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Transcript of Taxation of Mineral Resources bt Robert F. C. and R. Btyce H.pdf
Taxation ofMineral Resources
Books fromThe Lincoln Institute of Land Policy
The Lincoln Institute of Land Policy is a school that offers intensivecourses of instruction in the field of land economics and propertytaxation. The Institute provides a stimulating learning environmentfor students, policymakers, and administrators with challengingopportunities for research and publication. The goal of the Institute isto improve theory and practice in those fundamental areas of landpolicy that have significant impact on the lives and livelihood of allpeople.
Constitutions, Taxation, and Land PolicyMichael M. Bernard
onstltutlons, Taxation, and Land Policy-Volume IIMichael M. Bernard
.'ederal Tax Aspects of Open-Space PreservationKingsbury Browne
Taxation of Nonrenewable ResourcesAlbert M. Church
Taxation of Mineral ResourcesRobert I. Conrad and R. Bryce Hool
Incentive ZoningJerald S. Kayden
Building for WomenEdited by Suzanne Keller
State Land-Use Planning and RegulationThomas G. Pelham
The Art of ValuationEdited by Arlo Woolery
Taxation ofMineral Resources
Robert F. ConradDuke University
R. Bryce HoolState University of New Yorkat Stony Brook
LexingtonBooksD.C. Heath and CompanyLexington, MassachusettsToronto
Library of Congress Cataloging in Publication Data
nrad, Robert FTaxation of mineral resources.
Bibliography: p.Includes index.1. Mines and mineral resources-Taxation-United States. 2. Mining
industry and finance-Taxation-United States. I. Hool, R. Bryce, jointauthor. II. Title.HJ4169.C66 336.2'7833385'0973 80-8392ISBN 0-669-04104-1
Copyright © 1980 by D. C. Heath and Company
All rights reserved. No part of this publication may be reproduced ortransmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage or retrieval system,without permission in writing from the publisher.
Published simultaneously in Canada
Printed in the United States of America
International Standard Book Number: 0-669-04104-1
Library of Congress Catalog Card Number: 80-8392
To Helen and Emily
Contents
List of Figure and Tables ix
Introduction and Summary xi
('hupter 1 Mining Taxes 1
Output-Related Taxes 1Profits Taxes 12Property Taxes 13Discussion 18
('hllpter 2 Mining Decisions 19
Description of the Mining Process 19The Effects of Uncertainty 24Effect of Risk: An Example 26Summary 31
('hapter3 Effects of Mineral Taxation 35
Extraction 35Some Numerical Illustrations 44Integration of Taxes 53A Note on Taxation and the Concentrating
Decision 54Effects of Taxation on Investment and
Related Issues 55Summary 59
hapter4 Policy Implications 63
Calculating the Net Impact of an IntegratedTax System 63
Incidence Issues 68Recommendations 69Concluding Remarks 77
Appendix State Tax Collections 79
vii
Contents
List of Figure and Tables ix
Introduction and Summary Xl
~hapter1 Mining Taxes 1
Output-Related Taxes 1Profits Taxes 12Property Taxes 13Discussion 18
'hapter 2 Mining Decisions 19
Description of the Mining Process 19The Effects of Uncertainty 24Effect of Risk: An Example 26Summary 31
hapter 3 Effects of Mineral Taxation 35
Extraction 35Some Numerical Illustrations 44Integration of Taxes 53A Note on Taxation and the Concentrating
Decision 54Effects of Taxation on Investment and
Related Issues 55Summary 59
Chapter 4 Policy Implications 63
Calculating the Net Impact of an IntegratedTax System 63
Incidence Issues 68Recommendations 69Concluding Remarks 77
Appendix State Tax Collections 79
vii
viii Taxation of Mineral Resources
Bibliography
Index
About the Authors
95
103
111 Figure
2-1
Tables
1-1
1-2
1-3
-1
2-2
-3
-4
. -I
J-2
l
.1-4
.1-5
-I
-1
List of Figureand Tables
Cycle of Mining Operations
Output-Related Mining Taxes
Profits Taxes
Property Taxes
Annual Price of Tin (1960-1972): HypotheticalTin Deposit
Optimal Extraction Profile for Tin Deposit
Extraction Profile Using Average-Grade Rule
Optimal Extraction Profile with Lower Capacity
Hypothetical Mines and Price Profiles
Optimal Extraction Profiles for Mine I
Optimal Extraction Profiles for Mine II
Effects of Output Taxes on Mine I
Effects of Output Taxes on Mine II
Taxes on New Mexico Uranium Mines
State Tax Collections
ix
20
3
14
16
27
28
29
30
45
46
47
49
50
65
80
Introductionand Summary
There has been a substantial increase in recent years in the level oftaxation imposed on mining firms by state· and. local governments.This increase can be attributed to three factors. First, there has beena heightened awareness that resources are limited in quantity and,consequently, there is a need to conserve the resource base. Second,the environmental damage resulting from mining operations, notably the deterioration of water quality and land abuse, has broughtdemands for just compensation. Third, significant price increases forsome minerals have often been viewed by states as an opportunity tocollect additional tax revenue.
It is important to understand the implications of this taxationand, in particular, the effects associated with each of the variousforms of taxes that are being applied. Accordingly, the broad aim ofthis book is to provide a comprehensive economic analysis of theffects of mining taxation on the extraction of mineral resources.
Although we shall deal specifically with the taxes imposed by statend local governments in the United States, the conclusions will have
more general applicability, since the essential forms of the taxationare applied universally.
On the basis of this analysis, we offer a set of recommendationsfor fax policy. The primary objective of this design is to minimize thedistortionary incentives created by the taxation. From a practicalstandpoint, however, one must also recognize the degrees of diffi-ulty in the administration of the various taxes.
The analysis and recommendations will reflect the premise that,f r tax purposes, a mining operation should be treated in a neutralmanner, that is: like any other form of economic activity. We regardI his premise as appropriate for two reasons. First, in the absence ofproved market failures, a nonneutral tax treatment of the miningIi ctor creates an inefficient allocation of resources. Too many or toofew resources devoted to mining will be costly to states in terms of. bs and output, either in mining or some other activity. Second, ifI he tax system is nonneutral, it may be difficult to detect whethermarket failure is due to the nature of the activity or to relative distorIi ns induced by the tax system. If, for instance, it is determined that
xi
a state's resource base is being depleted too fast, an output tax maybe justified. However, if the resources are being depleted too fastbecause of an excessive property tax, for example, an additional taxmay succeed only in deterring further development. It is thereforeappropriate for states to move toward a neutral tax policy and thento evaluate any alternatives from that position.
The analysis is also based on the assumption that mining firmsrespond, in the short run, to changes in prices and costs and, in thelong run, to changes in the net-of-tax rate of return on investment. Achange in tax policy will always have an impact on mineral development. An increase in the mining industry's tax burden will result inslower growth of mineral development in the state and, consequently, lower output and job creation. To expect otherwise is toexaggerate the realizable benefits of taxation.
The study is presented in four chapters. The first two chaptersestablish the context for the economic analysis. In chapter 1 we setout the major categories of mining taxation and discuss salient features of the several forms within each category. References to themethods adopted by particular states are supplemented by a detailedtabular survey of the taxes applied in twenty-two states with significant mining sectors.
In chapter 2 we describe the main elements of the mining processitself. Recognition of the structure of mining decisions is essential tot?e rel~vance of economic analysis and policy prescription. Of partIcular Importance here is the interaction of economic and geologicalfactors.. The core analysis of the impact of taxes on a mining firm'sInvestment, development, and extraction behavior is presented inchapter 3. We focus initially on the individual effects of the taxes andthen consider the net effects of different taxes applied in combination. To illustrate the major influences, we construct numericalexamples that display the variations in a firm's response to differenttaxes, in otherwise identical economic and geological conditions, aswell as the variations in response to a given tax as economic and geological conditions vary.
Chapter 4 begins with an illustrative computation of the netquantitative effect of a state's tax system and then discusses tax shifting. It concludes with a presentation of recommendations for taxpolicy.
We now summarize briefly the main conclusions from the analysis and our policy recommendations. The particular taxes consideredcan be grouped in three distinct categories: severance (outputrelated) taxes, property taxes, and profits (or income) taxes.
Severance taxes may be specified as a fixed nominal payment perton of final output (that is, payment of a specified number of dollarsper ton, whatever the price level); as a fixed nominal payment per tonof ore extracted, before processing; or as a proportion of sales revenue. Each variant is distinct in its effects. A per-unit tax on outputcreates a tendency to reallocate extraction from present to future andmay also alter the time profile of the quality of ore selected forextraction. A per-unit tax on ore is also an inducement to deferextraction, but such a tax will not influence the quality profile. An advalorem tax will not alter the quality profile but will induce a shift inextraction from present to future, or vice versa, according to whetherprices are rising at a rate less than or greater than the rate of interest.All variants lead to an increase in the cutoff grade of ore, reducingthe size of economically recoverable reserves-the phenomenon oftax-induced high-grading.
All severance taxes, and indeed all taxes, reduce the rate ofreturn on capital and thereby serve to discourage investment anddevelopment expenditures. This is the major long-run distortion ofmining taxation in general, whose incidence across states is in relation to the total tax burden imposed by each state.
Property taxes, in practice, are also levied in various forms, fewof which show any evident connection to the economic definition ofproperty value. As administered, property taxes have the advantageof stable revenue. Their disadvantage is the practical difficulty ofproperty assessment. A true property tax, based on the estimatedvalue of reserves remaining in a deposit, will effectively subsidize andthereby accelerate extraction. At the same time, it will tend to lowerthe cutoff grade and so increase total extraction.
Profits taxes may be proportional (levied at a uniform rate) orprogressive (levied' at an increasing rate) and are typically contaminated by special deductions, such as depletion allowances. In theabsence of deductions, a proportional profits tax is nondistortionarywith respect to extraction, whereas a progressive tax will induce themining firm to modify its profits profile in a manner that will depend
n the time paths of prices and costs. This redistribution may be
xii Taxation of Mineral ResourcesIntroduction and Summary xiii
brought about by changes in the rates of extraction or in the qualitiesof ore extracted, or some combination of the two.
Depletion allowances serve to subsidize extraction. Cost depletion, a fixed nominal allowance per ton of ore extracted, acts as anegative per-unit severance tax. Extraction tends to be reallocatedfrom future to present; cutoff grades will be lower and recoveryhigher than otherwise. Percentage depletion, a fixed proportion ofcurrent revenue, acts as a negative ad valorem severance tax.Accordingly, it encourages a shift in extraction from future to present, or vice versa, as prices are rising at less or more than the rate ofinterest. It also lowers the cutoff grade and increases total recovery.
The preceding array of potential distortions, together with therelative difficulties of administering the options, lead to the following prescription for the general design of mineral tax policy.
1. A proportional profits tax should be the cornerstone. Its primary advantages are recognition of cost as well as revenue; avoidance of a high-grading incentive; and ability, in conjunction with theindividual income tax, to collect the resource rents. The income-taxpackage should include these provisions: (a) percentage depletionshould not be allowed; (b) capitalization of exploration expendituresshould be required; (c) development expenses should be subject tousual depreciation rules; (d) all other state and local taxes should bedeductible; and (e) taxable income should include only incomederived within the state.
2. A property tax is recommended for states that rely on theirmining sector for a stable source of revenue. Administration of theproposed tax is likely to be proportionately less costly for such states.The property-tax base should be an estimate of present value, thefuture income stream being obtained by applying a historical averageprofit margin to estimates of reserves and production. The use of amoving historical average profit margin will reduce the incentive forhigh-grading and accelerated extraction.
3. Given the relative ease of administration, many states willprobably impose a severance tax of some sort. If so, we recommendthat it be an ad valorem royalty, since this does not bias the qualityprofile or induce any consistent quantity-profile bias. All severancetaxes have the undesirable consequence of high-grading, but per-unitseverance taxes also induce extraction-profile distortions. We recommend further that (a) the tax should be imposed on ore, prior to pro-
xvxiv Taxation of Mineral Resources
Introduction and Summary
cessing; (b) ore prices should be quality-adjusted, with a stan.dardprice derived, if necessary, from the price of concentrate wIth ~deduction for processing costs; and (c) the t~x ~a~e s~ould be UnI
form, that is, independent of the price. The J.uStlficatlOns. for. theseproposals and for the rejection of the alternatIves are detaIled m thefinal chapter.
Acknowledgments
Financial support for the research for this book was generously provided by the Lincoln Institute of Land Policy. We wish to thank ArloWoolery, director of the Lincoln Institute, for his encouragement ofthis research. .
We are also grateful to all the state tax administrators for theIrhelpful cooperation.
1 Mining Taxes
I here is considerable variation across states in the types of miningI Ixation currently employed and even in the names they go by. To, mplify the description and discussion of these taxes we divide themIllto three broad categories: output-related (or severance) taxes,pr fits (or income) taxes, and property taxes. This classification islIso used in the subsequent analysis.
Output-Related Taxes
)utput-related taxes are defined here as taxes imposed on a per unitII Isis on mineral output, either at the mouth of the mine or after conI' ·ntration. They are most commonly known as severance taxes butII also referred to as production or mining privilege taxes. This type,I tax takes two general forms: a fixed nominal amount per unit of
0111 put, and a fixed proportion of the value of output (an ad valoremI IX).
These taxes are popular means of raising revenue for several rea-( n . First, the administrative costs are relatively small when com
pared to other forms of taxation, on account of clearly defined unitsof taxation. No costs, depletion, or depreciation need be calculatedIlld valuation problems are relatively minor. However, as Stinson(1977) notes, there are difficulties in assigning values for purposes ofIII output tax based on gross value. The problem arises because\I m's-length market transactions may not occur. This is especially api oblem in vertically integrated operations that purchase mineralolltput as an input into the production process (not necessarily in the
line state).econd, the output tax is perceived as collecting part of the value
( f extracted resources. Unlike other economic operations, mineralI r ction permanently reduces the natural wealth of the state. Thus
Olltput taxes are seen as providing a tangible link between the extrac-
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Mining TaxesTaxation of Mineral Resources2
tion process and the perceived resource rents. We question this argument in chapter 3.
Third, the revenue from such taxes, whose source is readily identifiable, is fairly easy to earmark for specific purposes. Like gasolinetaxes used for highway trust funds, output taxes are sometimesplaced in special funds for land reclamation and other projects identified with the mining process. The tax is thus viewed as a means offorcing the mines to "pay their own way" for public services andenvironmental damage. There is no inherent reason that other typesof taxes cannot be similarly earmarked. However, the advantage ofoutput taxes is that a legislature can link a tax to a specific purposewithout allocating a fixed nominal amount of expenditure for theservices in the budget.
Finally, it has been suggested that these taxes are passed throughin the form of higher prices to consumers of finished products, andthus the tax is "exported" out of the state. This claim is examined indetail in chapter 4.
Output-related taxes are not without their difficulties. Chapter 3shows that severance taxes favor large operations of high-gradedeposits whose profits can easily absorb the tax. Second, theyincrease the cost of extraction regardless of the size of the operationand quality of the deposit, causing high-grading, that is, the bypassing of ores that could be profitably extracted in the absence of thetax. Third, they may alter the intertemporal extraction profile.
Table 1-1 compiles the types of output-related taxes in the statessurveyed. It is evident that the taxes and rates vary widely acrossstates for the same mineral. For instance, coal in Ohio is taxed at arate of only 4¢ per ton, while coal in South Dakota is taxed at 50¢ perton, plus a I-percent increase for every 3-percent increase in thewholesale price index (WPI). The taxes also vary across minerals inthe same state. This reflects in part the legislature's perception ofcost differentials and the relative importance of a particular mineralin the state's economic base. (Other economic factors also playarole. For example, the recent decrease in the copper royalty in Arizona reflects a decline in copper prices.)
It is apparent that states are aware of the adverse incentives created by this output tax. Some states lower tax rates for small producers (Wyoming, Alaska, and Montana) as well as allowing rates tovary with quality differentials (Wyoming and Alaska). The need for
Tab
le1
-1co
ntin
ued
Stat
e/M
iner
alN
ame
Bas
ean
dR
ale
Rem
arks
~
Ari
zona
All
min
eral
s
Ark
ansa
s
Oil
Gas
Oil
and
gas
Iron
are
Bar
ite,
baux
ite,
tita
nium
are,
man
gane
sean
dm
anga
nife
rous
ores
,zi
ncor
e,ci
nnab
ar,
and
lead
are
Occ
upat
iona
lgro
ssin
com
e
Seve
ranc
e
Spec
ial
fund
Seve
ranc
e
Con
vers
ion
Seve
ranc
e
Seve
ranc
e
2.50
70o
fgr
oss
valu
e
5070
of
gros
sva
lue
ifw
ell
prod
uces
mor
eth
an10
barr
els/
day.
4070
of
gros
sva
lue
ifw
ell
prod
uces
less
than
10ba
rrel
s/da
y5
mill
spe
rba
rrel
0.30
70/1
,000
cubi
cfe
et
10m
ills
/bar
rel
orI
mill
/I,O
OO
cubi
cfe
et
2¢/t
on
l5¢/
ton
Pri
cede
term
ined
byre
fere
nce
tom
ar
ket
publ
icat
ions
less
out-
of-s
tate
pro
cess
ing
char
ges
and
tran
spor
tco
sts.
1070
of
the
2.50
70is
allo
cate
dby
set
for
mul
a.F
rom
6/1/
78to
6/30
/80
rate
onco
pper
min
ing
and
smel
ting
is20
70.
Use
dto
esta
blis
hth
eA
rkan
sas
Oil
Mus
eum
.
All
seve
ranc
eta
xes
are
allo
cate
dbe
tw
een
stat
ean
dlo
cal
gove
rnm
ents
byse
tfo
rmul
a.
-i
til
X til .- o ::J o - :i!:
::J CD i» ::D CD C/) o c d CD C/)
Se'\-
eran
ceI.
x,t
on
:i!:
::J ::J
<0
Seve
ranc
eI~/ton
-i
til
X
Seve
ranc
e50
70gr
oss
valu
eCD C
/)
Gyp
sum
(sol
dfo
out-
of-s
tate
use)
,ch
emic
al-g
rade
lim
esto
ne, s
.ilic
asa
nd,a
nddi
men
sion
ston
e
Cru
shed
ston
e(m
ost
vari
etie
s)
Oth
ers
(inc
ludi
ngdi
amon
ds,
salt
,an
dso
on)
Cal
ifor
nia
Oil
and
gas
Col
orad
o
Met
allic
min
eral
s
Mol
ybde
num
Oil
and
gas
Coa
l
Oil
shal
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
eSe
vera
nce
Seve
ranc
e
Seve
ranc
e
Rat
eva
ries
year
ly,
0.02
070/
barr
elin
1977
2.25
070
ofgr
oss
reve
nue
inex
cess
of
$11
mill
ion
15~/ton
2070
ifgr
oss
reve
nue
less
than
$25,
000
3070
$25,
000
to99
,999
4070
$100
,000
to29
9,00
050
70ov
er$3
00,0
00
6O~
inop
enpi
t;30~
unde
rgro
und
plus
1070
incr
ease
for
ever
y30
70in
crea
seo
fw
hole
sale
pric
ein
dex
max
imum
4070
gros
sva
lue
ofth
e4t
hye
aro
fop
erat
ion
Con
side
red
are
gula
tory
tax.
Pro
pert
yta
xes
are
allo
wed
asa
cred
itup
to50
070
ofth
ese
vera
nce
tax
due.
Fun
dsgo
into
stat
etr
ust.
87.5
070
of
prop
erty
taxe
sm
aybe
used
asa
cred
it.
Fir
st8,
000
tons
per
quar
ter
exem
pted
.L
igni
tege
tsad
diti
onal
5007
0cr
edit
.
2507
0cr
edit
for
on-s
ite
met
hods
.
