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Moneys from the tax penalty would help fund the various incentive programs described above. Stipulation: The tax penalty would apply to land use conversions or economic activities resulting in the elimination or substantial degradation of endangered, threatened, and candidate species and significant biodiversity habitat. Such a penalty could be progressively structured so that the most sensitive and biologi- cally valuable habitat would carry the most severe tax. Rationale: The concept for a tax penalty is founded in the mature body of work on pollution fees and taxes (Pearce 1990, Baumol and Oates 1988) designed to reflect the external, social costs of economic activity. Pollution fees, for example, are an increasingly common pollution control device in Europe (Shaw 1991). Just as pollution fees penalize polluters of clean air, water, and soil, penalty taxes would penalize land abusers of `clean,' habitat. Transaction Costs: A progressive tax penalty for habitat conversion would require the development of a variable rate tax structure reflecting the biological value of the various habitats. Lands to be converted would have to be assessed for their habitat type and quality, and acreage delineations would have to be conducted. This could entail National Environmental Policy Act (NEPA) type reporting requirements for all levels of land use changes (as are already required by California's Environmental Quality Act). A monitoring and penalty system would also have to be established to ensure compliance. Research Questions and Issues: The primary research need is fora comprehen- sive biological survey on private lands. Existing information on endangered and threatened species population locations on private lands is imprecise and incom- plete. The knowledge curve drops sharply for locational information of candidate species and habitat supporting significant biodiversity. The annual conversion rate of habitat-supporting private Iands is unknown. Research on establishing appro- priate taxation levels is also needed. Eliminating Perverse Incentives. Perverse incentives are those financial and regulatory inducements that lead to a loss and degradation of habitat for endan- gered species and significant biodiversity. Examples include the pre-1985 USDA subsidy to farmers for drainage and conversion of wetlands to agricultural land, subsidized federal timber sales, price supports to sugar farmers that result in habitat loss and pollution in Florida, and below-cost grazing fees that encourage the use of federal lands that may be better suited for other uses. Losos (In Prepa- ration) documents that perverse incentives often result in habitat loss that then requires the expensive protection of the ESA. 11