or uncertain to allow generalizations as to how they would effectuate climate-friendly practices.

The majority of agricultural emissions are from nitrous oxide produced in soils, much of which is caused by the application of nitrogen fertilizer. In section A, we discussed regulatory options to reduce emissions from nitrogen fertilizer; however, state and federal policymakers should also use their taxing power to address fertilizer emissions. Since, as noted in Chapter IV.A.1,

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most producers routinely apply excess fertilizer, federal or state legislators should consider adopting a fertilizer fee that could both encourage more judicious use of fertilizer and help fund training on climate-friendly agricultural practices.⁸³ Economists long considered demand for nitrogen fertilizers to be relatively inelastic, meaning that farmers generally continued to buy about the same amount of nitrogen fertilizer barring drastic price changes.⁸⁴ However, more recent evidence indicates that rising fertilizer prices have made farmers examine fertilizer use more carefully.⁸⁵ A 2011 study in the United States estimated that for every 1% increase in price for synthetic fertilizers, demand for the product would drop 1.87%.⁸⁶ At this rate, a 10% tax on nitrogen fertilizers would reduce application rates by 2.4 million tons annually,⁸⁷ and result in hundreds of millions of dollars of revenue, while having an insignificant effect on overall costs and prices.⁸⁸

Just as a fertilizer fee could reduce emissions from commodity crops, a small fee on conventional grain feed for cattle could reduce livestock emissions while funding programs designed to support climate-friendly management methods, such as perennial pasture-based systems, methane-reducing vaccines, or feed with methane-reducing additives.

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generation. While the majority of cattle ranches are owned by small-scale hobbyists or retirees, they purchase relatively little grain feed.⁹⁰ Instead such a tax would target large-scale Animal-Feeding Operations (AFOs), which consume most of the country’s cattle feed.⁹¹ Cattle AFOs are also highly lucrative, earning an average net income of $377,000 in 2017, making a small fee on conventional grain feed both financially feasible for individual feedlots and politically feasible for policymakers.⁹²

States and local governments can also discourage carbon-intensive practices through taxation (although local governments usually need state authority to levy fees and taxes). Many states and local governments currently provide significant property tax reductions for farm owners, regardless of how large or profitable their farm operations are.⁹³ In Utah, for instance, property taxes can be reduced by more than 99% for farms and ranches.⁹⁴ These tax benefits can keep farms viable in areas where encroaching development might otherwise make property taxes unaffordable or inordinately burdensome. While protecting farmland from development can have climate benefits, governments should also take farm practices into account when assessing farmland values. Highly profitable, highly polluting hog CAFOs are often eligible to receive agricultural use exemptions, for example. States and local governments should condition tax reductions for agriculture on the adoption of more climate-friendly practices, perhaps targeting more stringent requirements on larger farms or those with a larger than average (perhaps analyzed by size range) carbon impact.⁹⁵ States and localities can also explore ways to expand tax incentives for carbon-friendly practices.

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reduction if they have a plan to harvest timber, to get an equivalent tax reduction if they manage their forest to improve carbon sequestration and water quality.⁹⁶

A number of federal, state, and local tax expenditures also support conservation easements. In 2015, Congress permanently extended an enhanced tax deduction for landowners donating a conservation easement to a land trust or government agency.⁹⁷ Among other benefits, the enhanced deduction allows farmers and ranchers to deduct up to 100% of their income.⁹⁸ Conservation easement donations also reduce state and local taxes by reducing the assessed value of the land, and, in some cases, through tax deductions and credits.⁹⁹ Thirty states allow tax deductions for conservation easement donations,¹⁰⁰ while 16 states grant tax credits, including New York and California.¹⁰¹

In order to be eligible for the federal enhanced tax deduction, a conservation easement must be created exclusively for “conservation purposes,” as defined in the Internal Revenue Code.¹⁰² The definition is broad, however, and includes the “preservation of open space,” including farmland.¹⁰³ Maintaining the rural character of an area, for example, can be a sufficient conservation purpose.¹⁰⁴ State and local governments generally have similar requirements for tax deductions or credits. Federal, state, and local governments should all consider requiring farm owners to comply with basic climate-friendly practices, such as installing buffer strips next to streams, in order to receive tax benefits for agricultural easements or, at a minimum, discount the value of any agricultural easement that does not ensure the implementation of such practices.

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