01
Tab
le1
-1co
ntin
ued
Stat
e/M
iner
alN
am
eB
ase
and
Rat
eR
emar
ks
0)
Pho
spha
tes
Seve
ranc
e10
%gr
oss
valu
e
Idah
oN
one
All
are
inco
me-
base
d
Ken
tuck
y
Coa
lSe
vera
nce
4.5%
gros
sva
lue
Oil
Seve
ranc
e0.
5%gr
oss
valu
e
Lou
isia
na
Sul
fur
Seve
ranc
e$1
.03/
10ng
ton
Flo
rida
Oil
Gas
Solid
min
eral
s
Salt
Sand
and
grav
el
Mar
ble
Coa
l
Oil
Gas
Mic
higa
n
Oil
and
gas
Min
neso
ta
Sem
itaco
mite
conc
entr
ate
Cop
per-
nick
el
Tac
omit
e,ir
onsu
ifid
eco
ncen
trat
es
Mis
siss
ippi
Oil
and
gas
Oth
erm
iner
als
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Pro
duct
ion
Seve
ranc
e
Seve
ranc
e
Occ
upat
ion
Seve
ranc
e
Occ
upat
ion
8%gr
oss
valu
e(i
fav
erag
epr
oduc
tion
isgr
eate
rth
anI(
)()ba
rrel
sIda
y)
5070
gros
sva
lue
5%gr
oss
valu
e
6¢
/to
n
3¢
/to
n
20¢/
ton
10¢/
ton
12.5
%gr
oss
valu
e
7¢/I,
OO
Ocu
bic
feet
2%gr
oss
valu
e
10¢/
ton
plus
1/10
of
1%of
grad
egr
eate
rth
an55
%I%
of
valu
epl
us2Y
2¢/t
onpl
us10
%o
fba
ses
for
each
0.1
%in
crea
seof
valu
ab
leco
nten
tab
ove
62%
$1.2
5Ito
npl
us1.
6%fo
rea
chI%
valu
ab
leco
nten
tab
ove
62%
6%/b
arre
lor
6%va
lue
3m
ills
/cub
icfo
otor
6%va
lue
5%gr
oss
valu
e
7/8
tost
ate
gene
ral
fund
;11
8to
coun
tyw
here
prod
uced
.
80%
tost
ate
gene
ral
fund
;20
%to
coun
tyw
here
prod
uced
.
75%
toge
nera
lfu
nd;
25%
tola
ndre
clam
atio
ntr
ust;
cred
itfo
rpr
oper
tyta
xes
upto
20%
of
taxe
sdu
e.F
urth
ercr
edit
sif
firm
has
own
recl
amat
ion
prog
ram
.
50%
toge
nera
lfu
nd;
50%
tola
ndre
clam
atio
ntr
ust.
Min
imum
50¢/
ton.
Up
toI%
addi
tion
alm
aybe
colle
cted
byco
unti
es.
All
seve
ranc
eta
xes
dist
ribu
ted
byse
tfo
rmul
abe
twee
nst
ates
and
loca
litie
s.
Rat
eca
nbe
redu
ced
for'
smal
lw
ells
and
spec
ial
circ
umst
ance
s.
Pai
din
lieu
of
prop
erty
taxe
s.
5¢
/to
nba
seif
proc
esse
din
stat
e.
Rat
ein
crea
ses
with
stee
l-m
illpr
oduc
tsin
dex.
Pai
din
lieu
ofpr
oper
tyta
xes.
Rev
enue
dist
ribu
ted
tost
ate
and
loca
lgo
vern
m
ents
byse
tfo
rmul
a.Sl
ight
tax
for
adm
inis
trat
ion
of
cons
erva
tion
law
s.
-; ~ X ~ - o ~ o - ~ ~ CD.
OJ :::D CD en o c n CD en ~ ~ ~ CO -i~ X CD en -..
..l
CD
Tabl
e1
-1co
ntin
ued
Stat
e/M
iner
alN
ame
Bas
ean
dR
ate
Rem
arks
--
Mon
tana
Cem
ent
and
gyps
umL
icen
se22
c/to
no
fce
men
t5~/ton
of
gyps
um
Coa
lSe
vera
nce
Btu
/lb
Surf
ace
Und
ergr
ound
G.V
.=
gros
sva
lue.
Fir
st20
,000
tons
>7,
000
12~/ton
or5~lton
or
exem
pt.
Dis
trib
uted
tova
riou
sco
unti
es20
070
G.V
.3%
G.V
.an
dst
ate
agen
cies
byse
tfo
rmul
a.
7,00
1to
22¢/
ton
or8¢
/ton
or8,
000
30%
G.V
.4%
G.V
.
8,00
1to
34¢/
ton
orlO
¢/to
nor
-i
llJ9,
000
30%
G.V
.4%
G.V
.X llJ
90,0
1740
¢lto
nor
12¢/
ton
or.....
30%
G.V
.4%
G.V
.0 ::J
Met
alli
fero
usL
icen
seG
ross
Val
ueR
ate
0 .-or
es0-
100,
000
0.15
%~
100,
001-
250,
000
0.57
5%::J (1
)
250,
001-
400,
000
0.86
%.... llJ
400,
001-
500,
000
1.15
%:D
500,
000
and
over
1.43
8%(1
) enM
icac
eous
ores
Lic
ense
5¢/t
on0 C
Oil
Seve
ranc
e2.
1%
firs
t$6
,000
of
gros
sva
lue
2.65
%.... ()
exce
ssov
er$6
,000
of
gros
sva
lue
(1) en
All
min
eral
sR
esou
rce
trus
t$2
5pl
us0.
5%gr
oss
valu
ein
exce
ssU
sed
tore
ctif
yen
viro
nmen
tald
amag
e.of
$5,0
00
20"0
of
gros
sva
lue
4m
ills
/dol
lar
5m
ills
/bar
rel
of
oil
or/5
0,00
0cu
bic
feet
of
gas
Si
Oil
and
gas
Nev
ada
Oil
and
gas
New
Mex
ico
Ura
nium
Sev
eran
ceC
onse
rvat
ion
Con
serv
atio
n
Seve
ranc
eV
alue
/lb
0-5.
00
5-7.
507.
50-1
0.00
10.0
0-15
.00
15.0
0-20
.00
20.0
0-25
.00
25.0
0-30
.00
30.0
0-40
.00
40.0
0-50
.00
750.
00
Tax
(mar
gina
lra
te)
1%
1.6
%
2.0
%
3.0
%
4.0
%
5.0
0/0
7.0
%
9.0
%
12.5
%
$3.2
4
Ifco
ntra
cts
info
rce
prio
rto
1977
,ta
xis
1.25
%.
Fun
dsfr
omse
vera
nce
taxe
sgo
tost
ate.
~ ::J ::J CO -i
llJ X (1) en
Oil
and
gas
Coa
l
Pot
ash
Cop
per
Oth
ers
Har
dm
iner
als
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Res
ourc
eE
xcis
e
.45¢
/bar
rel
or5~/1
,000
cubi
cfe
etpl
usin
crea
sefo
rch
ange
inC
Pl
38¢/
ton
plus
incr
ease
for
chan
gein
CP
I(l
8¢lt
onst
eam
coal
)
2.5%
gros
sva
lue
•1/
3
0.5%
gros
ssa
les
•11
20.
125%
gros
ssa
les
•1/
20.
75%
gros
sva
lue
~
......
o
Tab
le1
-1co
ntin
ued
Stat
e/M
iner
alN
ame
Bas
ean
dR
ate
Rem
arks
Nor
thD
akot
a
Oil
and
gas
Coa
l
Ohi
o
Coa
l
Salt
Lim
esto
nean
ddo
lom
ite
Oil
Gas
Okl
ahom
a
Oil
and
natu
ral
gas
Ura
nium
Oth
erm
iner
als
Sout
hD
akot
a
Oil
and
gas
Pro
duct
ion
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Pro
duct
ion
Pro
duct
ion
Pro
duct
ion
Seve
ranc
e
5%gr
oss
valu
e
65¢/
ton
plus
1I1Jo
for
ever
y3%
chan
gein
WP
I
4¢/t
on
4¢/t
on
I¢/t
on
3¢/b
arre
l
I¢/I,
OO
Ocu
bic
feet
7%o
fgr
oss
valu
e
5%o
fgr
oss
valu
e
0.75
%of
gros
sva
lue
3%o
fgr
oss
valu
e
Pai
din
lieu
of
prop
erty
taxe
s.R
eve
nues
divi
ded
betw
een
stat
ean
dlo
cali
ties
byse
tfo
rmul
a.
Not
inlie
uo
fpr
oper
tyta
xes.
Rev
enue
sdi
vide
dbe
twee
nst
ate
and
loca
litie
sby
set
form
ula.
Seve
ranc
eta
xre
venu
ego
esin
tost
ate
gene
ral
fund
.
Pai
din
lieu
of
all
othe
rta
xes.
Pai
din
lieu
of
licen
seta
x.
-i
Ql
X Ql ..... o ~ o -- ~ ~ (I) ~ :Il
(I) en o c n (I) en
Ten
ness
ee
Oil
Gas
Sul
fur
Uta
h
Met
als
Seve
ranc
e
Seve
ranc
e
Seve
ranc
e
Occ
upat
ion
5¢/b
arre
l5%
gros
sva
lue
$1.0
3/lo
ngto
n
1I1Jo
gros
sva
lue
Rev
enue
allo
cate
dto
vari
ous
agen
cies
byse
tfo
rmul
a.
Fir
st$5
0,00
0is
exem
pt.
Por
tion
of
tax
mus
tbe
prep
aid.
~ ~ ~ <0 -i
Ql
X (I) en
Oil
and
gas
Occ
upat
ion
2%gr
oss
valu
e
Wes
tV
irgi
nia
Coa
lL
imes
tone
orsa
ndst
one
Oil
Gas
Occ
upat
ion
Occ
upat
ion
Occ
upat
ion
Occ
upat
ion
3:85
%gr
oss
valu
e
2.2%
gros
sva
lue
4.34
%gr
oss
valu
e
8.63
%in
exce
ssof
valu
e
$5,0
00of
gros
s
......
......
Rev
enue
toca
pita
lfa
cilit
ies
acco
unt.
Rev
enue
sto
vari
ous
fund
s.
Rev
enue
tost
ate
gene
ral
fund
.R
even
ueto
min
eral
trus
tfu
nd.
1.5%
gros
sva
lue
5%gr
oss
valu
e
2%gr
oss
valu
e
2%gr
oss
valu
e
Seve
ranc
e
Min
ing
exci
se
Seve
ranc
e
Sour
ces:
Wri
tten
corr
espo
nden
cefr
omst
ate
tax
adm
inis
trat
ors;
Sti
nson
(197
8);
Gill
is(1
979)
;S
tate
tax
stat
utes
;C
omm
erce
Cle
arin
gH
ouse
:S
tate
Tax
Gui
de;
Yas
now
sky
and
Gra
ham
(197
6);
and
Ste
erin
gC
omm
itte
eon
the
Impa
cto
fT
axat
ion
onE
nerg
yM
arke
ts,
Nat
iona
lA
cade
my
of
Scie
nces
(197
9).
Not
e:T
his
tax
tabl
ew
asco
mpi
led
usin
gin
form
atio
nfr
oma
vari
ety
of
sour
ces.
The
info
rmat
ion
was
cros
s-ch
ecke
das
far
aspo
ssib
leto
ensu
re
cons
iste
ncy
and
toin
clud
eth
em
ost
rece
ntta
xla
ws.
Wyo
min
g
All
min
eral
s
Coa
l,ur
aniu
moi
l,ga
sC
oal,
uran
ium
Coa
l
Profits Taxes
a secure revenue base is also reflected in the linking of tax rates toinflation indicators (South Dakota) and in the calculation of taxesusing both a fixed dollar per ton rate and an ad valorem rate withcollection of the larger amount (Montana and Alaska). Finally, taxrevenues are used for a variety of purposes. In Alabama, outputtaxes go directly to the general fund and are paid in lieu of propertytaxes, while in North Dakota these taxes are earmarked for variouscategories of expenditure at both the state and local levels.
Profits taxes, if imposed in a state, are paid by every corporateentity. So in the absence of special tax privileges granted to anyindustry, mining enterprises are treated equitably under this tax. Theprofits tax has an advantage over other types of taxes in that it considers both the costs of operation and the depletion of the resourcebase. Taxes are paid only when revenues exceed costs, which againimplies that taxes are levied on a more equitable basis. Also becausecosts are considered, the tax recognizes the ability to pay. Thus thereis no inherent bias against low-profit, small marginal mines.
From the state's perspective there are several difficulties withemploying the profits tax. One is the cost of administration. In orderfor the tax to be applied equitably, accurate books and proceduresmust be maintained. States have partly attacked this problem bymerely adjusting the tax base used for federal tax purposes (table1-2). In effect, some states piggyback the federal taxes, substantiallyreducing administration at the state level. However, this advantage ispartly offset by revenue fluctuations induced by changes in the federal tax laws.
Second, there is the problem of allocating the income of a corporation that operates in more than one state. The major allocationrule for income is known as the"ABC" rule, which allocates incometo the state on the basis of three ratios: the ratio of total sales in thestate to total corporate sales; the ratio of total assets in the state tototal corporate assets; and the ratio of total employment in the stateto total corporate employment. This is an arbitrary procedure thatwill typically not reflect the profitability of a mine in a given state.
Third, there is the intrafirm pricing problem for integrated firms.
13
"roperty Taxes
d valorem property taxes are the oldest form of taxation imposednn the mining sector. Ideally the tax shoul? b~ a tax o~ the "wealth~'( f the mine. However, the wealth of a mme IS very ?lfficult to eS~IInate. Neither future prices and costs nor the geologIcal charactensti s of the deposits are known with certainty. Furthennore, local t~Issessors are not usually trained in the techniques necessary to. estlI~ate these parameters. To compound these difficulties, as will beshown, property taxes induce the firm to extract the ore at a fasterrate than would be the case in the absence of the t~. .
As shown in table 1-3, several states have reahzed these dIfficul-ties and in effect use other forms of taxes in lieu of property taxes.
nly Arizona attempts to estimate the present value of the operation. Other states employ gross-proceeds methods, output ~a~es, ororne form of net-proceeds tax. Net-proceeds taxes ar~ SImIlar to
profits taxes in that they aim to measure the net profIts from anoperation. The major distinctions between net-proceeds and corpo-
Mining Taxes
Illt I state transactions may be of an intrafirm nature, wi~h no m~rI t price established for output. This is a severe ~roblem m the ~n
II , tor where quality variations are reflected m t~e market pnceI III n Ybe difficult to detect on an intrafirm transactIOn.
Finally, there is the issue of allocating corporate overhe~~ andIlllllp nsation of corporate officers. ~hile these are legltl.mateI I 'n es at the corporate level, they are dIfficult to prorate to differ-• III 'tate operations. .
able 1-2 presents a summary of profits taxes m .the states ~ur-
t ycd. As noted, most states use the federal tax base WIth onl! ~norIt I 1I. tments. Those that do not (Arizona, Minnesota, and MIChlg~n)II I different methods in computing loss carry-forwards, depreclaI Oil and expensing. The rates differ from a low of 2.35 percent( i'higan) to a high of 12 percent (Minnesota). Also some states,1Iow a deduction for federal taxes (Alabama) while other~ do not( izona). Finally, some states add back other state taxes paId to theI ral government while others do not. Those that do (Colorado,lur example) increase the net effective rate of th~se taxes on. thelIline's operation and so increase the burden of taxatIOn on the mme.
Taxation of Mineral Resources12
Tab
le1-
2P
rofi
tsT
axes
Stat
eR
ate
Fed
eral
Inco
me
Tax
Ded
ucti
ble
Fed
eral
Inco
me
All
owF
eder
alU
sed
asB
ase
Dep
letio
nR
emar
ks
-'~
Ala
bam
a
Ala
ska
Ari
zona
Ark
ansa
s
Cal
ifor
nia
Col
orad
o
Flo
rida
Idah
o
Illin
ois
Kan
sas
Ken
tuck
y
Lou
isia
na
Mic
higa
n
Min
neso
ta
5'-0
9.40
/0
10.5
070
inco
me
>6,
000
6% inco
me
>25
,000
9% 5% 5% 6.5%
4.0%
6.75
%in
com
e>
25,0
00
5.8%
inco
me
>25
,000
8% inco
me
>20
0,00
0
2.35
%
12%
Yes
No
Yes
No
No
No
No
No
No
No
No
Yes
No
No
No
Yes
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
No
No
Yes
No
No
No
Yes
(exc
ept
shal
e)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Cur
rent
expe
nses
of
unsu
cces
sful
ex
plor
atio
n.
Som
eex
pens
esfo
rex
plor
atio
n.
Min
imum
tax
=$2
00(r
educ
edto
$25
for
gold
).C
urre
ntex
pens
ing
of
expl
orat
ion
and
deve
lopm
ent.
Per
cen
tage
depl
etio
nal
low
ed.
Acc
eler
ated
dedu
ctio
nfo
roi
lco
st.
Dep
leti
on:
oil
=38
%;
coal
=15
%;
and
sulf
ur=
23%
.
Min
imum
tax
=$1
00;
fede
ral
depl
eti
onal
low
edfo
rco
pper
and
nick
el.
-i
Q)
X Q) ... o ::J o - ~ ::J CD tu ::D CD CIl o c: .... (') CD CIl
Mon
tana
6.75
%N
oY
esY
es
New
Mex
ico
5%N
oY
esY
esA
BC
rule
atfr
rm's
opti
on.
Nor
thD
akot
a6%
Yes
Yes
Yes
~
inco
me>
15,0
00::
J
Okl
ahom
a4%
No
Yes
Yes
Oil
depl
etio
n.::J CO
Pen
nsyl
vani
a9.
5%N
oY
esY
es-i
Q)
Sou
thD
akot
a5.
5%X
No
Min
imum
=$2
5.CD
Uta
h4%
No
No
CIl
Wes
tV
irgi
nia
6%N
oY
esY
es
Sou
rces
:W
ritt
enco
rres
pond
ence
from
stat
eta
xad
min
istr
ator
s;S
tins
on(1
978)
;G
illis
(197
9);
Sta
teta
xst
atut
es;
Com
mer
ceC
lear
ing
Hou
se:
Sta
teT
axG
uide
;Y
asno
wsk
yan
dG
raha
m(1
976)
;an
dS
teer
ing
Com
mit
tee
onth
eIm
pact
of
Tax
atio
non
Ene
rgy
Mar
kets
,
Nat
iona
lA
cade
my
ofSc
ienc
es(1
979)
.N
ote:
Thi
sta
xta
ble
was
com
pile
dus
ing
info
rmat
ion
from
ava
riet
yo
fso
urce
s.T
hein
form
atio
nw
ascr
oss-
chec
ked
asfa
ras
poss
ible
to
ensu
reco
nsis
tenc
yan
dto
incl
ude
the
mos
tre
cent
tax
law
s.
......
c.n
10 Taxation of Mineral Resources Mining Taxes 17
rate-profits taxes are the use of cost depletion and straight-linedepreciation; the disallowance of corporate overhead, research anddevelopment, and executive compensation; and differences in interstate profit allocation rules. In effect, net proceeds are closer to theeconomic definition of profit from the mine than is the measure forcorporate-income taxes.
The use of other types of taxes in lieu of ad valorem propertytaxes offers other advantages. First, the tax is usually a statewide tax,thus ensuring equity among the state's mineral producers. Second,administration is transferred from the local level to the state. Thestate's larger and more highly trained bureaucracy provides scaleeconomies in administration and more effective assessment, collection, and enforcement. Finally, the funds are allocated to the localities in a fashion that attempts to measure the costs of local servicesattributable to the mine. Mines in one county may use public servicesfrom another county: in particular, schools, electricity, and water.Under the old system, the counties providing the services could notobtain reimbursement when the mines were technically in a differentjurisdiction.
