Mining and the law: Severance taxes on hard rock mining is a bad idea

There has recently been a great deal of talk about how the hard rock mining industry in Alaska "needs to pay its share." One proposal is that this industry should be singled out for the imposition of a severance tax.

In discussing this matter with a friend who is not involved with the hard rock mining industry, I was somewhat amazed by her support for this type of taxation. When I suggested to her that major mines often take more than a decade to go from discovery to production, and that the cost of infrastructure is often many hundreds of millions of dollars, she was totally unimpressed.

It was only when she understood that there was no money available to pay severance taxes until the product was actually sold did she begin to grasp the problem. This experience made me want to share some thoughts about hard rock mining and tax policy and where a severance tax would fit into the picture.

First, let's start with a definition - what is a tax? A tax occurs whenever the government puts its hand into your pocket. It makes little difference what the rationale for the tax is. When the government charges to ride a People Mover, it is a tax. Parking meters are automated tax collection machines. A filing fee for an assessment appeal is a tax.

Mining tax springs from desire to deter mining

Governments impose taxes to raise revenue and to frame social policy. Often times, any given tax is a blend of both. The motivation to impose a severance tax on mining operations in Alaska in large part must spring from a desire to deter the presence of mining. Policy makers are keenly aware that mining is a very narrow margin industry and that a severance tax (or any other additional tax) on mining will generate relatively little revenue.

Notably, Alaska miners are already subject to a "mining license" tax that burdens mine production when sold. A severance tax would be an additional tax. This doubling of the tax burden is analogous to taxing a farmer when he harvests his crop, and taxing him again when he sells it.

An argument advanced for placing an additional tax on hard rock mining is that the resources being extracted are non-renewable and the mining companies are being allowed to take them without leaving behind a long-term benefit. What is missing from the argument is a fair analysis of the contribution and nature of the mining industry.

Congress has encouraged mining

Mining in the United States is unique globally in many ways, and the historic contribution of the industry to this state is massive. Since the days of the earliest mines in Spain dating back to the sixth millennium BC, minerals in the ground have belonged to the sovereign. The tin mines in Cornwall and King Solomon's fabled gold mines all belonged to the crown. When gold was discovered in California in 1849, for the first time, miners were allowed to keep what they found!

In 1866, Congress passed the first law regulating mining on the public lands. This law was designed to foster and encourage the industry. It was evident that gold turned into federal dollars, and those dollars, when spread around a community, made that community prosper. The rising tide lifted all the boats, but when the gold played out, often the communities had no further reason to exist and the mining towns were turned over to the ghosts.

Self-initiation, security of tenure

Alaska echoed the California experience. The miners came here and founded Windham, Comet, Ruby, Wiseman, McCarthy, Fairbanks and Juneau. In the early years, mining in Alaska and throughout the American west flourished as the direct result of two key aspects of the Mining Law - self-initiation and security of tenure. Under the law, a miner could go on to the public domain, make a discovery and have the right to buy title to his claim from the United States.

It is no secret that the opportunity for the finder of valuable minerals to make his fortune by the sweat of his brow has contributed mightily to the strength of America today. The opportunity for a citizen to file a claim and ultimately to secure a patent made it possible.

Despite this national policy, however, mining is rarely profitable and never easy. The entire global mining industry is worth less than Bill Gates' Microsoft holdings on a good day. Mining's contribution to the owner state is not that it is a source of tax revenue, but that it creates new value out of rocks that are otherwise worthless. Lawyers, bankers and bureaucrats, not to mention plumbers, taxicab drivers and software designers do not create wealth. They simply pass around the wealth at hand.

Fishermen and farmers and loggers and miners and oilmen - producers who convert "natural resources" into usable products - are the ones who provide the things needed for all of us to enjoy a better life. The mines near Kotzebue (the world's largest producer of zinc concentrates) and Juneau (the largest silver mine in the United States) make the lives of all Alaskans better through the creation of long term, safe, healthy jobs.

Payrolls stabilize economy

The payrolls from these mines, as well as those from the Fort Knox mine in Fairbanks and the Usibelli Mine in Healy and the expected payrolls from Pogo, Kensington, Mystery Creek, Pebble, Donlin Creek and others will stabilize Alaska's economy for generations. Unlike in the oil patch, hard rock mining operations are labor intensive. The salaries are good, but not glamorous. The work is hard, but many eat because of what miners produce.

If the purpose of taxing the hard rock mining industry is to chase it out of Alaska, what result will follow? The demanded commodities will be recovered in other places like Borneo or Burma or Brazil or other third world places. These are countries that do not have America's health and safety standards, that do not regulate wages and work hours and that do not have the environmental safeguards in place that we have in Alaska.

In a very real sense, urging Alaska's hard rock miners to go elsewhere is arguing for exporting the negatives everyone associates with mining, but without demanding the stringent standards we impose on the mining industry to follow. A widowed mother in Chile would undoubtedly be glad to have a job scratching silver ore from a dangerous hole in the ground, but facilitating that lifestyle is not a positive result.

Alaska benefits from having a strong mining industry in place. Doubling the tax obligation of the mining industry, on the other hand, sends a different message. Taxing mines before they are able to turn a profit will deter investment in Alaska. How we treat our miners is watched carefully throughout the world. What we say, as well as what we do makes a difference.