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Bar News - March 13, 2009

The Land Use Change Tax: A Criticism


Donald Sienkiewicz
Current Use taxation is New Hampshire’s system of taxing farm, forest or wild land based on its income-producing ability in that “current use” instead of at its “highest and best” use (usually residential house lots). It was made possible in 1968, after a campaign by advocates of open space preservation, by the addition of Article 5-B to the New Hampshire Constitution. Around that time, several states had begun enacting similar schemes of preferential taxation designed to reduce financial pressure on landowners that might cause them to develop their land or sell to developers.[1] RSA 79-A, the Current Use statute, was enacted in 1972.

In the 37 years since then, statutory amendments, administrative rules, and judicial decisions have reflected the increasing complexity of the Current Use law as ever finer points of the statute have been disputed. The changing character of these disputes, however, may evidence a shift in the focal point of the law away from the statutory purpose of land conservation, in particular with respect to application of the land use change tax (“LUCT”), a tax assessed when land is taken out of current use.

The LUCT is ten percent of “the full and true value” of the land, “determined as of the actual date of the change in land use if such date is not April 1,” and is due and payable upon such change in use. RSA 79-A:7, I. To understand why the LUCT has become such a contentious part of the Current Use statute, one need only reflect on how it impacts Current Use landowners, developers, builders, and municipal taxing authorities. Because the economic impact of the LUCT, through statutory and regulatory amendments and judicial decisions, has moved further away in time from the decision of the farm or forest landowner to develop or sell for development, it has arguably lost whatever motivating power it may have had to keep land in current use. Disputes over its timing (both assessment and billing), incidence (who bears the economic burden of the tax), and magnitude have largely ceased to be relevant to the statutory purpose – open space preservation – and instead become battles over money between real estate developers and municipal taxing authorities.

A typical transaction giving rise (eventually) to a LUCT begins when a farmer or forest owner decides to put land up for sale without restrictions, or to sell to a developer who has approached him. A purchase and sale agreement will be signed, perhaps contingent upon permits, and the developer will submit a subdivision plan for approval. Many months or even years later, often after the farm or forest owner has deeded the land to the developer and been paid, subdivision approval will be granted. If the subdivision is large or the market is slow, it may be still more months or years before construction is begun on a road serving the approved house lots or on the lots themselves, and by that time the lots that will be subject to the LUCT may have been sold by the developer (who specializes in obtaining subdivision permits for raw land) to a builder (who specializes in building houses). Even after the statutory “change in use” has occurred, it may be many more months, possibly even years, later that the municipality sends a LUCT bill (though valuation of the land for purposes of assessing the size of the LUCT has to be retrospective to the date of the change in use). Finally, a builder may not pay the LUCT when billed, but instead allow it to remain a lien on the house lot until he closes the sale to a homebuyer. The homebuyer often ends up paying the LUCT.

An apparent unfairness of this scheme is that the current use landowner who received the benefit of a lower assessment is not the one responsible to pay the LUCT.
[2] If the legislature intended, as the New Hampshire Supreme Court assumed in Opinion of the Justices, 137 N.H. 270, 275 (1993), overruled in part by Tyler Road Development Corp. v. Town of Londonderry, 145 N.H. 615 (2000), that revenue recapture was not just a result of the LUCT but one of its purposes,[3] one would think it also intended the foregone revenue to be recaptured from the person who didn’t have to pay it in the first place. The major difficulty in placing the legal obligation of the LUCT on the seller is collection: once the land is sold, there is no longer an asset of the taxpayer for the tax lien to attach to.

In fact, sophisticated developers will estimate the portion of the LUCT they may be liable for and try to account for it by lowering the purchase price. In this way the seller of land may indeed pay some or all of the LUCT. However, a pure developer (not a builder) may not be liable for the LUCT at all, since his act of obtaining subdivision permits does not trigger a change in use, and in any case the actual imposition of the LUCT may come so many years in the future (and be paid by one or more buyers removed from him) that it is impossible to correctly price it into the initial sale. At the other end, for unsophisticated or unrepresented buyers (developers or otherwise), the LUCT bill can be a nasty surprise that arrives in the mail long after the seller has taken his money and gone away.