In summary, states have generally moved away from the oldtypes of property-tax administration. The alternatives also presentboth administrative difficulties and adverse economic incentives, butthese drawbacks have been judged lesser than those of property-taxadministration.
Sources: Written correspondence from state tax administrators; Stinson (1978); Gillis (1979);State tax statutes; Commerce Clearing House: State Tax Guide; Yasnowsky and Gr~ham(1976); and Steering Committee on the Impact of Taxation on Energy Markets, NatIOnalAcademy of Sciences (1979).Note: This tax table was compiled using information from II; variety of so~rces. Theinformation was cross-checked as far as possible to ensure consIstency and to mclude themost recent tax laws.
Progressive rates.
Remarks
New mines must prepay taxesto offset increased demandson local public services.
Severance taxes paid in lieu ofproperty taxes.
Severance taxes paid in lieu ofproperty taxes.
300070 of value of profitstimes 1/3 which is statewideassessment ratio.
Other taxes replace propertytax.
State rate; local rates vary.
None
Assessed value
None
Base
25070 gross value less royalties
9070 gross value
Profits
Gross value
Net proceeds
Local assessment
Local assessment
Gross value
Local assessment
10¢ per $100 ofassessed value
None2070 of five-year averagenet-production value
None
Local assessment
Local assessment
2 times average of netproceeds for 3 years non-metalliferous 30070 capitalizednet income for 5 years plus$5/acre
West Virginia Local 'assessment
Wisconsin Net proceeds
Wyoming 100070 gross proceeds
Oregon
Pennsylvania
Utah
Nonproductive properties
North Dakota
Montana
Nevada
New Mexico
Uranium
Oil and gas
Coal and otherminerals (productive)
Oklahoma
Louisiana
Michigan
Mississippi
Arkansas
alifornia
olorado
l7forida
Ken lucky
Siale/Mineral
Table 1-3 continued
Remarks
Present value of planned extraction using five-year average profit margin.
Production tax paid in lieu ofproperty tax.
Other taxes paid in lieu ofproperty tax.
Base
None
None
Gross value of production
60070 of full coal value
Table 1-3Property Taxes
State/Mineral
Arizona
Oil and gas
Other mines
Alabama
Alaska
The preceding discussion shows the wide variety of tax methods usedby states. There are numerous reasons for this variance. First thesize of the state's economic base (and thus the tax base) derived fromthe min~n~ sector is an important factor. States that have relativelylarge mmmg sectors must rely more heavily on mineral taxation tosupport state and local services. Presumably, this leads to a morediverse and sophisticated set of tax policies, since these states need tocollect r~latively more revenue from the mining sector while ensuringthe contmued economic viability of their resource base. States thatdepend on the mining sector for a substantial part of their revenuesal~o. employ and ~rain tax administrators to deal exclusively with themmmg sector. ArIzona is a prime example: the state assesses all mineral property, has its own mineral tax division, trains assessors, andexpends considerable effort keeping up to date on cost market andtechnological trends. ' ,
Second, state legislatures differ in their perceptions of the role ofmineral taxation. Some regard these taxes as a means of collectingresource rents and a method of tax exportation while others view. 'mmes as corporate enterprises and attempt to treat them as such.
A third reason is the attitude of some states that state taxes aresmall relative to federal taxes, and that, since state taxes are deductible from federal taxes, the impact of state taxes on the economicbehavior of a mine is small. This may have been true in the past butchapter 4 shows that it is no longer the case. The appendix providesdata on the size of the revenues generated by these taxes.
Description of the Mining Process
Exploration
The objective of the mining firm is to profitably extract and processthe valuable contents of a mineral deposit. This objective is achieved,if at all, only after a long and costly process. This chapter describesthe process and models it from an economic perspective. Proper recognition of the actual structure of mining decisions, and of the influence of geological factors, is essential for prediction of responses tochanges in economic conditions.
Mining Decisions2
Figure 2-1 presents schematically the major phases of a typical mining cycle, with estimates of the time and cost necessary to completeeach phase. In practice, the time and cost requirements can vary sub-tantially across minerals and across mines of the same mineral, on
account of geological differences, location, and other factors. Thenumbers on figure 2-1 should therefore be considered as only repreentative. Each phase is now described in some detail. 1
Taxation of Mineral Resources18
Discussion
A typical exploration program usually involves a three-step procedure: preliminary exploration and sampling; detailed exploration;and estimation of reserves and recovery factors. 2 The first step aimsto determine areas of possible mineralization or anomalies over largeregions. If there has been previous mining activity in a region, oldmappings, surveys, and other historical documents are studied. Geological maps and other material compiled by state or federal agenciesare also used. Specially equipped airplanes (or even satellites) arethen used to photograph the region and to conduct magnetic andother geographical surveys. 3
19
20 Taxation of Mineral ResourcesMining Decisions 21
Activity
Exploration
Investment
Development
Exploitation
Time to CompleteActivity
2-4 years
2-4 years
2-4 years
10-20 years
Cost
$10 million
$50 million
$100 million
include (1) length, width, and depth of mineralized area; (2) faulttructure and other discontinuities; (3) specific gravities; (4) moisture
levels; (5) grade of ore; and (6) nature of overburden.This information from the samples is used to place the reserves
into three broad categories.
I. Proved reserves: ores that have been both delineated and measured; tonnage and grades are known within 5-percent error.
2. Probable reserves: tonnage and grades are computed fromwidely spaced samples and from geological projections; errors inestimates are usually less than 20 percent.
3. Possible ore: no samples available; estimates based on inferencessolely on geological structure and geophysical anomalies. 6
Profit
Source: Adapted from Thomas (1973), p. 60.
Figure 2-1. Cycle of Mining Operations
The results of this work identify promising anomalies which arestudied in more detail in a series of preliminary on-site inspections.These inspections consist of general geophysical or geochemical testso~ chip s~mples from outcroppings or streambeds. Tliese tests, alongwIth detailed mappings, enable a determination of the areas whichhold the greatest prospects for mineralization and thus merit moreintensive exploration. 4
The methods employed in the detailed exploration phase dependon the type of mineralization and the geological characteristics of theparticular deposit. Costeaning and shallow drilling are used fordeposits with only a thin layer of overburden. In cases where themineralized area is farther below the surface, diamond drilling isusually employed. Regardless of the technique, the objective of thedrilling is to determine as accurately as possible the size of thedeposit, the metallic content, the fault structure, and other geological, ?eophysical,. and geochemical features·of the deposit. This pro~ess mvolves takmg samples of the area at various points and depthsm order to map the extent of the deposit. ~ The samples are also usedto determine what processes will be necessary to recover the valuablematerial from the waste rock. The types of information obtained
The estimates of reserves and other factors are then used to compute an estimate of the total tonnage of ore contained in the deposit,that is, theoretical reserves. This estimate is adjusted for the faulttructure and other geological factors to obtain an estimate of how
much ore can be extracted, that is, minable reserves. 7
Once the sample information has been analyzed, a determinationis made of alternative methods which might be used to extract andprocess the reserves. This involves choosing a set of mining methods(open pit, underground) and a concentrating process (flotation, sep-
ration) which are appropriate given the available geological information. For each mining method, the mineral reserve estimates aremodified in two ways. The mining process itself may cause some oreto be left behind. This results from the necessity of roof and floorsupports in underground methods, or overburden removal in openpit methods. To allow for this, minable reserves are adjusted by an
timate of the extraction ratio (the proportion of ore left unmined)to derive net recoverable reserves. 8
Dilution of ore also occurs in the mining process. It is inevitablethat some waste rock will get mixed with ore. This reduces the value
f ore mined and increases the tonnage of ore which must be handled(run-of-mine ore) to recover the same amount of valuable product.Therefore, an adjustment called the "dilution factor" must be madeto account for the increased tonnage which must be processed.
The final adjustment is made for losses incurred in the separationr concentrating process. In most cases, raw ore is processed at or
Investment
near the mine site to separate the valuable material from the waste.In ~he case of metal mining the ore is crushed and a chemical or magnetIc process used to separate the metal from the other elements. Themethod used in the process is determined, in part, by the characteristics of the ore. Some valuable material will be lost as a result of theseparation process and so a further adjustment must be made inorder to estimate the tonnage of material which will be sold. Thisadjustment in known as the "recovery rate."
To summarize, the exploration process is a method where various areas are selected for intensive examination to determine thenature of reserves. In addition to estimating the reserves in thedeposits, various adjustments are made to account for losses in themi?ing and recovery process itself. The results of this stage includeestImates of recoverable ore and material available for sale in addi-. ,tlOn to reserve estimates. 9
If exploration has been successful, a determination of the mine'sprofitability must be made. This determination is usually a two-stepprocedure.
10A "quick" assessment of the mine's profitability is
made to decide if the expense and time necessary to complete detailedfeasibility studies are warranted. This assessment is based on currentprice projections, the average grade of ore, and crude cost estimates.
If the chances for profitable operation are promising, detailedstud~es are.initiated. <:>ne part of this process is a series of engineeringstudI~S WhICh determme the best technology, scale, and processingtechmques, under alternative methods of operation. 11 The engineering detail is quite specific in order to determine capital and laborr~quirements.and costs, as well as ordering the reserves for productIon. MarketIng studies are made to determine price projections and~c.c~ss to markets. Preliminary negotiations w!th potential buyers areInItIated to determine quality and quantity characteristics whichform the basis for long-term contracts. Finally, alternative methodsof financing are evaluated and banks are contacted to obtain loans. 12
The information from the engineering and marketing studies isthen combined to select the most profitable method of operation.The procedure commonly used is to determine the profits from an
23
After all this time and expense involved in exploring and constructing the mine, extraction of ore can proceed and a positive cash flowgenerated. At this stage the firm is constrained by all its previousdecisions. Capacity and technology are in place, limiting the amountof ore that can be currently extracted and determining both overhead
Mining Decisions
annual extraction and development profile for a given scale of operations and a specific technology. The size of the operation is changed(in increments of about 50 percent) to generate new estimates ofprofitability. Finally, sensitivity studies are made to determine theeffect of changing conditions on profitability under alternative mining methods. The fimll decision on the type and scale of the mine tobe constructed is based on a number of criteria. First, the presentvalue is calculated using discount factors that reflect attitudes towardrisk. The internal rate of return is calculated for comparison withother investments. Minimum returns may range from 12 to 25 percent. Finally, the undiscounted payback period is calculated to estimate the time necessary to recapture the initial investment. Based onthese and other criteria, the technology and plant size are chosenwhich yield the greatest estimated present value of profits.
Once financial arrangements are made the construction anddevelopment stage is begun. Before any ore is extracted and processed, the mine, processing plant, and storage and transportationfacilities must be constructed. Not all of the mine is constructed atonce, however. Rather, development expenditures of different partsof the mine are sequenced in a manner consistent with the longrange development profile. Even if it were technically feasible todevelop the entire mine at once, economic considerations would dictate a sequence of incremental expenditures. If too many areas aredeveloped relative to capacity, additional investment costs would beincurred early in the operation which have no immediate payback. Inaddition, overall costs would be increased as a result of keepingdeveloped areas not currently in operation in safe and productivecondition. Thus it is better to sequence mine development so thatsome areas are developed as others are exhausted, to lower overheadand defer incremental expansion costs until conditions warrant them.
Extraction
Taxation of Mineral Resources22
24
tracted and processed this month?14 Such a procedure does not'liminate risks, but it allows incorporation of new information and
I • valuation of options based on previous results.Since not all decisions are made and reevaluated at once, simpIi
nations or rules of thumb have to be used. These simplificationsvary from one decision to another. They relate to (1) length of theI lanning horizon; (2) areas of the mine under consideration; and (3)lIverages (of various magnitudes) of such variables as costs, daysw rked, and tonnages of ore processed. IS For instance, explorationdoes not provide complete information about the nature of reserves.I rojections must be made, based on samples and past experience.
• he investment decision is made on the basis of these estimates andannual averages of prices and costs. At the current extraction stage,urrently developed areas are the only consideration and the
planning period may be less than a year.This segmentation of the process results in a hierarchical decision
structure which allows for revisions as time proceeds. This procedurealso enables variables which must be determined at one level to betreated as exogenous at another. For example, exploration providesreserve estimates which are used in the investment decision. Theinvestment determines the technology and capacity, which in turn aretreated as given when extraction plans are made. Further, information acquired at one level can be used in the reevaluation of plans atother levels. For example, information gained from current extraction, such as profits and revised ore estimates, is used in evaluatingpossible changes in capacity and modifications to development andfuture exploration activity.
One consequence of this decision structure is that uncertainty isreduced at lower levels. At the current extraction level, the managercares only about short-term variations in prices and costs. Prices tenyears from now are of no concern. The areas of possible extractionhave been developed and the properties of the ore are known.Finally, capacity is in place and there is a history of operations to aidin reevaluation. The initial investment decision, in contrast, must bemade without the benefit of this information. Prices and costs mustbe projected far into the future so that annual averages must be usedto make any projections at all. The structure of the ore body is anestimate and the technological implications of alternative investmentstrategies are unknown. 16
A further consideration of practical importance is that modifica-
Taxation of Mineral Resources
and variable costs. The only variables which can be controlled at thislevel are the quantity of ore processed, and its quality. The cash flowgener~ted fro~ current operations is used to repay debt, pay returnsto eqUIty, begm operations and exploration activities in other minesor reinvest in the current operation. •
Although the firm is constrained by all its previous decisions theextraction process is still dynamic in nature. Production schedulesmust be established for a six-to-twelve-month period and must ber:e.valuated in light of new developments and changing market condItIons.
The Effects of Uncertainty
Uncertainty in mining operations arises from three sources. First, thetonnage and quality of a deposit are not known with certainty. Untilhafts are developed (or overburden removed) the exact delineationf ~.articular areas is uncertain. In addition, the tonnage and qualityf fmal output may not be known until the ore is extracted and pro-
ce ed. Second, the future economic conditions (in particular, pricesand costs) a~e unknown and cannot be perfectly predicted. Third,there are socIal and political uncertainties which may be beyond thecontrol of the operator. Governments can change tax and environmental policies at some future date, thereby affecting the profitability of the operation. 13
These risks are compounded by the time lag between explorationand .extracti~n, and by the costs of obtaining and processing informa~lOn. An m:estment decision made today will not generate salesuntIl three to fIve years hence. This means that funds must be committed for a substantial period of time before any profits are forthcom~ng. Further~ore, if an attempt were made to account for everypossIble eventualIty, the firm would spend too much money and timeto warrant an investment. Therefore, trade-offs must be madebetween accuracy of prediction and the risks assumed by the operators.
The mining process follows a logical sequence from explorationto exploitation and thus it is natural to segment the decisions according to each phase. This segmentation allows each decision to be considered separately; for example, should there be more exploration'how much development is warranted; and how much ore should b;
Mining Decisions 25
Effect of Risk: An Example
tions to long-run decisions take time and incur adjustment costs. Forinstance, if prices are higher than expected, a larger capacity andmore development may be needed to exploit this trend. But aninstantaneous adjustment is not possible and there is always the riskthat, by the time any change has been effected, the interim evolutionof events will have rendered it unprofitable.
For an illustration of how uncertainty can affect the decisions madein mining operations, consider the hypothetical tin deposit describedin table 2-1. The price of tin for 1960-1972 is also reported in thetable. If the operator knows all geological and economic factors withcertainty, the only problem is to choose an investment which willyield the greatest present value to the firm. Such an investment andthe corresponding optimal extraction profile are reported in table2-2. The calculations are based on an investment cost of $200 million, extraction cost of $10 per ton of ore, a capacity of 2 milliontons of ore per year, and a lO-percent discount rate.
Two properties of this plan should be noted. First, the orderingof the grade selection profile corresponds to the ranking of discounted prices (see column 3 of table 2-1). The best two grades ofore are extracted in 1965 when the price discounted at 10 percent isthe highest. The reason for this behavior is that more metal per ton isobtained from high-grade ore than from low-grade ore and thus current revenues are always maximized by extracting the best ores.However, the best grades of ore are in limited supply and so shouldbe extracted when their contribution to profitability is the greatest;that is, in the periods with the highest discounted prices. 17
Second, the mine closes in 1971 even though there are 16 milliontons of reserves left in the deposit, because the remaining reservescannot be profitably extracted; that is, they are below the cutoffgrade. For instance, if the 25-percent ore were extracted in 1972, a$2.25 million loss would result. Therefore, even in the absence ofuncertainty, it may be optimal from the operator's perspective toleave some ore behind. 18
When uncertainty is incorporated into the decision structure theplanned operation may change substantially. For simplicity, it will beassumed that the characteristics of the reserves are known, so that
27
uncertainty arises only because of lack of information about futureprices and costs. One procedure commonly used to project prices andcosts is extrapolation along a linear trend. 19 Suppose that an economic analysis of historical data reveals that pri~~s and costs r~se at a5-percent annual rate. This means that the deCISion maker will take$101.40 per ton and $10 per ton of ore as base-period prices andincrease each by 5 percent a year through the planning period.
Mining Decisions
Table 2-1Annual Price of Tin (1960-1972): Hypothetical Tin Deposit
Annual Price of Tin
Price Ranking of
Year Price (qflb) Discounted @ /0% Discounted Prices
1960 101.40 92.18 4
1961 113.27 93.61 3
1962 114.61 86.11 5
1963 116.64 79.67 7
1964 157.72 97.93 2
.1965 178.17 100.57 I
1966 164.02 84.17 6
1967 153.40 71.56 8
1968 148.11 62.81 10
1969 164.43 63.39 9
1970 174.13 61.03 II
1971 174.36 55.56 12
1972 177.47 51.41 13
Hypothetical Tin Deposit
Grade Tons Grade Tons
(%) (millions) (%) (millions)
2.80 I 0.70 2
2.60 I 0.65 2
2.40 I 0.60 2
2.20 I 0.50 2
2.00 I 0.40 4
1.60 I 0.30 4
1.20 I 0.25 8
0.80 I 0.20 8
Source: American Metal Market (1978), p. 243.
Taxation of Mineral Resources26
Table 2-2Optimal Extraction Profile for Tin Deposit
28 Taxation of Mineral ResourcesMining Decisions
Table 2-3Extraction Profile Using Average-Grade Rule
29
Undiscounted payback period: 5.35 years. Present value using Hoskold meth~d: 36.15(calculated using average annual earn,ings, an 8-percent safe rate, and a 15-percent risk rate).
A verage Grade UndiscountedYear Extracted Profit
1959 -200.00
1960 1.28 33.50
1961 1.28 35.17
1962 1.28 36.93
1963 1.28 38.77
1964 1.28 40.71
1965 1.28 42.75
1966 1.28 44.89
1967 1.28 47.13
A verage Grade Undiscounted DiscountedYear Extracted (%) Profit (million $) Profit (million $)1959
-200.00 -200.001960 1.00 20.56 18.691961 1.80 61.55 50.871962 0.70 12.09 9.081963 0.60 7.99 5.461964 2.30 125.10 77.681965 2.70 172.42 97.331966 0.65 22.65 11.621967 0.50 10.68 4.981968 0.40 3.70 1.571969 0.40 6.31 2.431970 0.30 0.90 0.311971 0.30 0.92 0.29
Total244.87 80.31
Totals 119.85
DiscountedProfit
200.00
29.13
26.59
24.28
22.17
20.24
18.48
16.87
15.41
- 26.83
ource: Conrad (I978b)Marginal cost: $lOlton.
apacity: 2 million tons/year.Discount rate: 10010.Investment cost: $200 million.
Another method used to account for uncertainty is to increasethe discount rate. 20 In the present example a IS-percent discount ratewill be used, representing a 50-percent premium over the rate in theabsence of uncertainty. Finally, operators often assume that theaverage grade of ore will be extracted in each year. Since prices arenot known, an optimal grade-selection profile cannot be determined.The average-grade rule is used to simplify the calculations and tolower the range of possible extraction profiles, in order to keep downcomputational costs. When a detailed plan is made, the firm mayalter this assumption.
