The 2023 omnibus spending bill, signed into law by President Biden last month, is a massive $1.7 billion spending spree, but the 4,000-page package does include a modicum of fiscal prudence. It will limit tax write-offs for land donations that benefit wealthy investors under the guise of conservation. While this represents a small step toward more effective environmental policy, it is a welcome one.
The provision, urged by a bipartisan coalition of lawmakers, limits deductions for conservation easements, a popular private conservation tool. These are perpetual agreements between landowners, who give up rights to subdivide and develop houses, and nonprofit land trusts or government agencies who monitor the land use.
Conservation easements can provide public benefits by limiting development of environmentally sensitive lands. And because the donations are voluntary, they are an attractive alternative to coercive land-use regulations. This explains why Congress has allowed federal tax deductions since the 1970s, and why several states now offer generous exemptions and credits. Economist Walter Thurman and I show that, as a result, the per-donation value of conservation easements dwarfs all other forms of charitable giving and the total number of acres covered by easements is the size of Washington State.
The problem is that tax-driven easement donations can conserve the wrong lands—those with less environmental value than the cost to general taxpayers in the form of foregone tax revenue. High-profile examples of questionable deals involve Donald Trump, who sheltered $39 million in taxable income when he gifted an easement on a New Jersey golf course in 2005. This easement, like his more recent $21 million deduction in New York, arguably qualified for a charitable deduction because Trump claimed the appraisal was valid and that the golf course preserved significant open space benefits for the public, which is the vague requirement for tax deduction under current law.
But only “syndicated” easements are the subject of the omnibus bill crackdown. Syndicates are partnerships that buy undeveloped land for the purpose of donating easements, often producing little conservation benefits. They spread deductions and credits over a large number of partners with high marginal tax rates to fully exploit tax advantages. Syndicated easement donations comprised $6 billion in 2016 alone, which exceeds deductions from individual easement donors.
The organizational structure of syndicates has been perfectly legal; the main problem is that syndicates guarantee investors big returns, which can happen only if they acquire eyebrow-raising appraisals. In one case, a syndicate bought undeveloped land in South Carolina for $5.4 million and found an appraiser who deemed it worth $41 million, nearly eight times the purchase price. This allowed the investors to claim a large deduction on land with questionable environmental value. Because easement values are difficult to objectively assess, the IRS struggles to audit such cases under current law.
Enter the omnibus bill’s solution, championed by mainstream conservation groups and supporters such as Sens. Ron Wyden (D-Ore.) and Steve Daines (R-Mont.) and Reps. Scott Perry (R-Pa.) and Mike Thompson (D-Calif.). Under the new rule, syndicated easements appraised at more than 2.5 times the land’s purchase price will be deemed ineligible. This creates a clear rule that attempts to dampen incentives for abuse without eliminating good easement deductions. This is a step in the right direction. A better rule would base appraisals on comparable sales, apply those to both individual donors (such as Trump) and partnerships, and clarify criteria for public benefits.
Ultimately, however, the tax code may not be the best way to finance private land conservation. Our research shows that even prudent land trusts accept easement donations outside of conservation priority areas that they otherwise would not purchase themselves. This is not surprising. Most of us are more careful with our own money.
More fundamental reforms could better align the incentives of conservation groups and landowners—who can best evaluate conservation value—with the taxpaying public. This might be done by asking land trusts to raise matching funds for conservation projects from private cash donors before turning to government support, as I outlined in 2005. This could improve easement targeting because groups are unlikely to succeed in raising private money for bad projects.
The cap on easement deductions is a win for the general taxpayers in an otherwise bloated spending bill. Additional reforms could further demonstrate how fiscal prudence makes for good conservation.