It makes sense that Current Use taxation would reduce the pressure on cash-strapped landowners to sell for development. But has the LUCT ever really operated as a disincentive to development? Perhaps not - when demand for housing, retail goods, office space, or industrial uses are high enough in a formerly rural area, land will be converted (in the absence of a LUCT high enough to confiscate the entire difference between the current use and converted use value of land, or zoning laws that simply prohibit the converted use). It is probably also not useful to think of “penalizing” CU owners or recapturing the “benefit” they had received. If we didn’t believe that all citizens benefited from the preservation of open space and productive farm and forest land, we wouldn’t have amended the Constitution to give it preferential tax treatment.

Instead, in a time in which past economic certainties are being called into question at every turn, we may want to reconsider the bias inherent in the phrase “highest and best use” which is invariably tied to residential or commercial development.
[4] Such development may indeed bring the highest short-term financial return, but in an economy where most of our food, fuel and fiber comes from far away and is extracted, harvested, processed and transported to us using a mineral resource that will eventually run dry (petroleum), we may want to think again about the potential uses of our land and its ability to replace some of those distant resources.

Recent court decisions involving the LUCT and current legislative and regulatory activity are focused on whether municipalities should be able to delay assessment of the value of the LUCT and imposition of the tax until completed lots are sold. This is an argument of critical financial importance to builders, who want to delay imposition of the LUCT as long as possible, and if possible push it off on homebuyers. It is equally important to municipal tax authorities, which generally have the same incentive as the builders - later imposition of the LUCT eases assessment (lot sales are the best evidence of land value); the aggregate “retail” value of lots sold (especially if “betterments” such as roads, utility lines, and other common infrastructure are allowed to be included) is much greater than the “wholesale” value of “raw” or unpermitted land; and finally (current conditions notwithstanding), land value tends to rise over time where population is growing.

Who else has a vested interest in the present application of the LUCT? Probably not Current Use owners, as long as the LUCT stays far away in time from the decision to develop or allow land to be sold without restrictions. On the other hand, assessing and imposing the LUCT at the time of subdivision application might operate as a real disincentive to sell for development, since it would end up getting priced into the sale more frequently and more accurately.
[5] Homebuyers, who are hurt by the LUCT generally (since it is a direct and significant state-imposed addition to the price of a house lot) might pay a little less in the end. As for citizens, present and future, who presumably benefit from the preservation of open space, wild land, farm and forestland? They probably don’t have much reason to care: the LUCT may not measurably slow conversion of Current Use land, and in any case it is a blunt instrument, not distinguishing among conversion of prime or marginal crop- or timberland. Which begs the question: is all of the attention paid to the LUCT justified, given how little it serves the statutory purpose of Chapter 79-A?

In January of this year, the Current Use Board considered whether to change two administrative rules in response to Formula Development v. Town of Chester, 934 A.2d 504 (NH 2007), in which the Court stated that the lot-by-lot, or “piece-meal” assessment method favored by builders and tax collectors was illegal, and implied that CUB rules allowing it were ultra vires. Builders, developers, and municipalities testified at the hearing, and the Board, in a compromise apparently supported by the erroneous belief of some members that the Formula decision turned on that development having been structured as a condominium, voted to leave CUB 307.02 unamended (preserving lot-by-lot removal and assessment) for non-condominium “clusters,” but alter CUB 307.03 to state that condominium developments change in use when common infrastructure construction begins, and assessment must happen at that point.