The net effect of these three adjustments is to lower the presentvalue of the investment. This is clear from an examination of table2-3, where the present value is negative. Note also that the plannedmine life has been reduced to eight years. This is a consequence ofthe method used to project and discount prices and costs. In effect,the cutoff grade is the one which would be calculated using the base-
year price and cost estimates, thereby forcing more ore into the submarginal category.
The higher discount rate further reduces the present. value offuture earnings from the planned extraction. Although undisc.ountedannual profits consistently rise (because of the m~thod of. pnce andcost extrapolation), their present value constantly f~lls. Fmally, theaverage-grade extraction rule further reduces the .estlIDate ~f presentvalue because it does not allow the matching of hIgher quahty of orewith higher discounted price. (In the present example, the best oreshould be extracted in 1965.)
The fact that this scale of operation produces a loss does notnecessarily mean that the mine will not open. There may be anotherplant size which can generate a positive. present .value. Such a pla?tsize and corresponding optimal extractIOn profile. are presented mtable 2-4. Note that a lower capacity generates a hIgher cost per ~on
of ore extracted. This means that less ore is planned for .extr.actIOnbut its average grade is higher (that is, the cutoff grade ~s hIgher).Note also that the planned life of the mine is longer than WIth a .largeinvestment, because capacity is smaller relative to econo~llcaIlY
recoverable reserves. The mine manager may furtht:r restnct thedecision by arbitrarily imposing a fixed planning horizon. 21
Undiscounted payback period: 4.97 years. Present value using Hoskold method: 1.17.
These examples highlight several basic points about the effects ofuncertainty on the operations of the mine. First, investment andextraction are not all-or-nothing decisions. The optimality of plantsize is relative to given economic and geological conditions. In general, uncertainty reduces the amount the firm will be willing to investat the beginning of the operation. This results in higher extractioncosts, lower total recovery and, in most cases, a shorter planned life.
Second, the acquisition of information over time may suggest asubsequent reevaluation of the plan. The examples cited are limitedto what the firm initially plans to extract. Even with a given investment it is possible that the actual behavior of the firm will be significantly different once new information is available. If prices rise (fall)relative to costs, more (less) ore may be recovered and the life of themine may be longer (shorter) than anticipated. However, the firmmust bear the costs of its past decisions in making these adjustments.This by no means implies that the operator's behavior is not systematic. Rather, uncertainty complicates the interpretation of economicbehavior.
Table 2-4Optimal Extraction Profile with Lower Capacity
31Mining Decisions
Summary
The preceding description of the mining-decision process wasintended to highlight the economic artd geological variables whichinfluence the behavior of a mine operator. An understanding of thisdecision structure is important in determining the effects of publicpolicy, particularly taxation, on the overall development of the mining sector in a particular state. At different stages of the mining cyclethe firm is operating on different cost curves and using differentassumptions to make decisions. Therefore, a tax imposed on a minethat is fully developed may have different effects than the same taxon a mine which has yet to be completed. Also a tax may have noeffect on the extraction profile once the investment is made, yetmight change the future development of the mine.
A second important aspect of this decision structure is the jointinfluence of geology and economics. Each mine is unique and, evenif economic conditions are the same for all, decisions will typicallyvary across mines. Accordingly, a public-policy initiative, such as atax, may produce different responses. Geological factors cannot beoverlooked.
Finally, it should be emphasized that the decision structure usedin mining is not peculiar to this industry. All economic agents mustconfront uncertainty and limited computational capacity, and this isreflected in planning structures. 22 Individuals plan for retirement andplan next month's budget. The decisions are clearly interrelated butthey are not made simultaneously. There are also analogs to theexploration and the long lead times necessary to obtain a positivereturn that characterize mining. For instance, the drug industryspends large sums on research (exploration) for new drugs, much ofwhich is spent on abandoned projects (dry holes). This research isconducted with the knowledge that a competitor may make the discovery first and control the market (if a cure is not found in theinterim which makes the drug obsolete). Finally, the time from initialdiscovery to positive cash flow is on average quite similar to leadtimes in mining. So while risks exist at all levels of the mining problem, they must be taken in context and evaluated relative to risksinherent in other economic activity before appropriate policy can beformulated.
-25.00
3.96
3.62
3.30
3.02
2.75
2.51
2.30
2.10
I.91
1.75
2.22
DiscountedProfit
-25.00
4.56
4.78
5.02
5.28
5.54
5.82
6.11
6.41
6.73
7.07
32.32
UndiscountedProfit
Taxation of Mineral Resources
2.4
2.4
2.4
2.4
2.4
2.4
2.4
2.4
2.4
2.4
A verage GradeExtracted (%)
30
Year
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
Totals
32 Taxation of Mineral Resources Mining Decisions 33
Notes
1. This section is only an introduction to the complexities of themining process. For a more complete description see McKinstry(1948), Truscott (1962), Pfluder (1968), Just (1976), and Thomas(1973).
2. See Thomas (1973) and Allais (1957) for details.3. Byrne and Sparvero (1969) and Maximov et al. (1973)
describe such processes.4. See Preston (1960) and Patterson (1959) for a complete
description.5. The determination of where to drill may be based on mathe
matical methods, such as those described by Agterberg and Kelly(1971). For a description of diamond drilling see Koch and Link(1971).
6. Thomas (1973).7. See Patterson (1959) for a description of this.8. Hazen (1967), Koch (1971), and Link et al. (1971) describe
such factors.9. See Cooper, Davidson, and Reim (1973) for a discussion of
the trade-offs between accuracy and cost.10. Details of this process are found in Lewis and Bhappu
(1975), Beasley, Tatum, and Laurence (1974), Bennett et al. (1970),Gentry (1971), Gentry and O'Neill (1974), and Halls, Bellum, andLewis (1969). The industry traditionally employed the Hoskoldformula, Hoskold (1877), or a variant of it at this level.
11. Ibid.12. For an analysis of the financial considerations see Lindley et
al. (1976), Frohling and McGeorge (1975), and Frohling (1970).13. Brown (1970) describes the nature of such risks.14. The economics underlying this model are developed in Con
rad (1978a) and Conrad and Hool (1979a).15. ee Roff and Franklin (1964) and MacKenzie et al. (1974)
f r alt rnative descriptions.16. c Harris (1970) and Bennett et al. (1970) for a detailed
d s 'ripl i n of the use of this type of data.17. . onrad and Hool (19790) for a proof. For a mining
en in r's p r pective on the grade-selection problem, see Walduck(1976) lind Thomas (1976).
18. Cutoff grades are generally more complicated, but thismodel is a standard rule of thumb; see Lane (1964).
19. See Conrad (1978b) and references cited therein.20. See Thomas (1973) for a discussion.21. U. Peterson has noted this to the authors.22. See Cigno and Hool (1980) for a discussion of this.
Extraction
The following notation will be used to facilitate the analysis. In theabsence of taxes, discounted profit in any period is given by
Effects of MineralTaxation3
35
III = discounted profit in period t
PI = price of output in period t
XI = ore extracted in period t
C/ (XI) = total cost of extraction and processing in period t (afunction of ore and not of output)
Tn this chapter we investigate the effects of the various types of taxescommonly employed in the United States.1 The analysis begins with aconsideration of the effects of each individual tax on the firm'sbehavior. Numerical examples are then developed to demonstratehow the impact of a given tax may differ across mines. Finally, thetaxes are considered in combination to exhibit the possibility of reinforcing or offsetting effects. This integration is essential in view ofthe fact that most states do impose a variety of taxes on the miningindustry.
As described in the previous chapter, the overall planning problem for a mining operation is segmented in a hierarchical fashion.However, the objective of each segment is the same: to maximize thepresent value of extracting and processing ore. Since the majorconcern of tax policy has been the induced extraction distortions, it isappropriate to begin by analyzing the extraction decision.
where
36 Taxation of Mineral Resources Effects of Mineral Taxation 37
(l + r)'
at = average gr~de of ore extracted in period t, measured relatIve to the standard quality of metaloutput (concentrate)
r = discount rate
Total output sold is defined as at X;. This formulation allows forthe effect of grade variation on total production. Note also that totalcost is a fun;tion of the total tonnage of ore processed, independentof the grade. The cutoff grade is calculated as
* Mela =--Pt
where a * = cutoff grade
MCI = marginal cost of extraction
Ores whose average quality is below the cutoff grade will not beextracted since this would result in a reduction in profit; that is,
ifa<a*
We now consider in turn the effects of the various mining taxes.
Severance Taxes
Seve~ance taxes are generally of three types: a fixed payment, innommal terms, per ton of final output; a fixed payment, in nominalterms, per ton of ore extracted; and a proportion of the sales price ortotal revenue. Twenty-nine states currently employ some form ofseverance tax..As noted in chapter 1, this popularity has resultedfro~ the relatIve ease of administration and collection,3 and thebehef t.hat such taxes can be used to collect rents that accrue fromextractmg a nonrenewable resource.4
. After-tax discounted profit for a firm which pays a severance taxImposed per ton of output is
~ (PI - T) [XIXI - C I (Xl)III
(l + r) I
where T = severance tax in dollars per ton of output. If a fixedpayment per ton of ore extracted (that is, at the mouth of the mine) isimposed, after-tax discounted profit is
PI a t XI - C I (XI) - 'YXIIl = ----'-----'------'---=---..:....--=----=-------'-
I (l + rrwhere 'Y = severance tax in dollars per ton of ore. Finally, an advalorem tax on total revenue results in discounted after-tax profit
where (3 « 1) = proportion of revenue collected as tax.The fixed fee per ton of output is seen to decrease the expected
price in each period by the same dollar amount, T. Since the tax isfixed in nominal terms, the present value of the tax decreasesthrough time; that is,
T T T---> >----(1 + r)I+1 (l + rr+ 2' ... ,
This means that the operator has an incentive to reallocate extractionfrom the present to the future. (Some states, such as North Dakota,have attempted to offset this effect by allowing the rate of tax toincrease with inflation. This type of tax is discussed below.) Forinstance, a firm which produces the same tonnage of output over thelife of the mine before and after the imposition of the tax will have topay the same amount of tax in nominal terms regardless of when it isextracted. However, the longer the firm can defer extraction, thelower the tax payments will be in real (present value) terms, andconsequently the higher the after-tax discounted profit. S
This type of tax may also affect the ordering of grade selection ifdiscounted prices are expected to rise. Recall that chapter 2 showedthat the firm will extract the best grade of ore when the expecteddiscounted price is greatest. A severance tax on output effectivelyreduces the price received by the firm by the same nominal amount ineach period. Therefore, if the price is expected to rise, such a tax mayalter the period with the highest effective (net-of-tax) discountedprice; that is, it may well be the case that
This will occur if (and only if)
(1 + r)Pt - Pt+17>----'------'---------..:....:-...:...
r
A fixed fee per ton of ore extracted will similarly induce a reallocation of ore extraction from the present to the future, but will haveno potential effect on the grade-selection profile. Such a tax increases the cost of extraction and processing by a constant amountinstead of lowering the price received per ton; that is, it is a tax o~both valuable content and waste. If the raw ore were not processed,the effects of a $10 per ton tax on output would be identical to a $10per ton tax imposed at the mouth of the mine. However, mostminerals, even coal, when extracted are used as inputs into a processing plant at or near the mine site where the valuable material is separated from waste products. Therefore, the lower the proportion ofraw ore sold after processing, the greater the impact of a tax imposedat the mouth of the mine. Suppose, for example, that it takes twotons of raw ore to produce one ton of concentrate. Suppose also thata state is considering a tax of $10 per ton to be imposed either at themouth of the mine or on output of concentrate. If the tax is imposedon concentrate, then for every ton of raw ore extracted the firm mustpay $5. If the tax is imposed on ore, the firm must pay $10.
The effect of an ad valorem output tax is different again fromthose of the other two output taxes. This tax reduces the discountedprice received in each period by the same proportion. It will, there~
fore, have no effect on the grade-selection decision since the rankingof discounted prices is unaffected. However, this tax may alter theextraction profile. A proportional tax on revenue will collect a highertax per unit the higher the price. This means that the firm can lower
39
for the ad valorem output tax
for the fixed-fee tax on ore
for the fixed-fee tax on concentrate
MCt + 'Ya* = --'---
PI
MC ta* = ---'--(1 - (3)~
a* = MCt
P t - T
Effects of Mineral Taxation
Variable per unit severance taxes have been introduced in somestates, examples being North Dakota and Minnesota. The usualjustification for such taxes is that, because of inflation, revenuesfrom fixed-rate output taxes do not keep up with the real costs ofgovernment services. The tax is therefore linked to some price indexin order to compensate for such losses. There are two problems with
An increase in the cutoff grade means that marginal ores will now beleft in the ground. The total tonnage of economically recoverablereserves is therefore reduced. This phenomenon is known as "taxinduced high-grading" and has been noted extensively in the naturalresources literature.6
Since each of these taxes is collected regardless of a mine's profit-ability, the downside risk associated with mining is increased. Giventhe risk-averse behavior of most mining operations, an increase inrisk will generally shorten the life of the mine because of lowerinvestments and high-grading.
A Note on Variable Severance Taxes
its tax payments on the same tonnage of output by extracting less orein periods of higher discounted prices and more ore in periods oflower prices. If discounted prices are expected to fall through time,the firm would reallocate extraction from the present to the future asin the per unit case. If discounted prices are expected to be the same,no distortion occurs, while if discounted prices are expected to rise,the firm will extract more ore early and less in later periods.
Each of these three output taxes creates the further distortion ofincreasing the cutoff grade; that is,
Taxation of Mineral Resources
~ - 7 > Pt+l- 7
(1 + r)1 (1 + r)t+1
P t P t + 1--->----(1 + r)t (1 + rr+ 1
38
but, with the tax,
(1 + rr
Property Taxes
41Effects of Mineral Taxation
ever, such a value is impossible to estimate, and state and localpractices vary. We therefore leave this as a general function.)
Note that the assessed value is directly negatively related toprevious extraction. This means that once the ore is extracted andsold the tax base, and therefore tax payments, are permanentlyreduced. This gives the firm an incentive to increase extraction inearly periods and decrease extraction in later periods. In effect, thetax serves as a subsidy to rapid extraction because each ton of oreextracted increases after-tax present value by the tax rate times thepresent value of the taxes that would have to be paid if the extractionwere delayed.
This type of tax may also increase mine recovery by lowering thecutoff grade. If a tax must be paid on ores remaining in the ground,it may be cheaper for the firm to extract and process low-grade orethan to pay the tax indefinitely.s In the long run, when capacity isvariable, lower investment as a result of taxation may lead to anincrease in the cutoff grade.
The effects of the tax are complicated by the inability to accurately assess the property. An ideal property-tax base would be thenet present value of the deposit. But such a base is impossible todetermine since it depends on future prices and costs as well as thegeological structure, none of which is known with certainty. To dealwith this problem, states have resorted to arbitrary and sometimescomplicated methods to calculate the tax. For instance, the Wyoming tax base is 100 percent of gross proceeds at the mine. This tax is,in effect, an ad valorem output tax and has no relationship to thetraditional concept of property taxation. Utah bases assessments on30 percent of capitalized net income for the previous five years. Thistax has the opposite effect to the property tax, because the higher thehistorical profits, the larger the tax. In addition to the obviousproblem of using historical values to project future profitability,there is no clear relationship (and, if anything, a negative one)between historical extraction and the current mineral content of thedeposit. This problem is particularly acute in the later years ofoperation when marginal ores are being extracted. A tax based onhistorical profits will always overestimate the value of the mine inthis case. Finally, some states have replaced property taxes withseverance and net-proceeds taxes because of the difficulty of fairassessment.
40 Taxation of Mineral Resources
this p!ocedure. First, there is the choice of the price index with which~o adjust the tax rate. If the index is a function of the price, the taxI~creases regardless of costs. Consequently, firms may have to payhIghe: taxes e:en though profits are falling. If the index is not relatedto pnce (as m North Dakota and New Mexico), the problem isfurther compounded because a change in the index is only remotelyr~lated. to the cost an~ price structure of anyone mine. Such indexatIOn ~Ill therefore remforce the distortionary effects noted above'that IS, cu~off grades will rise, extraction will be reallocated andrecovery wIll be reduced. '
Ad valorem pr~p.erty taxation is the oldest form of taxation used bytatc and localItIes for collecting revenue 7 The tax b' 11dr' ase IS usua yC In d a th.e market value of reserves. This market value dependsn the quantl.ty of reserves remaining in the deposit and the averagerade at the tIme ?f assessment. The tax paid is a proportion of thIs
value. After-tax dIscounted profit is then
where u = millage rate
at X t = output equivalent of ore remaining in thedeposit in period t
liR = output equivalent of total ore reserves beforeextraction began
~t-I
~j=o aj~ = cumulative output of extraction to date
FO = assessment function
(Theoretically, F(·) is the present value of remaining reserves. How-
Proportional Profits Taxes and DepletionAllowances
where k = profits tax rate
d = cost depletion allowance (in dollars per ton of output)
Il = P t CitXt - Ct(Xt) - k{PICi I XI - Ct(X) - dCitXt }
I (1 + rr
43
- Ct(X)]kh(1 - k)[(l + 1 _ k'Pt Cit
=---_-----::=-----:.:....-:------(l + r) t
Effects of Mineral Taxation
where h = deduction allowance as a proportion (0 :;; h :;; 1) ofrevenue.
When profits are positive, this allowance increases the after-~ax
price of output by a fraction kh/(l - k) and is, in effect, a negatIvead valorem output tax; that is, a subsidy for extraction. (The totaldeduction is usually limited to some proportion of profits. If thatlimit is reached consistently, no distortion will occur.) Therefore, theeffects of the allowance are the opposite of those discussed withrespect to ad valorem output taxes. In addition. to the~e .effects, itshould be noted that in most cases this allowance IS not lImIted to thetotal costs of the mine. This means that it is entirely possible for thesum of the deductions taken through time to exceed the costs ofacquisition and development. Most of the debate over percentagedepletion has been in the context of oil and gas. However, the sameanalysis applies for nonfuels.10
Progressive Profits Taxes
Renewed interest in progressive profits taxes has occurred for at leastthree reasons. First, governments have sought a means to increasetheir share of profits in good years (perceived windfalls) withoutimposing ex~essive taxation in lean years. Second, governments havebeen concerned about equity issues, particularly with respect to smallmarginal operations. In effect, the ability-to-pay principle has been
from the future to the present, cutoff grades will be lower andrecovery higher than would be the case without the allowance.
Percentage depletion allows a fixed proportion of currentrevenue to be deducted to compensate for exhaustion. After-tax discounted profit in this case is
Pt Cit X t - Ct(X1
) -k[Pt CitXt ~ Ct(X) - hPt CitXt]
Il t = (1 + rr
Taxation of Mineral Resources42
kd(1 - k)([~ +1----=7() Cit X t - c: (X; )]
=(l + r)t
It has been well established that a pure proportional profits tax doesnot affect the behavior of the mine once an investment is made. Inaddition, it does not affect the downside risks because taxes are paidonly when profits are positive. However, the profits taxes employedby the federal government and the various states are not pure profitstaxes, because of the various deductions which are available to thecorporate sector in general and the mining sector in particular.
