Beware effects of federal mining royalty

A new federally collected royalty (read tax) on hardrock mining has recently been proposed as a part of Congress' solution to fix the national debt and manage the mining industry. A bill co-sponsored by U.S. Rep. Raul M. Grijalva, D-Ariz., would set a 12.5 percent royalty rate on the value of certain hardrock minerals on public lands.

This proposal would rewrite the original 1872 mining law in the United States. The proposed U.S. royalties would be among the highest of any country in the world.

Mining is today one of the most regulated and government-supervised business sectors in the economy. Some in Congress see this proposed mining royalty or tax as a new source of "revenue strip mining."

One congressman stated, "We've been leaving a huge pot of money on the table."

The Washington Post also has added its opinion to the idea. In its recent editorial about possible new legislation on hardrock mining, the paper stated, "Even if the increased revenue is only an extra billion or two, a stretched federal budget could certainly use it now."

What is missed is the fact that taxes and other fees are currently collected.

All western hard rock mining states, including Alaska, would be affected by this new legislation. South Dakota, for example, has a rich history of hardrock mining. The Homestake mine began operations in the Black Hills of Dakota Territory in 1877 after a group of California miners purchased mining claims. These original claims comprised about 10 acres. By 1999, the Homestake Mine had grown to more than 8,000 acres of patented claims for open cut and deep mining and was the oldest continually operating gold mine in the world.

When mining operations ended in 2002, Homestake was the oldest, largest and deepest mine in the Western Hemisphere, with deep mining reaching more than 8,000 feet below the surface. By the time the mine closed, it was the most productive gold mine in North America and had yielded more than US$1 billion in gold over the years.

It is indeed easy to figure what that does for a local and regional economy. Mining states, including South Dakota, have longstanding mineral severance taxes which are enforced on federal and private lands.

Adding to the existing framework of taxes, fees, required environmental compliance, as well as regulatory and reclamation laws imposed on the mining industry, the proposed law would create a new revenue collection protocol on top of six existing categories of costs, fees and taxes now assessed against the mining industry. Consider that the government's most 'uniform' way of collecting revenues from the mining industry is already in place - income taxes.

Undermining economic development

The new proposed legislation is the same as proposing a new royalty assessment on ranchers' pre-tax profits from the sale of livestock when the cattle are finished and taken to market. The federal government already charges ranchers a rental fee on leased federal lands. It is called a grazing fee.

The federal grazing fee, which applies to federal lands in 16 Western states on public lands managed by the Bureau of Land Management and the U.S. Forest Service, is adjusted annually and is calculated by using a formula originally set by Congress. A grazing fee is really the cost to ranchers for renting federal land.

Would it be reasonable for the federal government to collect a rental for use of federal lands and also 'tax' the rancher a percentage of sale proceeds from the rancher's profits when the cattle go to market?

After some consideration, this new 'cattle royalty' does not appear logical or reasonable. Such a cattle royalty, however, would have the same effect as the new proposed mining royalty. Charge the rancher for use of the lands and also charge the rancher a portion of the pre-tax profit that he receives from his cattle sales. After that, assess the rancher for income taxes. This is a nonsensical but revenue-positive way of governing.

Mining rules constitute a full pallet of regulations and are administered at a cost to the industry by both federal and state agencies with broad and encompassing authority. Compliance with these mining rules is expensive and results in many financial 'soft costs' in the form of monies given to the government.

The mining industry currently pays for and complies with six different categories of fees and taxes, including mineral severance taxes collected by the state of South Dakota at a rate of US$4 per ounce of gross production (plus an additional surtax based upon mineral value), as well as 10 percent of net income and 8 percent of royalty value.

These mineral severance taxes have long been developed by western states for the benefit of the local economy. Adding a new federal royalty (read tax) would undermine economic development in active western mining states.

In urgent economic times, a hurried act creating new revenue sources does not necessarily result in a long-term cure. The congressmen through their suggested mining royalty legislation would create a new tax-like device on top of the existing costs, fees and tax categories now assessed against a mining operation. It may be expedient for Congress to become a 'tax machine' and establish a new mandatory royalty payment requirement. But there are always economic and social consequences when new revenue sources are adopted.

The mining industry is handsomely assessed with taxes and administrative costs. Why now should the bedrock 1872 Mining Act be so radically rewritten? To paraphrase John Milton: For what can a new tax but endless new taxes still breed?