Testimony was given to the effect that preserving the regulatory status quo would encourage “cluster” subdivisions, which concentrate houses on a portion of the development site, leaving some common open space. This argument may have been foremost in the minds of some Board members and open space advocates, but it is somewhat beside the point of Chapter 79-A. A parcel of “open space” required by the density provisions of a cluster ordinance will be significantly smaller than the original tract and unlikely to retain a significant portion of the ecological, agricultural or silvicultural values of the parent tract. Moreover, it is unlikely to be used for farming or forestry in the midst of a residential development. A statutory “fix” has been proposed for the Formula result
[6], but language circulated as of this writing does nothing to address the major criticism of this article: that the LUCT has become superfluous to the purpose of Chapter 79-A. As for any incentive effect, towns have begun to recognize that even requiring minimum lot sizes of five or ten acres is a recipe for sprawl, and are beginning to require clustering of any significant subdivisions – as they should.

It is not the intent of this article to call into question the purpose of Chapter 79-A, merely whether the statute as it has evolved serves that purpose. A broader inquiry into how we citizens of New Hampshire view and use land may be in order, and how the intent of Chapter 79-A might be supported by amendments or other statutes, including an examination of the LUCT. As the New Hampshire Supreme Court has said, “the purpose of the current use system is not to facilitate development of land [nor, one might add, to enhance municipal revenues through the LUCT] ... [t]o the contrary, the current use system was developed to encourage the preservation of open space in New Hampshire.” Tyler Road Development Corp. v. Town of Londonderry, 145 N.H. 615 at 618 (2000).

It may be that the only constituency in favor of such an inquiry would be the ones without a vested financial interest in the current practice: future generations of New Hampshire citizens who value a beautiful, healthful landscape and a larger degree of economic security and self-sufficiency than we enjoy now.

©2009 Donald H. Sienkiewicz. All rights reserved.
Donald H Sienkiewicz has degrees in Economics and Environmental Policy from Boston University. He practices general business and real estate law in New Hampshire and Massachusetts. He is also a real estate developer; his current project, First Light Neighborhood & Farm ( is a condominium conservation subdivision and will be subject to the LUCT “when the actual use changes.” He can be reached at

[1]SeeBlue Mountain Forest  Assoc.v. Croydon, 117 N.H. 365, 377 (1977)

[2] This is the subject of a bill in the current legislative session: HB 235, introduced by Representative William Hatch (D, Coos 3).

[3] The Court cited Appeal of Peterborough, 120 N.H. 325 at 329 (1980), though there the Court simply observed that “[t]he ten percent tax allows the town to recapture some of the taxes it would have received had the land not been in the lower open space tax category” (emphasis added). That statement, in turn, reflects an assumption that the LUCT represents, in all cases, only a partial recapture of foregone tax revenue. In fact, whether a LUCT applied to any piece of land would equal some, all, or more than the foregone taxes is a function of timing and market conditions.

[4] This bias, and the related assumption that farm or forest land is not “productive,” was reflected in Dana Patterson, Inc. v. Town of Merrimack, 130 N.H. 353 at 355 (1988): “The statute operates as a disincentive to intensify the productive use of land… Where current use land is put to productive use, however…” (emphasis added; internal citation removed). Query whether a field that can grow food crops every year is less productive than land which has been paved and built on. See also Appeal of Sawmill Brook Development Co., 129 N.H. 410 at 412 (1987): “The "full and true value" of the land in question is that which represents its "'best and highest use.'" Furthermore, "[b]est and highest use has been defined as that 'use which will most likely produce the highest market value, greatest financial return, or the most profit. ...'"” (Citations omitted). Query further whether conversion to housing or commercial structures invariably results in the “greatest financial return,” or merely the greatest financial return to a given owner, in the short run – as opposed to a return measured by its value to present and future owners, or to the citizenry in general.

[5] One would expect Current Use owners to resist this. Municipal tax authorities would resist this because LUCT revenues would be reduced. The assessed value of a subdivision at the beginning of the permitting process is lowered by the cost and uncertainty of obtaining permits. Builders would resist it, though developer/builders might not, depending on market conditions (an earlier assessment may result in a lower overall LUCT).

[6] HB 424, sponsored by Representative Derek Owen (D-Merrimack 4)

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