The most common deduction available to the mining industry isthe depletion allowance. There are two types of allowance currentlyused by various states: cost and percentage depletion.9 Cost depletion is a fixed nominal allowance per ton of ore extracted. Theamount of the deduction is based on estimates of the costs (orpresent value) of the mineral property and estimates of the recoverable tonnage of ore. In effect, the allowance attempts to allow adeduction for the reduction in reserves on a unit of production basis.After-tax discounted profit with cost depletion is
As shown, the effect of the depletion allowance is to raise the net-oftax price received per ton by kd/(l - k), when profits are positive. Ittherefore acts as a negative severance tax (an implicit subsidy) perton of extraction and its effects are accordingly the exact opposite ofthose of the per unit output taxes. (It should be noted that any formof expensing that is deducted on a unit-of-production basis will havethis effect. For example, for federal taxes development expendituresmay be deducted in this manner.) Extraction tends to be reallocated
Some Numerical D1ustrations
To illustrate how geological and economic factors combine to determine the tax response of a particular mine, two hypothetical mineral
45
Minimum of average cost curve: $90@ 450 tons oreMarginal cost: .2X,
Minimum of average cost curve:$51.38.@·256.90 tons ore
Marginal cost: .2X,
Effects of Mineral Taxation
Grade tonnage4070 450 tons ore (18 tons output)2070 550 tons ore (II tons output)1070 1,000 tons ore (10 tons output)
Total cost = $20,250 + .IX,2
B. Alternative price profiles to be used in calculations1. P, = $5,OOO!ton output every year2. P z = P 3. = $5,250!ton output
P, = $5,OOO/ton output all other years
Mine II
A. Description of mines to be used in calculationsMine I
Grade: 2070Tonnage: 1,000 tons ore (20 tons output)
Total cost = $6,600 + .IX, Z
Table 3-1Hypothetical Mines and Price Profiles
deposits are considered. 14 The essential characteristics of eachdeposit are detailed in table 3-1. Mine I is composed of a homogeneous ore body, while mine II has three distinct grades with tonnages varying by grade. The marginal costs per ton of ore extractedare the same for each mine, but the fixed costs (and thus the averagecosts) of extraction and processing are different. Such differencesmay be due to different techniques or different geological structures.Two alternative price profiles are also noted in table 3-1. Calculations will be made for the two different price profiles to show howalternative economic conditions can affect the outcome qualitativelyas well as quantitatively.
The optimal extraction profiles for mines I and II under bothprice profiles (and in the absence of any taxes) .are reported i~ tabl~s3-2 and 3-3, respectively. As shown, the optimal hfe of mme I IS
three years with either profile. Extraction steadily declines whenprices are coustant in nominal terms, while extraction is highest. inthe second year when nominal prices increase in the second and thudyears. The optimal life of mine II is only two years with either pricesequence and none of the 1 percent ore is ever extracted or processe.d(that is, it is below the cutoff grade). The best grade of ore ~s
extracted and exhausted in the first year!S The 2-percent ore IS
extracted in both years and exhausted. Note that, when the nominalprice is increased, extraction of the 2-percent ore is reduced in the
Taxation of Mineral Resources44
PI (XI XI - CI(XI) - T(P, (XIX, - C,(X»
(1 + ry
used to argue that large, more efficient firms should be made to beara larger proportion of the tax burden: 1 Third, there has been asearch for alternative taxes which do not have the distortionaryeffects or large administrative costs of other types of tax which havebeen in use (particularly ad valorem property taxes). The recent Wisconsin net-proceeds tax is a case in point.
After-tax discounted profit in any period with a progressiveprofits tax is defined as
where T(·) = profits taxes paid in period t, a function of the level ofprofits, with r > 0, T8 > O. This form of the profits-tax functionshows that taxes paid by the firm increase with profits at an increasing rate. In effect, the firm chooses its own marginal tax rate in eachperiod.
The effects of this type of tax depend on the firm's expectationsregarding the time paths of discounted prices and costs. In general,the tax will induce the firm to shift output (and therefore profits)from periods with higher tax rates to those with lower rates. Thereare several ways of accomplishing such a transfer. Extraction can belowered in periods with high expected profits and increased in otherperiods; the average grade of ore extracted can be increased ordecreased; or the firm can change both extraction and grade toreduce taxable profits in some periods. 12
Regardless of the method employed, it is important to emphasizethe distortionary incentives that are present in such a system. It isunlike a proportional profits tax in that the firm, by choosing thequantity-quality mix, can change its marginal tax rate in each periodand thus the total taxes that it will pay. The exact magnitude of thedistortion will vary according to the specific design of the tax, butthis incentive will always exist! 3
~ (j)
Tab
le3
-2
Opt
imal
Ext
ract
ion
Pro
file
sfo
rM
ine
Iun
der
Var
ious
Pri
ceP
rofi
les
Opt
imal
extr
acti
onpr
ofil
ew
hen
curr
entp
rice
is$5
,000
Iton
each
year
Out
put(
met
al)
Und
isco
unte
dP
rofi
tD
isco
unte
dP
rofi
t
Out
put(
met
al)
Und
isco
unte
dP
rofi
tD
isco
unte
dP
rofi
t
~ X s:u - o :::J o - ::D (1) en o c d (1) en3: :::J
(1) W
15,6
39.0
9
16,0
19.6
8
13,9
83.4
6
45,6
42.2
3
15,6
39.0
9
17,6
21.6
5
16,9
19.9
9
50,1
80.9
3
6.98
16,1
18.0
96.
6815
,639
.09
6.34
15,0
59.1
5
20.0
046
,816
.93
6.68
6.84
6.48
20.0
0
16,1
18.0
9
14,2
17.3
5
12,4
45.5
8
42,7
81.0
2
Opt
imal
extr
acti
onpr
ofil
ew
hen
curr
entp
rice
sar
e:PI
=5,
000,
P2
=P
3=
$5,2
50
Year
Ext
ract
ion
(ore
)
I34
8.94
233
3.84
331
7.22
Tot
als
1,00
0.00
---
Year
Ext
ract
ion
(ore
)
I33
3.84
234
2.22
332
3.94
Tot
als
1,00
0.00
Tab
le3
-3O
ptim
alE
xtra
ctio
nP
rofi
les
for
Min
eII
unde
rV
ario
usP
rice
Pro
file
s
Opt
imal
extr
acti
onpr
ofil
ew
hen
curr
entp
rice
is$5
,000
Iton
inea
chpe
riod
Year
Ext
ract
ion
(ore
)A
vera
geG
rade
Out
put(
met
al)
Und
isco
unte
dP
rofi
tD
isco
unte
dP
rofi
t
150
0.00
.038
19.0
049
,750
.00
49,7
50.0
0
250
0.00
.020
10.0
04,
750.
004,
318.
18
Tot
als
1,00
0.00
29.0
054
,500
.00
54,0
68.1
8
in - -(1) (') -en o - 3: :::J
(1) W -I s:u X s:u - o :::J
Opt
imal
extr
acti
onpr
ofil
ew
hen
curr
entp
rice
sar
e:P
I=
$5,0
00,
P2
=P
3=
$5,2
50
Year
Ext
ract
ion
(ore
)A
vera
geG
rade
Out
put(
met
al)
Un
disc
ount
edP
rofi
tD
isco
unte
dP
rofi
t
148
8.10
.038
418
.762
49,7
35.8
449
,735
.84
251
1.90
.020
10.2
387,
295.
346,
632.
13
Tot
als
1,00
0.00
29.0
0057
,031
.18
56,3
67.9
7
~ -...J
48 tl f Min ral Resources Effects of Mineral Taxation 49x n
first year and increased in the second. This increases the average~ ~ ~grade of ore extracted in the first year but decreases total output in
E-..;; '" E-..;;",8 8 ~ N s:: E-..;; '" 8 a- - :28 00 r-- V) 0
~'" ~'" o 0~'" - 00 IC r-: '" ;:sIC 0
'" ;:s g 0\ 0\that year.
'" ;:s v\ 00 .0 \Ci V) - s:: .n .n 0 0 ;:;:: _ s::00- s:: s:: '" o V) V) s:: '" o - -s:: '" r-1000\1l('') a-
~ 0 ;:s .. N - r-- -;:s .. t"('r'IO'\\O r--. ;:s .. <"l N 00 .....The taxes considered are three forms of output taxes: a 10-0'" ~C""'\N 0\ ... 0'" MMM 0\0'" N N ~_'" 00 <.>Cl:: .!:j Cl::
<.>Cl::.!:/ IIpercent ad valorem tax on output; a tax of $500 per ton of concen- .!:/
~ ~
~~trate produced; and a tax of $10 per ton of ore extracted. These
s::numbers are used for illustration only. However, the distortions ·9t:;will occur regardless of the size of the tax. The effects of each tax i§ ~~ i§~ <"l r-- 00 00on the extraction profile of mine I are reported in table 3-4. When Q:; -("f'10\r- 0 Q:; o a- r-- IC Q:; V) a- _
~Il(")r-~\O "<l: 00 "'" <"l ~ ~0\ § .,;to 0\ ~
~a-~ ~ ~ ~ g V)
~00 s::
00 N -nominal prices are $5,000 in each year the taxes have identical 0 N N r-- N '" - "'" V)~-...~t"l ~ s:: N r-- N N s:: s::~.. ~ :i ...0
s::N N-" ...0
~;:s;:s
~O\r-\O <"l ;:s<"l
effects, as shown in part A of the table. There are two reasons for8 <"l
~0 - - - <"l 8<.>
8 .~.~ .~this. One is that, when prices are $5,000 per ton, a lO-percent ad~ Ii: ~ ~ ~
~valorem tax collects $500 per ton from sales. Therefore, when -9 II
'" ~price do not change through time a per unit tax is equivalent to an ..
i§~ i§ :s i§'"
ad val rem lax.~ Q:; B- Q:;Q:; N ;:s <"l r-- r-- r--
Th econd reason for equivalence in this case is the uniform- ;;=; ~ ~ ~ "'" 0~ ~ ~ ~ ~
0 ~V) "'" "'" "<l:~ ~
..... ... ~ gi ~ ;:!i00 ~ 0\ 'Ci ... ~ v\ N 0 a- a-~ 00~ s:: 0
rad di lribution. Since the ore is 2 percent throughout the deposit, r- V) 0\ 00 ~ s::~ 8 ~ '" ;:s _ .. .-1.. ~ N
s::IC 0 N <"l "'". ;:s 00 0
~;:s c 0 ti :f ~ 0\ 0
~ :! ~if lak s fifty tons of ore to produce one ton of concentrate. Thus a ~ 8 ~:i~oO 00 ...., <.> ...., <.>
~ <"l "l .!:/ <"l "l .~.~
::i ~ ::i ~$10 tax per ton of ore is equivalent to a $500 tax per ton of output in <.>~
:§ :§~ :§ II IIthis a e. This remains true when prices vary through time. Thus part - . ~
.;s:: Q., Q., ...of table 3-4 shows again that the $500 per ton output tax and the .. .ll:!II II 0'" .......~ .;: .... .... e$10 per ton extraction tax are equivalent. However, a comparison = ;:s Q., Q.,
::::l- S::::l-~
~ ::::l-~ ~
~~ :2~
~ s::of the two per unit taxes with the ad valorem tax (part B of table 3-4) s::'" '" '" 8 fA
.....~ '" .§. N r-- 8 .§. 00 "'"
00Q .§. V) N <"l 8 § G 00 V) § V) 00 ""! ~shows that the output and ad valorem taxes are no longer equivalent. V) 00 "'" -0 -0 -0 0 :s -0 -0 IC 0 e-'" ... :s V) V) -<i -<i 0 :s N "t:l~ ~ N ::i N ::i B-When prices increase the ad valorem tax collects more revenue per t: B- B- elO:: ;:s ;:s'"Q ~
;:sII C) II C)ton than either of the per unit taxes, and the response of the firm is ... ~
C)Q.,- -==- 8 Q.,
~correspondingly different, as shown.
= s:: ~:§ '" 0.S -s:: -s:: .......Finally, each tax induces the firm to reduce extraction in the$ e- $ $
..... S~ ..... .....early periods and increase it in the later periods. Note that the life of e '" '" '" ~ 8~ .5- .5 ~ .5
Ii: V)the mine is increased by one year in the constant-price case, while ~ Ii: Ii: ~ 8 ~ V) r-- 00 8 fAriIil ~ N a- N r-- 8 IC <"l ::: ... - 0 r-: ~
...'" <"l "<l: V) ... s:: IC "!
~s::
~~= ~ s:: g 0
~~ .9 0 00
~.9 0\ N 00
more ore is extracted in year three when prices vary. This conserva-Q .9 r-- 0:: <"l ~ N
~ t:; N "'" N oJ~r-- N .ll:! t:; <"l <"l <"l <"l <"l <"l'" t:; N N N N
'§ ~ ~ ~ :::ltion effect is the best-known property of such taxes. However, it is~ ~ ~ - <ll
~...
~ >~ ...
~ ~ ~only valid when grades do not vary. CIS ~
s:: <f-~ s:: § .9 :2The effects of the three output taxes are quite different again - .9"11 t:;= t:;
~Q"~ ~
~~
when the grade varies within the deposit. The results for mine II are - ..= ~ ~ ...0 '"reported in table 3-5. Part A of the table shows the optimal extrac-
<; <; <;l(j~ ....
.§ .§ .§~
tion profile with the 10 percent ad valorem tax and the $500 per ton I Q
~l"l '" ~ ~ '"E-<output tax in the constant-price case, while part B reports the profile ~t; '" '" <ll ~<ll ... <ll ...,Q ~ ...
'" 0 '" 0 0which results from imposing the $10 per ton tax under the same price CIS;:: '" 0 I:ci ~ cj ~ E-< Z~~ ~ ~ ....... N f'f') v E-< - N <"l E-< - N <"l
(]l o
Tab
le3
-5E
ffec
tso
fO
utpu
tTax
eson
Ext
ract
ion
Pro
file
sof
Min
en
A.
10%
outp
utta
x:an
d$5
001t
onou
tput
tax
Yea
rE
xtra
ctio
n(o
re)
Ave
rage
Gra
deO
utpu
t(m
etal
)U
ndis
coun
ted
Pro
fit
Dis
coun
ted
Pro
fit
Dis
coun
ted
Tax
I45
0.0
418
.00
40,5
0040
,500
9,00
0.00
245
0.0
29.
000
04,
090.
91-i Q.
>T
otal
s90
027
.00
40,5
0040
,500
13,0
90.9
1X Q.
> ...B.
$10l
ton
ore:
cons
tant
pric
es0 ::J
Year
Ext
ract
ion
(ore
)A
vera
geG
rade
Out
put(
met
al)
Un
disc
ount
edP
rofi
tD
isco
unte
dP
rofi
tD
isco
unte
dT
ax0 -
145
0.0
418
.00
45,0
00.0
045
,000
.00
4,50
0.00
~2
450
.02
9.00
00
4,09
0.91
::J 0 .....T
otal
s90
027
.00
45,0
00.0
045
,000
.00
8,59
0.91
~
C.
10%
ou
tpu
ttax
:P
I=
$5,0
00an
dP
2=
P3=
$5,2
50::I
JCD (J
)Y
ear
Ext
ract
ion
(ore
)A
vera
geG
rade
Out
put(
met
al)
Und
isco
unte
dP
rofi
tD
isco
unte
dP
rofi
tD
isco
unte
dT
ax0 C .....
I45
0.00
.04
18.0
040
,500
.00
40,5
00.0
09,
000.
00() CD
247
2.50
.02
9.45
2,07
5.62
1,88
6.93
4,51
0.23
(J)
Tot
als
922.
5027
.45
42,5
75.6
242
,386
.93
13,5
10.2
3
D.
$500
lton
outp
ut:P
I=
$5,O
OO
andP
2=
P3=
$5,2
50
Yea
rE
xtra
ctio
n(o
re)
Ave
rage
Gra
deO
utpu
t(m
etal
)U
ndis
coun
ted
Pro
fit
Dis
coun
ted
Pro
fit
Dis
coun
ted
Tax
m - -I
450.
00.0
418
.00
40,5
00.0
040
,500
.00
9,00
0.00
CD ()
247
5.00
.02
9.50
2,31
2.50
2,10
2.27
4,31
8.18
... Ul
Tot
als
925.
0027
.50
42,8
12.5
042
,602
.27
13,3
18.1
80 -
E.$1
0lto
nor
e:P
I=
$5,0
00a
nd
P2
=P
3=
$5,2
50~ ::J
Year
Ext
ract
ion
(ore
)A
vera
geG
rade
Out
put(
met
al)
Und
isco
unte
dP
rofi
tD
isco
unte
dP
rofi
tD
isco
unte
dT
axCD ..... Q.>
I45
0.00
.04
18.0
045
,000
.00
45,0
00,()
()50
0.00
--t2
475.
00.0
29.
502,
312.
502,
102.
274,
318.
18Q.
> X Q.>
Tot
als
925.
0027
.50
47,2
32.5
047
,102
.27
4,81
8.18
... 0 ::J (]l .....
.
assumption. Note that the extraction profiles are identical in parts Aand B. Note also that extraction is reduced in both periods. The bestgrade of ore is extracted and exhausted in the first year while only450 tons of 2-percent are are extracted in the second year. Thisoccurs because the net-of-tax price received per ton of 2-percent oreis exactly equal to the cost of extraction and processing at theminimum of the average cost curve; that is, 2 percent is now thecutoff grade. This is confirmed by the fact that after-tax profit isequal to zero in the second year when only the 2-percent ore is beingextracted. The mine operator will be indifferent between extracting450 tons and extracting nothing at all. Any other tonnage wouldproduce a loss. If the tax had been higher, none of the 2-percent orewould have been extracted.
Although the extraction profiles are identical under either tax,the tax revenues to the government are lower when there is a $10 perton tax on extraction. This is because of the grade variation. Notethat $9,000 in tax revenue is generated in the first year when the tax isimposed on output, while only $4,500 is taken when the tax isimposed on extraction. When are is 4 percent, only twenty-five tonsof ore are necessary to produce one ton of concentrate. Therefore,an equivalent output tax on 4-percent ore would be $250. However,the tax revenues are equivalent when the 2-percent are is extracted.Again it takes fifty tons of 2-percent are to produce one ton of concentrate, so that a $10 per ton tax on ore is equivalent to a $500 perton tax on output. This demonstrates that a per unit tax on extraction imposes a smaller burden on high-grade than on low-grade ores.The lower the grade, the smaller the valuable content and thereforethe larger the tax in terms of its value.
Parts C, D, and E of table 3-5 show how the effects of the taxesvary when nominal prices are not constant through time. As shown,the ad valorem tax has a greater effect on the extraction profile thando the two per unit taxes. Again, when prices change, the dollarvalue of the tax paid changes, altering the effect on extraction. Theextraction profiles for the two types of output taxes are identical (thedistortionary effects of the taxes are the same), but the tax revenuesdiffer for the reasons cited above.
These examples, while hypothetical, highlight the important factthat economic and geological factors in conjunction determine theconsequences of any tax or set of taxes. In actual situations, theeffects of a tax across mines could range from little or no effect to a
complete closing of an operation, depending on the geological structure unique to each deposit and the general economic conditions.
kd X(1 - k)[(Pt +~) a,X, - C,(X,)] - Tat I
TI, = (1 + ry
53Effects of Mineral Taxation
(1 - k)[(Pt + ~d_-kT)at X, - C,(X,)]
(1 + ry
The depletion allowance increases the net-of-tax price while the p~runit tax decreases the net-of-tax price. This means that, used mcombination the allowance and the output tax tend to offset oneanother. If kd = T, then they exactly offset each other and no distortionary effect occurs, since the profits tax is neutr~l in the s~ort r~m.If a per unit tax were used with percentage depletlOn, the dlstortlOneffects would again be offsetting.
If the severance tax is allowed as a deduction for profits-tax purposes, then for a complete offset the unit tax would have to be equalto the allowance. For example, if the profits-tax rate were 50 percentand cost depletion $10 per ton, a $5 per ton output tax which is notdeductible and a $10 per ton output tax which is deductible wouldeach result in no distortionary effect in the short run. The analogousoffsetting would result with percentage depletion and an ad valoremseverance tax with the rates suitably chosen.
A combination of taxes often employed is an output tax and an
Integration of Taxes
Several states and localities impose more than one tax on the miningindustry. These taxes are used for a variety of purposes, and each taxhas its own set of distortionary effects. It is thus of interest to determine how these taxes in combination affect the firm's behavior.Consider first the effects of a profits tax with cost depletion combined with a per unit output tax. If the output tax is not deduc~ib~efrom income for profits-tax purposes, discounted after-tax profIt many period is
Taxation of Minerai Resources52
A Note on Taxation and the Concentrating Decision
ad valorem property tax. When the output tax is ad valorem, aftertax discounted profit is
The previous analysis has implicitly assumed that the quality of finaloutput is exogenously determined.'16 In practice, the level of processing is part of the decision structure and can be affected by taxation. The concentration (or processing) stage of a mining operationinvolves the separation of valuable material from waste. In general, a
55Effects of Mineral Taxation
trade-off must be made between increasing the quality of concentrateproduced and the total recovery of metal from the raw ore. Efficientoperations can usually increase the quality of concentrate only bydecreasing the amount of metal recovered.
Along with the geological and geochemical pr~perties o~ !hedeposit, economic variables play an important role In deterffilm~g
the trade-off between quantity and quality of output. The pncereceived is a function of the quality, while costs change with intensityof processing.I' A per unit output tax reduces the quality of concentrate while increasing quantity, whereas an ad valorem output taxhas the opposite effect. Finally, neither pure profits taxes nor perunit extraction taxes distort the concentrating decision.
These results are important because one of the goals of naturalresource policy has been to ensure maximum rec~very from thedeposit. Maximum recovery means not only extractIng the. gr~atestpossible tonnage of ore from the ground. If valua~le matenal IS u~
necessarily discarded at the processing level, maxl~um r~co.very ISnot being achieved. Care must therefore be taken In deslgmng taxpolicy so that losses are minimized at both the extraction and concen-trating h~vels.
Effects of Taxation on Investment andRelated Issues
whereNPV = net present value
I = size of initial investment
T II g- T
~ I ,
NPV= -1+ 1.J I1=0 (l + r)
A firm considering an investment in a mining opera~ion tr:at~ a~yform of taxation as a cost of doing business in a particular JUnsdlCtion. The taxes paid reduce the present value of cash flow and thusmake the investment less attractive. This means that, in addition tothe possible effects of a tax (or combination of taxes) on the extrac-tion profile, the tax will tend to decrease investmen~. .
To understand this process, consider the follOWIng expreSSIOn forthe net present value of a mineral investment
Taxation t Minerai Resources
(1 + r)t
PI exlXI - C,(XI ) - uF(aR - 1;1-1 ex.X.) - {3Pl ex I X,J~O J J
54
II,
If prices are not expected to rise at a rate greater than the rate ofinterest (as is usually assumed), the output tax tends to reduce extraction in early periods, which will tend to offset the tendency of theproperty tax to increase early extraction. There is no simple formulafor a combination which will produce no distortionary effects,because the base of the property tax is constantly changing. Acomplete offset in each period would require changing rates. Notethat if a per unit output tax were employed in combination with aproperty tax, there would be an offsetting tendency regardless of theexpected rate of increase in prices.
Another combination of taxes used is a profits tax with a form ofdepletion allowance and the ad valorem property tax. In this case,both the depletion allowance and the property tax tend to increaseextraction in early periods. They complement each other and thusinduce faster exhaustion than either tax individually.
In summary, the effects on extraction of taxes used in combination can be offsetting or reinforcing, depending on the nature oftheir respective distortions. This does not imply, however, thata government can select a set of taxes with offsetting effects and raisean arbitrary amount of revenue. In order for there to be no distortion in the long run, after-tax profits to the firm must remain sufficiently large to justify future extraction. If a sufficiently high levelof taxation is imposed the firm may prefer to cease operationsentirely.
56 Taxation of Min ral Resources Effects of Mineral Taxation 57
rr~ = gross-of-tax cash flow in period t
T( = tax revenue collected in period t
Fr~m this si.mple formulation of the net present value it is clear that~n Increase In tax payments reduces the present value and makes theInvest~entless attractive. This is true of profits taxes as well as othertaxes dIscussed earlier. It is true that a pure profits tax will not affectthe extraction profile, but that is not the only issue when investmentsare b~ing determined. For example, there is little doubt that for thesame In.vestment the firm would prefer an output tax which collects$1,000 ill present value terms to a nondistortionary profits tax thatcollects $2,000 in present value terms.
. ~ny ta.x .,,:ill therefore tend to decrease the size of investment inrrnmng activIties. This reduction increases the unit cost of extraction,decreases the tonnage of economically recoverable reserves, andgenerally shorte~s t~e ex~ected life of the mine. The tendency to discourage extractlOn IS reInforced by uncertainty. Taxes reduce theexpected. profitability and thus reduce the investment for a givenlevel of nsk. Also the same level of taxation will have a greater deterrent effect the more risky the investment, other things equal. This~eans that deposits which have low returns but are relatively safeillvest~ents may be preferred to deposits which have very hIgh .potential returns but have correspondingly high risks.
Expensing Provisions
~ining firms. are able to take advantage of special provisions regardIng expl~ratI~n and development, in addition to depletion and~epreCIatlOn, In calculating profits taxes. In general, these deductions do not change the total taxes paid over the life of the mine.Rather, they change the timing of tax payments from early to lateryears, thereb'y d~~rea~ing the present value of the tax payments.~ome of the JUStI.fIcatlOns for these privileges are (1) mining is morensky than other Investments; (2) development is mine-specific withno s~lvage value; and (3) firms need to finance development withde~t ~n early y.ears and therefore need a sufficient cash flow to repaypnncipal and Interest.
There is no doubt that the benefits from exploration are uncer-
tain. However, from an economic perspective, exploration is aninvestment made by a firm to obtain a stream of future benefits. Likeall economic agents, mining firms choose a strategy that will offsetthese risks. Firms can reduce risks by (1) forming exploration companies that legally separate the risks from other sources of income;(2) pooling risks, by buying interests in property owned by anotherfirm and selling partial interests in their own; and (3) exploring anumber of deposits in a variety of areas at one time, to spread therisk within the company. Given this ability to adjust for uncertainty,excessive governmental tax inducements will either transfer resourcesfrom other sectors of the economy to mining, or extend explorationto submarginal prospects.
Development, like exploration, is a capital expenditure made tocapture a future stream of benefits. As such, good accounting andeconomic practice dictate that such expenditures be amortized ordepreciated to offset these costs as benefits are received.18
One of the objectives of granting liberal allowances for exploration and development is to attract mining investments into aparticular area. However, in a market economy the benefits may notaffect the operations at all, but transfer income to other parties. Forinstance, a mine may sell the product at a lower price in order toensure a market. In this case, the firm will not change its behavior,and the tax benefits will be exported with price reductions to otherstates.19 The firm may also increase the price it is willing to pay forthe right to extract the resource. Again a tax incentive may notincrease investment at all but instead be shifted to somewhere orsomething else. In sum, the effect of these incentives is diluted oncethe interactions in a market economy are taken into account.
Taxing Rents
In most countries legal title to subsurface rights has been vested inthe state. The United States is exceptional in this respect, since title tosubsurface minerals is usually recognized as part of the ownership ofsurface rights. This aspect of the system has a number of implications for tax policy.
First, the original owner of the property collects a payment fromthe extractive firm for the right to explore and develop his property.
That is, the resource owner collects a "rent" because of his ownership. Competition would ensure that this payment would vary acrossmineral properties according to quality, quantity, and ease of extraction. Because of uncertainty, most of these payments are not lumpsum. Instead, a complicated system of lease bonuses and percentageroyalties have developed, to enable some risk sharing between theowner and producer. However, the essential point is that naturalresource rents accrue at teast in part to the initial owner of themineral rights.
Some analysts have argued that states and localities should collect the rents from resource extraction.20 Based on the above discussion, taxing rents implies that the incidence of the tax should beborne by the original owner and not by the extractive firm. Forinstance, if the property were sold outright, the state could tax theowner's capital gain from the sale. The firm's behavior would beunaffected, the supply of the resource would be unaffected, and thetate would be collecting the rent.
From the analyses of those who would supposedly tax resourcerents, this type of taxation is hardly what they had in mind. A truefax on natural-resource rent would be borne by the state's residents(if they own the land) and not by large firms. The tax could not (andshould not) be exported or shifted to purchasers in other states.Therefore, .a tax on pure natural-resource rent would involve only atransfer of Income from the owners of the property (usually residentsof the state or the state itself) to the government.
Part of the confusion over taxing rent is the tendency to correlatelarge profits with rent. It should be emphasized that large profitsmay. be~r little relationship to the rate of return on invested capital.CapItal IS allocated in a competitive economy until the rate of returnf~om inves,ting. in va:ious activities is the same. Modern mining is ahlghl~ capltal-In~e~SIVe process. This fact, combined with the longlead time for pOSItive returns, suggests the need for sizeable profits insome years. Thus industry spokesmen have some justification forclaiming that a comparison of annual profits, without calculating thenet-of-tax rate of return, is misleading and unfair.21 Given also thepaYments to the owners for the right to extract ore, any associationof profitability (even of so-called bonanzas) with some notion of rentis tenuous at best.
Another consequence of the emphasis on profitability when discussing the taxation of mining firms has been the neglect of the fact
Summary
The preceding analysis examined in detail the response of the miningfirm to the major forms of taxation, at each stage of the miningcycle. If price-taking, profit-maximizing behavior is assumed, only apure profits tax is nondistortionary in the short run. Further, any taxwill, ceteris paribus, discourage exploration, development, andinvestment by reducing the rate of return to capital. A subsidywill have the reverse effect. It was also shown that taxes applied inconjunction may have offsetting effects; for example, an ad valorem
59Effects of Mineral Taxation
that taxes paid by the firm are only part of the tax revenue generatedby mining activity. Most states impose income taxes 01) individualsand firms or collect paYments from state-owned lands. Capital gainsfrom the sale of mineral properties and royalties paYments whichaccrue to resource owners are part of the income-tax base. Therefore, states are already imposing a form of taxation on the owners ofthe resource. Little analysis has been done on the effects of thisaspect of taxation on the trade of mineral rights or the behavior ofowners. Also no estimates are available for the amount of tax collected in this manner. It is clear, however, that the sum of the directtaxes paid by mining firms will underestimate the tax benefits to thestate.
In summary, rent is a paYment above the minimum amountnecessary to bring forth a given supply of a resource. Since the property rights for minerals are usually vested in private hands, it is theowner who collects this paYment without contributing to product. Atax designed to collect natural-resource rent must then, by definition,be borne entirely by the property owner, and would have no effect onthe profits of the mining firm.
While simple in concept, the ability of the government to collectrents by taxation is complicated in practice. Because of uncertainty,mining firms will typically collect some of the economic rent thatwould otherwise go to landowners. However, policymakers must beaware of the implications of and distinctions between a tax on rentand a tax on the return to capital. A rent tax will have no effect onthe firm's behavior (because the owners of the firm do not bear theburden of the tax), while a tax on the income to capital will reduceinvestment.
Tax tlon f Min ral Resources58
property tax and an ad valorem output tax can offset each other.This does not imply, however, that the firm's long-range strategy willbe unaffected. Increases in the level of taxation increase the cost ofdoing business, regardless of the effect on extraction. Thus as notedabove, some decrease in investment will result.
Some writers have claimed that price-taking behavior is inappropriate for the analysis of tax policy at the state level. 22 They arguethat a state with large reserves can increase the level of taxationwithout affecting the industry in that state, since the tax can beexported to consumers in other states. They offer such mechanismsas hold-free clauses in long-term contracts as supporting evidence.This claim may well be justified, but only as a short-term phenomenon. A national firm will always try to shift the tax burden to someone else. Its ability to do so will depend on the relevant elasticities ofdemand for final goods and inputs. But as long as a state does nothold a complete monopoly of the resource, some response by thefirm is inevitable. Contracts do expire and buyers will always seekthe least expensive source. 23 States must therefore weigh short-runrevenue gains against long-term losses from excessive taxation. In theshort run behavior may not change, but in the longer run development and investment will fall.
Another implication of this analysis is the importance of separat- .ing the issues of taxing rent and taxing the return to capital. It is truethat large, rich deposits collect more rent, but in a market economy itis the owner of the land who collects at least part of the expectedvalue of the rent. So a tax on rent should be borne accordingly bylandowners and not capital. Such a tax would have no effect on thefirm's level of profitability unless it obtained the mineral rights forfree. While rents are easy to define, they are impossible to measure.Invariably, some rent is collected by firms as well as consumers ofthe product. However, an understanding of how rents are generatedand their relationship to profitability, if any, is essential fordesigning tax policy.
6160 Tax tl n I Min r I Resources Effects of Mineral Taxation
2. See Conrad and Hool (19790).3. Lockner (1965) and Stinson (1978) noted that the.d~vel~p
ment of severance taxes resulted from the cost of fairly admmlstenngthe ad valorem property tax.
4. See Boyle (1977). .5. This effect has been established by Hotelhng (1931) and
Lockner (1965).6. References to this effect are found in Gillis et al. (1978) and
Conrad and Hool (1979b).7. See Warren (1944) for discussion.8. See Conrad (1978b) for a proof. This is contrary to the
short-run high-grading effect claimed by McGeorge (1970).9. See Peterson (1976) for a discussion. .
10. The writings of Harberger (1974), Steiner (1959), DaVldso~(1970), and McDonald (1967) all pertain to some aspect of thls
debate.11. The validity of this point is discussed below.12. See Conrad and Hool (1979b) for details.13. Ibid.14. These examples are found in detail in Conrad (19790).15. This is consistent with the discussion in chapter 2.16. For a formal analysis of this problem see Conrad (1979b).17 See Conrad (1979b) for discussion.18: See Convery and Conrad (1979) for further discussions.19. The long-run implication ofthis is discussed in chapter 4.20. See Boyle (1977).21. See Hansen (1977).22. See Long (1976) and Sorenson and Greenfield (1977). .23. The same shifting can occur with subsidies as well. Davldson
(1970) argued that depletion allowances mai~IY ~ncrease .the rent payments to landowners, with no effect on the fum s behaviOr.
Notes
1. The model used to evaluate these taxes is developed inConrad (19780) and in Conrad and Hool (19790; 1979b). The formalproofs are found in these texts; only the results are reported here.
4 Policy Implications
In the previous chapter we examined the potential effects of varioustaxes on the decisions of mining operations. It was shown that taxeswill typically alter the pattern of quality and quantity of extractionbut, unless excessive, will not force an operation to close completely.Rather, investment and total mineral yield will tend to be smaller andthe life of the mine shorter as a result of taxation. In addition tothese losses, the citizens of the taxing jurisdiction must bear the costsof administration and enforcement. The choice of tax policy is oftencomplicated by a trade-off between the ease of administration andenforcement and the magnitude of the distortionary effects.
This chapter analyzes some of these trade-offs and offers somepolicy recommendations for consideration. For illustrative reference, we begin with calculations of the impact of the tax system of agiven state. A discussion of the incidence (who bears the burden ofthe tax) follows. In this context, administrative issues are discussedalong with the use of particular taxes to meet specific goals.
Calculating the Net Impact of an Integrated TaxSystem
The first step in the analysis of tax policy is to obtain a measure ofthe taxes paid by a single firm. Since states generally use more thanone tax, this measure must account for the combined effects of theentire state taxation system. It is also important not to overlook thefact that all state and local taxes are deductible for federal tax purposes.
The best way to illustrate the interactive effects of an integratedtax system is with a numerical calculation for a particular state. Therepresentative calculation presented below is for a uranium mine inthe state of New Mexico. New Mexico was chosen because of its variety of taxes imposed on mining.
63
64 T x tlon f MIn r I Resources
The t:u'es imposed on uranium operations in New Mexico arereported. III table 4-1. To simplify the calculation, the followingassumptIOns are made.
Policy Implications
Table 4-1Taxes Imposed on New Mexico Uranium Mines
65
Tax Rate Remarks
1. The fi:m is incorporated in New Mexico and has no multistateoperatIOns.
2. The firm owns the deposit.3. The price of uranium concentrate (yellow cake) is $29.04 per
pound. 1
4. The property-tax assessment is $0.2025 per pound of yellowcake. 2
The first assumption removes the problem of allocating income to~ew. Mexico, which uses the three-factor formula. The secondImphes that no royalty payments are made. Royalties are deductiblefrom several other taxes.
Total.taxes paid to New Mexico by the mining operation areexpressed III general terms as
Income 5OJo
Severance Value0- 5.00$ 5.00- 7.50$ 7.50-10.00$10.00-15.00$15.00-20.00$20.00-25.00$25.00-30.00$30.00-35.00$40.00-50.00$50.00 and over
Resource excise 0.75% of value
Conservation 0.0475% of value
Marginal Rate1.0%1.6%2.0%3.0%4.0%5.0%7.0%9.0%
12.5%$3.24
Uses federal tax base;a thereforegrants depletion allowance of22%.
Contracts prior to 1977 with nopass- through clause taxed at1.25% until 1985. Base is totalvalue.
Allows deduction for state andfederal royalty payments.
Allows deductions for state, federal, and Indian royalties. Rate is19/100 times 25% value.
T = te(PQ - C(Q) - hPQ - aPQ - rPQ - dPQ - eQ - fQ - 7:1)
+ aPQ + rPQ + dPQ +eQ +fQ
Continuedcare fund
Propertyb
1O¢/lb
Varies with location
Payments made until each minepays $1 miUion.
For producing undergroundmines, rate is total sales less state,federal, and Indian royalties timesone-fourth times one-third.
where P = price of yellow cake
Q = output of yellow cake
C( Q) = total cost of operations
h = federal depletion-allowance rate
a = severance-tax rate
r = resource excise-tax rate
d = conservation-tax rate
e = continued-care tax rate
f = property-tax rate
T_ 1 = New Mexico income taxes paid for the previous year
te = corporate-tax rate
Sources: Written correspondence from state tax administrators; Stinson (1978); Gillis (1979);State tax statutes; Commerce Clearing House: State Tax Guide; Yasnowsky and Graham(1976); and Steering Committee on the Impact of Taxation on Energy Markets, NationalAcademy of Sciences (1979).Note: This tax table was compiled using information from a variety of sources. The information was cross-checked as far as possible to ensure consistency and to include the most recenttax laws.aCertain adjustments for nonbusiness income.bCapital equipment valued at book value.
Because New Mexico uses federal taxable income as its corporatetax base, it explicitly allows a deduction for all its output-relatedtaxes, the property tax, and income tax from the last period, incomputing its income tax. Thus when profit is positive, the effectivepayment to the state from each tax (excluding the income tax) is 95¢per $1.00 actually paid (for example, the firm pays a dollar in property taxes but recoups 5¢ by the deduction). Also because of thefederal depletion allowance, 1.1 percent [(.05)(.22) = .011] of totalrevenue is excluded from the tax base.
Substituting the numerical values for tax rates and prices into theexpression for T yields the following formula for the tax paid peradditional ton of output.
6766 Taxation of Mineral Resources
Policy Implications
When all the state and local taxes are incorporated, the cutoff gradebecomes
However, when New Mexico taxes are introduced, the rate of returnis
r = 27040 - 1374 _ 1 = 25666 _ 1 = .0694, or 6.940702 24000 24000
MC + e + f _ 2 + .3025 = 8.33070a = d t] 29.04[.9412]
P[I - a - r - + 1 _ th
The introduction of taxation has reduced the internal rate of returnby over 45 percent. Other investment criteria may be used, but thequalitative effect of the taxation will be t~e sa~~. . .
While the above example is highly slmphfled, It serves to illustrate the fact that a tax which is small in relationship to the price (orto operating profit) can have a sUb~tantial impact on the rate ofreturn. Several authors made calculations of the lffipact of such mea-
= 27040 _ 1 = .1267, or 12.6707024000
PQ- Cr l = I -
This amounts to an increase of over 20 percent in the cutoff grade.The last equation shows clearly how the net-of-tax price and costs areaffected by the output-:related taxes. The ad valorem taxes reduce thenet-of-tax price, while the per unit taxes increase the cost per poundprocessed. Note that the depletion allowance tends to offset t~e
decline in the net-of-tax price. Other things equal, the taxes III
combination will reduce current extraction and lower total yield.The discussion to this point has concentrated on the short-run
effects of the tax system. But there will also be long-run effects oninvestment. When incremental investments are contemplated, the .taxwill serve to reduce the rate of return. To illustrate, suppo.se th.e fIrmis considering opening a new shaft at the mine. The ore III thIS newarea will produce 1,000 pounds of yellow cake at a cost ~f $2,000. Itwill cost the firm $24,000 this year to sink the shaft III order toextract all the ore next year. Assuming a price of $29.04 for y~llo~
cake next year, the internal rate of return in the absence of taxatIOn IS
MC 2a * = - = -- - 6 89 t,!op 29.04 - .
whcre MT = marginal tax and MC = marginal cost of extractionand processing. This shows that New Mexico will collect $2.73 less 5percent of marginal cost of extraction and processing, for eachpou nd of concentrate sold.
These taxes are partly offset by their deductibility from thefederal tax base, which effectively reduces the taxes paid by the firmt thc tate by an additional 46 percent. Therefore, the impact of thetax y tern, net of federal tax deductions, on this firm in New Mexicoi $1.47 - .027 (MG). The net effect amounts to a tax of 5.06percent of the value less 2.7 percent of marginal cost, per pound ofyellow cake.
This calculation highlights several important issues. First, thereis the effect of federal deductibility on the impact of state taxes paidby the firm. By allowing the deductions, the federal government is ineffect paying 46 percent of the taxes for the firm through lost taxrevenue. The total tax burden of both federal and state taxes is,however, higher than it would have been in the absence of statetaxes.
Second, there is the reduction in the state's own tax revenue dueto the use of the federal base. Since the state taxes are deductible forfederal taxes, they are deductible for state income taxes as well. Thisrevenue loss thus reduces the long-run distortionary effects of thetaxes.
Third, the tax system increases the cutoff grade. Suppose that thecost per pound of extracting and processing is $2. In the absence ofthe tax the cutoff grade would be
MT = .05(29.04 - MC - .22(29.04) - .035(29.04) - .0075(29.04)
- .000475(29.04) - .10 - .2025) + .035(29.04)
+ .0075(29.04) + .000475(29.04) + .10 + .2025
= $2.73 - .05(MC)
68 Taxatlonf Min r J Resources Polley Implications 69
sures as tax payments per ton of reserves, tax payments per ton ofoutput, or the ratio of taxes to current profit. 3 These figures do allow~ c?mparison of tax impacts across states but they are misleadingIndIcators of how a set of taxes can potentially affect the level ofinvestment activity. In the long run it is the rate of return to invested~apital. whi~h will determine the willingness of capital owners toInvest In mIne:al projects. The appropriate measure for evaluatingthe long-term Impact of a tax system is therefore the net-of-tax rateof return to capital.
Incidence Issues
It has been claimed by several authors that increases in the level ofstate and local taxation will have little or no effect on the behavior ofthe mining firm. This argument is based on the presumed ability ofthe firm to shift the burden of the tax to out-of-state purchasers ofthe resource, in the form of higher prices. 4 To substantiate this theseauthors cited "pass-through" or "save free" clauses in con~ractsand increased investment in some states despite increased levels oftaxation. 5 The ability of a mining firm or the entire industry withinany state to export or shift the incidence of a tax depends on a number ~f factors. 6 First, the state (or group of states) must have somedomInance over the resource; that is, the reserves located in the statemust be a substantial proportion of total reserves. However a domi-nant position is not sufficient for shifting to occur. '
A second factor is the elasticity of demand for the resource. Ifthe demand is inelastic, a substantial portion of the tax can beexp~rt~d. Minerals are used as inputs into other productive processesa~d It IS ~ener~lly agreed that in the short run the elasticity for mostmmerals IS qUIte small. However, the long-run elasticity is substanti~lly larger. 7 This is due to the ability of buyers to sign new contractsWIth lower-cost producers or to change production methods in orderto substitute less expensive alternatives for the taxed resource. This~eans that. through time the ability to export taxes through price'mcreases wIll become much more difficult.
A third .factor which must be considered is the mobility of factor~of productIOn. When factors are immobile the part of the taxin.cr~ase which is not exported may be borne by capital and laborWIthin the state. In the long run both capital and labor can move.
Mines close and the capital and jobs will be exported instead of thetax. Therefore, at least part of the burden will be borne by resourceowners and the state through lack of future development. 8
In summary, states can expect little or no effect from taxincreases in the short run. However, in the long run, investment andexploration activity will be lower and jobs will be lost as a result of atax increase. While this conclusion is simple in concept and inevitablein a market economy, it is difficult to convey to citizens and legislatures because it is largely unobservable. What are observed are profitlevels and mineral development when prices increase. The conclusionis then drawn that state taxation has little or no effect on the firm'sbehavior. As prices rise, mineral development will increase as long asthe increase in taxation does not capture all the return. The realissues from a policy perspective are (1) how much more mineraldevelopment would occur, (2) how much more would be paid toproperty owners for minerals rights, and (3) how many more jobswould be created, if the rate of taxation were lower?
A recent study by Genetski and Chin offers some empirical support for our prediction. 9 Vsing cross-section time-series data, theyfound that the burden of taxation by state had little effect on stateincome in the same year. However, when they introduced a threeyear time lag to allow for adjustments to tax changes they found thatan increase of 1 percent in a state's relative tax burden decreases astate's relative income by 0.5 percent. In the context of minerals, thisimplies that an increase in taxation in, say, New Mexico relative toother states will encourage capital and labor to move to other statesover time, decreasing investment and income in New Mexico andincreasing it in other states.
Therefore, state and local tax policy should be formulated in fullawareness of the fact that higher taxation will reduce the rate ofgrowth of mineral production, decrease economically recoverablereserves, and cause a relative increase in mineral activity in otherstates.
Recommendations
A rational mineral tax policy must be based on a well-defined set ofcriteria. Some goals of mineral tax policy are (1) revenue stability(particularly for schools and local government); (2) ease of adminis-
The Income Tax
A well-designed income (profits) tax should be the basis for any minerai tax policy. From a corporate perspective, the income tax is alevy on the return to invested capital. Therefore, an income tax oncorporate income can be designed so that it is neutral with respect toincentives within the corporate sector. The income tax has thefurther advantage of not increasing the downside risks as much asother taxes, since costs are considered explicitly and taxes are paidonly when profits accrue. Third, the tax does not induce high-grading in the short run, so will have relatively little effect in terms ofreserve loss. Finally, if there is also an individual income-tax system,
tration and enforcement; (3) control of external effects such as pollution and land reclamation; (4) consistency with a state's developmentgoals and the relative importance of mineral development in theachievement of these goals; and (5) neutrality of the tax system.
From the preceding discussion, it is clear that no single tax canimultaneously achieve all these goals. Recent theoretical literature
al 0 suggests that more than one type of tax may be preferable to asingle tax. 10 For instance, an income tax designed to ensure neutralityb tw en mining and other sectors may be impossible to administerb au of its complexity and may not generate adequate revenues inp ri ds of depressed markets. On the other hand, a severance tax perunit f output is a relatively stable source of revenue and is easier todminister, but it induces excessive high-grading and increases
down ide risks.In addition, different weights will be assigned to each goal,
a cording to the circumstances particular to each state. Finally, econ mic conditions change and tax policy should be flexible enough toodj u t to new conditions without excessive inducements or disincentive .
tates differ with respect to both the type and geological compo-ition of each mineral and their willingness to pay for tax administra
tion. (This is probably one reason why a regional tax policy has neverdeveloped.) However, the same basic criteria will apply to each state.Therefore, our recommendations deal with the general structure ofthe tax system. Particular modifications can then be incorporated byeach state according to its specific circumstances.
71
1. Only cost depletion should be allowed. . d2. Capitalization of exploration expenditures should be requlf~ ..3. Development expenses should be subject to usual depreclatlOn
rules.4. All other state and local taxes should be deductible.5. Taxable income should be defined to include only income accru-
ing within the state (that is, no income allocation rule).
Percentage depletion, as used in the United States, has been ~howneither to act as an income subsidy for mining fir~s or t? md~ceexcessive investment in mining activity. II The preVIOUS dlscusslOnalso showed that the allowance will generally increase early extraction and reduce the life of the mine. Finally, no other industry is permitted to deduct an amount greater than its investments cos.ts. Neutrality therefore dictates the elimination of percentage depletlOn.
The expensing privileges for explorat~on and ~evel.o~ment havebeen claimed to be justified by the risks mherent m mmmg and thelead times necessary to recapture the invested capital. However,these risks should be reflected in market pricing. Therefore, goodaccounting and economic principles imply that such expenses bededucted as income accrues. . ..
The deductibility of other state taxes will allow a partIal mItIga-tion of their distortionary effects. In addition, other taxes are generally privilege taxes or a form of use charge for publicly providedgoods. They are thus part of the cost of doing business in the stateand should be recognized as such. . .
In theory, a state income tax should only recogruze l~come andcosts which accrue in that state. Under the current allocatlOn sys~em
used by several states, it is possible that firms which suffer losses l~ astate must nevertheless pay income taxes there becaus~ of profItsgenerated elsewhere. Likewise, firms with high profits m.one statemay be able to reduce their tax liability there by deductmg lossesfrom operations in other states. In addition, McClure (1977) recently
Policy Implications
the state is assured of collecting part of the natural-resource rents. Ineffect the state should not care how the rents are divided betweenresou;ce owners and extractive firms, because it will collect part ofthe rent from both sources.
The following provisions should be part of the income-tax pack-
age.
x tI 11 f Min r I Resources70
Output-Related Taxes
Any output-related tax will discourage investment and induce highgrading. In addition, such taxes increase the downside risks associated with mining since they do not recognize costs. They are, however, extremely popular tax instruments and their use will apparentlycontinue. Given this, our recommendations are intended to serve asguides for minimizing distortions while generating revenue.
First, the tax should be imposed at the earliest possible point,that is, at the mouth of the mine if possible. This will minimize theeffect of the tax on other stages, such as concentrating and refining,and will thus partly reduce the incidence on capital and labor. 12
Second, the tax should be related to the value of the ore. Whilesome high-grading is inevitable there is no justification for imposinga uniform per unit tax on all ore. Such a tax will always create alarger high-grading effect for the same revenue than a tax which isrelated to value.
Three pieces of information are necessary to administer such atax: the tonnage, the grade, and the price. The first is easy to obtain,
showed that the formula currently employed acts to make the incometax a series of taxes on each of the three factors included in the formula (sales, employment, and assets), whose incidence may beregressive. Therefore, to preserve the neutrality and the intendedincidence of an income tax, only intrastate income should be taxed.
Some of the above recommendations are at variance with currentfederal practice. States that currently use federal taxable income asthe base will consequently incur a greater administrative burden ifthey adopt such measures. This is especially true with regard to thelast recommendation. States will have to determine what proportionof corporate overhead, research and development, and managementfees can be deducted within a state, if any. While some of these decisions will inevitably be arbitrary, the bias with such an allocation willnot be nearly as great as under the current system.
The net-proceeds tax, which has become increasingly popular, issimilar in effect to an income tax with the characteristics we prescribe. This move toward taxes of the net-proceeds type is an indication that states are willing to bear some additional costs to ensure, aswell as increase, their revenues.
73Policy Implications
the second may require independent analysis to ensure properenforcement, and the third may be difficult to obtain. The difficultyin obtaining price information is due to the fact that most metals arenot sold in their natural form. Rather, they are inputs into a concentrating process whose output is then marketed. Therefore, an arm'slength price in general does not exist. One solution is to deter~inefirst the arm's-length price of concentrate, either from an analysIs ofthe contract provisions or from an independ~nt source, an? thenallow a deduction for processing charges to arnve at a net pnce perton. This procedure will yield the value of ore in concentrate .that canserve as the base of the tax. (This is the same method used 10 determining income from mining which serves as the base for percentage
depletion.) . 'Finally, we recommend that the tax be at a umform rate. DIff~r-
ent rates may be imposed for different minerals or for alternatIvemining techniques (that is, one rate for underground mines ~nd onefor open pits) but the rate should be independent o.f the pn.ce. Theusual justification for progressive severance taxes IS that fI:ms donothing to bring about a price increase and thus collect a w1Odfall.This argument has three basic flaws. First, a win?fall should bedefined only with regard to the rate of return on capItal, and not ~heprice. It is entirely possible, given the risks of mining .a~d the pnceuncertainty, that a price increase may only reflect a mI~Imal rate ofreturn. Second, a price increase may be accompamed by c~stincreases such that the price increase is associated with lower profItsrather than a windfall. Finally, this tax is totally discriminatory. If astate legislature feels it has a right to tax windfalls, it ~hould do soconsistently. That is, it should increase the rate of taxatIOn on wheatfarmers when wheat prices are high, independent of costs; tax thesale of homes and property more heavily when housing prices arehigh regardless of maintenance and upkeep expenses; and so on.Unl~ss it can be proved that such a tax is functionally related to amarket failure its use is discriminatory and should be avoided. Asnoted above ~n output tax may be appropriate for environmentalconservatiod, but the cost of environmental damage bears little relationship to the market price.
If in spite of this such a tax scheme is to be used, it should berelated to the price of the specific mineral and should acknowledgeprice decreases as well as increases. A tax related t~ th.e consum~rprice index (as in New Mexico) or the wholesale pnce 10dex (as 10
Tax tlon f Min r I Resources72
74 Taxation of Mineral Resources Policy Implications 75
North Dakota) has a tenuous relationship to the profitability of anymine. Such indexes are composites of national averages and thuscould overestimate or underestimate the effect of the general level ofinflation on a particular region or mine. That the tax rate shoulddecline when prices fall is suggested as the natural counterpart to thetaxation of supposed windfalls. Such flexibility would reduce somewhat the discriminatory bias of the tax.
Property Taxes
One of the more important goals of state and local tax policy is toprovide a stable source of revenue to finance a minimal level of public services such as schools, police, and fire protection. Each of thetaxes outlined above is unsatisfactory in this respect because the taxrevenue is a function of mineral prices (and costs in the case ofincome taxes), which have historically been cyclical. Therefore, theycannot be relied on to provide a stable revenue base for the provisionof public programs.
Property taxes, on the other hand, do offer such stability. This isdue less to the nature of the tax than the way it is administered. Historically, proponents of the property tax have emphasized its revenuestability due to the inelasticity of the base. For example, Maxwell(1965) suggests that local governments resort to the property tax,rather than income or sales taxes, because the immobility of realproperty precludes a shrinkage of the tax base. This view has beenchallenged both theoretically and empirically"3 It has been shownthat the supply of real property is inelastic only in the short run.Over time, factors are mobile and an increase in the rate of taxationwill encourage movement. Individuals and firms have moved to thesuburbs to escape city taxes (while still taking advantage of city services). Local stores followed and shopping centers developed. Inaddition, high property taxes have been a factor contributing to anexodus from certain regions of the country. Therefore, in the longerrun, the tax base is not secure and thus cannot be the explanation forthe stability of the revenue generated by the property tax.
The key to the tax's revenue stability lies in its administration.The tax rate is usually determined after the budget for the next fiscalyear has been projected. That is, the tax rate is set to collect a specificamount of revenue. Since this is the process typically used, the reve-
nue is stable by definition, quite indepcnd nt f lh base. In thissense, any tax can be a stable source of r venue. iven this, realproperty may be a preferable base since it is less subject to periodicfluctuations than are other tax bases. But again it must be emphasized that the stability of the base itself is not to be identified with thestability of revenue.
Theoretically, the value of the property is its market value. Froman economic perspective the market value of a fixed asset is the present value of income generated by holding or using the asset. Therefore, a property tax based on market value is an income tax which. ispaid on the future stream of benefits generated by the asset. The dIfference between the regular income tax and the property tax is thatthe former is a tax on the realized stream of income, while the latteris a tax on the expected future stream of income. If there were nouncertainty, a property tax could be designed in such a way that theimpact and incidence of the tax would be identical to a tax on realized income. 14
Uncertainty, however, is a complicating factor and t~e difficulties it creates are most apparent in the mining sector. Unlike otherforms of real property the extent of mineralization in a mine is neverknown, in most cases, until it is extracted and processed. In addition,mines are not subject to frequent sale and the characteristics uniqueto each mine make comparisons difficult across mines. Finally, mineral-price profiles tend to be more uncertain than those of othertypes of real property. These uncertainties combine to make propertyvaluation more difficult in this sector.
States and localities have realized this problem and have developed numerous ways to cope with it. Among the tax bases currentlyin use are (1) a fraction of total revenue (in effect an ad valorem output tax); (2) net proceeds (in effect a tax on current realized income);(3) estimates of the present value; and (4) traditional local asses~ment. Of these four methods, the estimate of the present value IS
most likely to reflect the true worth of the deposit. However, thmeasure is far from perfect and the estimates must be derived withcare.
The valuation procedure we recommend is based on the Arizonamethod, which we feel is both feasible and more accurate than oth rmethods. In this approach, the present value of the operation is calculated on the basis of estimates of reserves and production. Insteadof projecting prices and costs, a profit-margin formula is used to
76
Notes
Concluding Remarks
local governments to justify such a distortionary in entive whichdeters development and cuts jobs in the mining ector.
77Policy Implications
1. Average price calculated by the New Mexico Taxation andRevenue Department (14 February 1979).
2. Tax calculated by the New Mexico Taxation and RevenueDepartment.
3. For one example, see the New Mexico Taxation and RevenueReport, where the impact of taxes is calculated to be about 6 percent.Income taxes and federal deductions have been ignored in this calculation. For another example see Shelton and Morgan (1977).
4. Griffin and Shelton (1978) adopt this argument, while Long
The recommendations outlined above reflect the view that for taxpurposes, mineral development should be treated in the same manner as any other form of economic activity. In the absence of provedmarket failures, this means that the burden of the taxation borne bymining activities should be the same as that borne by other sectors.While it is true, in a sense, that the minerals found within the boundaries of a state or locality are finite, this alone is not a sufficientcondition for excessive inducements for or taxes on mineral activity.16 In the long run, the effect of depletion will be largely beyondthe control of anyone state. State and local tax laws may distort thecurrent allocation of investment within and between states. However, these relative distortions will not substantially affect the longrun availability, because there are too many alternative sources.
A balanced approach is necessary to ensure that the minerals sector develops along with other sectors, so that the scarce resources canbe put to their most productive use. If market failures are present,the state has the obligation to correct them, and tax policy may be anefficient means by which to modify the system. However, the basisof the tax system should be neutrality. Otherwise, a proper evaluation of the effects of other adjustments cannot be made.
Taxation of Mineral Resources
c?nvert the extraction profile into an income stream which is thendIscounted to obtain the present value. The profit-margin formula isbased on the average margins for the preceding five years to even outfluctuations. I'
'!'his method has a number of advantages. First, it is consistentand IS based on the same principles as used in the industry itself. Second, .the ta~ base will not discriminate against marginal mines. Am~rgI?al mme is, by. definition, one with a lower profit margin, andth. ~Ill be reflected m the calculation. Third, it recognizes costs andthu IS ~ better measure of income from property than are sales.
ourth,. It uses a histor~cal average margin which weights the goodyear with the bad, and IS therefore better in this respect than currentnet proceeds. In addition, it alleviates the burden of projectingfuture costs and prices. Finally, it is not as distortionary as other~axes. There still exists an incentive to extract more, and higher qUalIty, ore early to keep down the estimated value of future extractionHo~ever, this effect is offset, at least in part, by the use of historicaiprof~t mar~ins. If the firm were to maximize the current return,profit margms would be higher and would thus serve to increase thefuture value.
~~e m~thod does have one major disadvantage: the cost ~fadrmrustratIOn. In order for the method to be accurate and consisten.t, much information is necessary and several unknowns must beestIma~ed. Comprehensive field reports are written annually on eachoperatIOn to ke:p.a current re~ord of technology and capitalizationr.ates. Also statIstics are compIled from financial and professionalItterature and Securities and Exchange Commission reports, in orderto a sure that assessments are fair. (It is our impression that someproblems exist in the Arizona system and that property values inorne cases may be subject to arbitrary methods.) It is clear that such
a method can only be employed by a state agency with the resources~o devote to such a task. However, any state that has an active minmg s~ctor should be collecting this type of information at the statelevel m a~~ event, and so the method could be employed withoutmuch addItIOnal expense.
. Once the base is estimated, the assessment ratio must be determmed. In the absence of proved market failure, the assessment ratioshould be. the s~me for mining as for other industrial sectors. Somestates, Anzona mcluded, employ higher ratios for mining. This distorts the long-run allocation of investment. The onus is on state and
I X tl , Minerai Resources
(1976) uses it as a justification for a regional tax policy on coal. Seealso Link (1978).
5. Sorenson and Greenfield '(1977) claim that a state can taxmining and capture at least part of the comparative advantage of astate's mine with no effect. However, for this to occur the tax mustbe shifted.
6. For a detailed analysis see McClure (1978).7. See Conrad (19780) and the references therein.8. McClure (1978) argues that in the long run the tax will be
borne almost entirely by resource owners, because reserves are theleast mobile factor.
9. Cited in the Wall Street Journal, 9 September 1979.10. See Atkinson and Stiglitz (1976).11. See Harberger (1974) for the classical statement of the dis-
tortion introduced by percentage depletion.12. See Conrad (1979b) for a discussion of downstream effects.13. See Mieszkowski (1972).14. See Fiekowsky and Kaufman (1976).15. This procedure is outlined in the Arizona statutes.16. Long (1977) supports this view.
AppendixState Tax Collections
Tab
leA
-ISt
ate
Tax
Col
lect
ion
sex
>(t
hous
ands
ofd
olla
rs)
0
Tax
1971
1972
1973
1974
1975
1976
1977
1978
(pre
lim)
Ala
bam
a
Lic
ense
53,3
8066
,834
76,7
6577
,191
81,6
2090
,704
99,7
0410
6,04
6O
ilco
mpa
nies
432
510
559
613
1,03
81,
269
1,70
01,
957
Indi
vidu
alin
com
e(n
et)
92,0
9411
8,99
414
2,23
116
9,80
118
9,96
422
4,59
726
1,89
531
7,95
8
Cor
pora
tion
net
inco
me
33,7
6432
,908
40,9
3947
,255
58,1
5860
,307
75,8
7483
,161
Cor
pora
tion
:ge
nera
l29
,667
29,0
4636
,622
42,2
8352
,643
55,4
2569
,043
74,3
07
Pro
pert
y24
,020
25,3
5527
,498
26,4
4728
,593
31,3
8134
,095
53,8
77G
ener
al23
,735
25,0
5226
,961
25,8
8427
,929
30,6
7033
,212
52,7
84
Sev
eran
ce2,
379
5,08
36,
522
8,62
710
,948
11,5
7013
,757
17,0
56-i
Ql
Pro
duct
ion
priv
ileg
e99
41,
492
2,06
03,
632
5,39
36,
158
7,68
610
,321
X Ql
Oil
and
gas
497
606
824
1,79
42,
697
3,07
63,
843
5,16
1.....
Coa
lto
nnag
e2,
040
2,63
51,
771
1,50
784
367
20
Iron
ore
tonn
age
198
84
1::
J 0 - ~A
lask
a::
JIn
divi
dual
inco
me
(net
)35
,484
39,1
1243
,363
49,2
1986
,975
156,
254
210,
338
145,
828
(1) ....
Ref
unds
NA
-30
,889
-41
,02
9-
35,5
13Q
l
Gro
ssco
llec
tion
sN
A17
7,14
325
1,43
018
1,34
1::c
Cor
pora
tion
neti
ncom
e6,
050
6,45
56,
964
8,24
117
,345
31,1
0335
,772
33,5
04(1
) enP
rope
rty
(spe
cial
)6,
566
306,
429
409,
767
173,
197
0O
ilan
dga
sre
serv
es22
3,14
727
0,62
7c: ....
Oil
and
gas
prop
erti
es6,
566
83,2
8213
9,14
017
2,99
5('
)(1
)
Sev
eran
ce14
,491
14,9
0514,0~9
17,5
1526
,619
27,9
7823
,758
107,
715
enO
ilan
dga
spr
oduc
tion
11,4
6914
,760
26,5
4227
,901
23,7
0510
7,60
0O
ilan
dga
sco
nser
vati
on3
7777
5311
5
Ari
zon
a
Sal
esan
dgr
oss
rece
ipts
316,
435
361,
950
419,
644
466,
695
579,
665
531,
172
710,
534
803,
503
Min
ing
9,58
28,
465
10,1
3912
,585
11,5
6011
,799
14,5
4011
,744
»In
divi
dual
inco
me
(net
)73
,710
94,5
7710
8,63
113
7,69
815
7,53
716
2,86
919
0,59
122
2,80
8"0 "0
Ref
unds
NA
-17
,87
3-2
4,1
81
-31
,427
(1)
Gro
ssco
llec
tion
sN
A18
0,74
221
4,77
225
4,23
5::
J Co
Cor
pora
tion
neti
ncom
e26
,987
28,1
2637
,408
39,3
5649
,553
46,4
9951
,788
63,8
42X
Pro
pert
y65
,547
68,5
3770
,392
47,6
0797
,158
114,
689
129,
834
136,
182
Gen
eral
57,3
6059
,016
59,5
5835
,870
75,3
5493
,642
102,
781
109,
253
Spe
cial
8,18
79,
521
10,8
2311
,737
21,8
0421
,047
27,0
5326
,929
Ark
ansa
s
Indi
vidu
alin
com
e44
,243
70,1
5089
,343
117,
022
126,
192
147,
688
163,
781
202,
939
Ref
unds
NA
-21
,44
0-3
5,3
49
-36
,02
3
Gro
ssco
llec
tion
sN
A16
9,12
819
9,13
023
8,96
2
Cor
pora
tion
net
inco
me
26,3
8431
,568
37,8
2545
,916
54,4
6956
,197
67,2
1083
,528
Pro
pert
y97
61,
078
1,21
31,
416
1,62
51,
779
1,70
32,
080
Gen
eral
103
9111
212
112
617
815
316
0
Sev
eran
ce4,
667
4,97
34,
911
6,52
87,
264
8,87
010
,495
12,3
91
Gen
eral
3,67
93,
871
3,84
05,
396
6,28
77,
798
9,24
810
,632
Cal
ifor
nia
Indi
vidu
alin
com
e(n
et)
1,26
6,55
61,
838,
503
1,88
6,44
21,
803,
080
2,45
6,57
32,
957,
788
3,62
0,93
34,
532,
488
Ref
unds
-45
5,3
67
-58
8,8
43
-63
4,7
66
-86
4,3
36
-81
9,3
90
Gro
ssco
llec
tion
s2,
258,
447
3,04
5,41
63,
592,
554
4,48
5,26
95,
451,
878
Cor
pora
tion
inco
me
533,
121
661,
071
866,
347
1,04
6,03
11,
252,
633
1,28
4,06
81,
641,
595
2,07
6,27
0
Sev
eran
ce1,
830
2,26
22,
079
2,53
72,
331
2,33
41,
530
30,4
52ex
>
Pet
role
uman
dga
s1,
231
1,55
41,
407
1,66
12,
331
2,33
41,
530
1,53
0~
Tab
leA
-lco
ntin
ued
ex>T
ax19
7119
7219
7319
7419
7519
7619
7719
78(p
relim
)I\
,)
eole
rad
o
Indi
vklu
alin
com
e(n
et)
143,
461
174,
269
185,
785
250,
527
280,
498
294,
008
338,
920
375,
341
Ref
unds
-11
1,6
30
-11
6,1
19
-15
5,7
25
Gro
ssco
llec
tion
s40
5,63
845
5,03
953
1,06
6
Cor
pora
tion
net
inco
me
28,8
3736
,463
38,9
9352
,745
58,1
1568
,504
80,5
7586
,202
Ref
unds
-8,8
49
-7,7
52
-9,3
93
Gro
ssco
llec
tion
s77
,353
88,3
2795
,595
Pro
pert
y2,
008
2,32
82,
561
3,18
11,
697
1,66
52,
438
2,60
7
Sev
eran
ce56
756
183
31,
108
2,36
14,
371
2,32
01,
838
Oil
and
gas
prod
ucti
on(g
ross
inco
me)
430
435
6384
61,
932
3,89
61,
762
1,37
0~
Oil
and
&as
cons
erva
tion
9489
182
217
333
417
482
404
III
XC
oalt
onna
ge43
3738
4546
5876
64II
I - 0 :::::l
Geo
rgia
0In
divi
dual
inco
me
(net
)18
3,35
323
9,90
028
4,90
934
0,04
037
3,91
641
3,18
849
5,63
960
4,36
1-
Ref
unds
-73
,43
5-
83,8
89-
91,8
88-1
01
,86
7-1
15
,67
6~
Gro
ssco
llec
tion
s41
3,47
545
7,80
550
5,08
659
7,50
672
0,03
7::::
:l roC
orpo
rati
onne
tin
com
e81
,688
88,9
2811
4,11
413
2,62
911
9,35
313
2,74
117
0,88
520
3,82
3.... III
Pro
pert
y4,
057
4,05
54,
590
5,09
96,
123
6,61
29,
903
7,91
4:0 ro en
Idah
o0 C
Indi
vidu
alin
com
e(n
et)
39,7
5550
,191
57,6
9172
,183
91,2
4498
,824
112,
470
138,
050
.... 0R
efun
ds-1
6,0
74
-22
,74
2-2
7,5
28
-32
,50
6-2
7,9
98
roG
ross
coll
ecti
ons
88,2
5711
3,98
612
6,35
214
4,97
616
6,04
8en
Cor
pora
tion
neti
ncom
e12
,563
12,8
9416
,024
23,0
7628
,162
31,7
5231
,034
33,3
26
Pro
pert
y44
628
928
337
232
525
722
823
5
Gen
eral
380
242
216
295
252
179
148
92
Spe
cial
6647
6777
7378
8014
3»
Sev
eran
ce:
min
ing
priv
ileg
e26
815
273
192
481
394
203
273
" "ro :::::l
Dlin
ois
~ X
Lic
ense
400,
327
412,
505
425,
701
Min
esan
dm
iner
als
583
605
437
Indi
vidu
alin
com
e(n
et)
773,
610
843,
251
894,
697
1,04
6,67
51,
136,
918
1,21
6,55
71,
413,
368
1,59
3,69
5
Ref
unds
-92
,43
2-1
10
,09
5-1
08
,04
5-1
26
,54
6-7
2,2
30
Gro
ssco
llec
tion
s1,
139,
107
1,24
7,01
31,
324,
602
1,53
9,91
41,
665,
926
Cor
pora
tion
neti
ncom
e15
4,98
417
3,91
222
9,08
322
6,94
430
6,82
831
2,13
138
4,41
037
6,09
8
Indi
ana
Indi
vidu
alin
com
e(a
djus
ted
gros
s-in
com
eta
x)21
8,46
728
3,66
928
4,91
632
8,07
140
0,79
340
5,43
247
9,25
953
8,22
5
Ref
unds
NA
-72
,27
6-4
3,9
95
40,0
00-
39,4
75
Gro
ssco
llec
tion
sN
A47
3,06
944
9,38
751
9,25
957
7,70
0
Cor
pora
tion
neti
ncom
e25
,642
77,4
2785
,487
86,1
9819
2,06
8
Sup
plem
enta
lnet
inco
me
15,4
0052
,094
56,3
8766
,037
122,
872
Adj
uste
dgr
oss-
inco
me
tax
9,58
010
,526
10,0
8410
,242
25,3
3329
,100
20,1
6169
,196
Pro
pert
y15
,592
22,2
2624
,688
25,1
1123
,046
24,9
8923
,568
23,6
50
Gen
eral
1,14
81,
740
945
800
1,76
01,
130
2,09
71,
892
Spec
ial
14,4
4420
,486
23,7
4324
,311
21,2
8623
,859
21,4
7121
,758
Sev
eran
ce:
petr
oleu
mpr
oduc
tion
239
221
203
315
475
508
580
649
Iow
aex>
Indi
vidu
alin
com
e(n
et)
115,
344
202,
158
242,
863
320,
594
358,
899
388,
212
447,
409
490,
210
W
Ref
unds
-44
,20
6-5
1,4
62
-61
,73
9-6
1,2
04
-74
,85
5
Tabl
eA
-Ico
ntin
ued
(X)
Tax
1971
1972
1973
1974
1975
1976
1977
1978
(pre
lim
)~
Iow
aco
nti
nu
ed
Gro
ssco
llec
tion
s36
4,80
041
0,36
144
9,95
350
8,61
356
5,06
5
Co
rpo
rati
on
neti
ncom
e28
,359
37,1
0947
,288
59,4
1660
,024
77,8
3191
,894
108,
961
Kan
sas
Indi
vidu
alin
com
e(n
et)
82,1
5695
,345
114,
268
147,
143
170,
044
193,
730
209,
171
241,
224
Ref
unds
-10
,55
1-1
2,5
20
-11
,31
3-2
2,2
87
-31
,416
Gro
ssco
llec
tion
s15
7,69
418
2,56
420
5,04
323
1,45
827
2,64
0
Co
rpo
rati
on
net
inco
me
25,1
1233
,153
53,8
2176
,766
85,8
8792
,848
116,
721
128,
513
Cor
pora
tion
s77
,213
84,6
0510
6,30
111
6,22
5
Pro
pert
y10
,459
11,3
3011
,807
12,5
0313
,294
13,9
729,
976
16,5
61X
Gen
eral
9,09
19,
698
10,0
2810
,445
11,0
0411
,190
444
13,1
04
Sev
eran
ce66
468
771
170
470
078
581
684
1::
JN
atur
alga
s40
543
244
646
445
840
251
654
7O
ilpr
oduc
tion
138
120
118
112
106
237
149
149
-O
ilp
rora
tio
n12
113
514
713
813
614
615
114
53: ::J
Ken
tuck
yCD .... D
)
Lic
ense
51,4
5957
,241
61,3
9867
,592
72,0
4175
,139
83,5
74-
Str
ipm
inin
gpe
rmit
s80
890
31,
295
2,59
41,
830
1,89
22,
862
:0 <DIn
divi
dual
inco
me
(net
)13
2,66
915
6,36
917
9,21
621
2,32
424
9,44
929
2,54
633
8,16
038
9,91
2C/
l0
Ref
unds
-44
,65
2--
52,3
57-
59,3
20-6
6,8
44
-76
,32
0c::
Gro
ssco
llec
tion
s25
6,97
630
1,80
635
1,86
640
5,00
446
6,23
2.... C
')
Co
rpo
rati
on
net
inco
me
40,0
9353
,903
69,3
3883
,364
116,
626
134,
785
131,
254
138,
597
<D C/l
Pro
per
ty26
,746
38,4
7731
,385
33,6
8135
,364
37,2
9943
,413
147,
366
Gen
eral
2,28
52,
430
2,40
52,
688
2,91
23,
216
3,44
875
,514
Sev
eran
ce18
25,
941
37,3
8553
,749
99,0
8991
,496
113,
005
128,
160
Coa
l5,
767
37,2
2653
,495
98,7
4091
,078
112,
597
127,
765
Oil
prod
ucti
on18
217
415
925
334
941
840
839
5> "0 "0 <D
Lou
isia
na
::J ~
Lic
ense
70,7
2779
,422
80,4
9992
,876
97,4
9411
4,15
812
2,63
614
0,72
5X
Dri
llan
dre
new
alpe
rmit
517
416
405
331
390
424
533
544
Indi
vidu
alin
com
e(n
et)
81,8
6710
5,35
410
9,41
799
,956
108,
870
117,
641
133,
614
192,
276
Ref
unds
NA
-34
,957
-24
,31
4
Gro
ssco
llec
tion
sN
A16
8,57
121
6,59
0
Co
rpo
rati
on
neti
ncom
e51
,299
79,5
2378
,781
67,6
0378
,718
87,7
4195
,248
186,
956
Pro
pert
y:ge
nera
l28
,254
29,1
1724
,030
163
2623
414
734
Sev
eran
ce25
6,60
024
4,45
626
7,71
239
0,34
554
8,51
035
8,49
549
5,49
847
6,82
9
Oil
and
dist
illa
te13
2,98
412
2,52
711
2,06
118
6.06
128
2,48
327
5,92
826
9,87
425
9,61
4
Gas
116,
095
113,
958
147,
394
192,
214
250,
940
225,
792
210,
372
202,
031
Sul
fur
2,65
92,
459
2,24
22,
131
2,04
64,
062
2,43
52,
295
Mai
ne
Indi
vidu
alin
com
e(n
et)
23,8
7828
,179
31,3
0839
,033
44,6
0352
,190
75,1
5710
3,17
7
Ref
unds
-8,7
49
-11
,03
0-1
2,3
90
-19
,78
1-1
9,1
14
Gro
ssco
llec
tion
s47
,782
55,6
3364
,580
94,9
3812
2,29
1
Co
rpo
rati
on
net
inco
me
8,55
88,
588
10,0
4413
,202
20,1
8132
,642
35,2
0034
,307
Pro
pert
y3,
967
5,81
95,
993
5,77
610
,250
13,4
9614
,317
18,7
63
Gen
eral
3,43
54,
885
5,25
15,
771
10,2
3813
,480
14,2
9518
,741
Mar
ylan
d(X
)
Indi
vidu
alin
com
e(n
et)
413,
976
456,
854
515,
933
573,
728
665,
997
790,
364
806,
740
884,
392
01
Ref
unds
NA
-18
1,80
3-1
97
,08
1-2
26
,87
2
Gro
ssco
llec
tion
sN
A97
2,16
71,
003,
821
1,11
1,26
4
Tabl
eA
-Ico
ntin
ued
CO 0'>
Tax
1971
1972
1973
1974
1975
1976
1977
1978
(pre
lim
)
Mar
y/an
dco
ntin
ued
Co
rpo
rati
on
net
inco
me
70,2
6077
,441
80,0
3590
,065
94,3
8910
9,25
411
5,29
712
6,80
2G
ener
alco
rpo
rati
on
83,9
6898
,404
101,
514
112,
528
Pro
per
ty33
,541
36,2
7345
,954
50,0
4752
,419
59,7
9272
,446
80,4
37G
ener
al:
loan
taxe
s33
,424
36,1
6245
,647
49,7
3852
,085
59,4
8672
,143
80,0
94S
peci
al:
roll
ing
stoc
k11
811
211
510
910
134
55In
tere
stan
dpe
nalt
ies
192
198
234
272
303
288
Min
neso
ta-i
lndi
vidu
alin
com
e37
0,70
248
3,21
558
6,23
570
1,39
880
7,10
884
9,52
095
6,93
31,
074,
552
tll'
Ref
unds
-15
7,6
41
-16
9,4
85
-21
6,84
5-2
54
,25
7-
311,
465
X tll
Gro
ssco
llec
tion
s85
9,03
097
6,59
31,
066,
369
1,21
1,20
01,
386,
017
... o·C
orp
ora
tio
nne
tin
com
e79
,969
112,
403
170,
655
190,
326
195,
905
196,
436
258,
095
292,
853
:::JR
efun
ds-1
3,4
08
-19
,26
9-2
8,1
00
-27
,03
8-2
7,7
65
0G
ener
al(g
ross
)18
7,21
519
9,00
420
3,25
626
3,73
729
3,64
6.....
.
Pro
per
ty6,
844
2,86
82,
122
2,57
62,
355
2,18
23,
083
3,76
0s::
Gen
eral
139
4855
2214
2218
:::J CDS
ever
ance
18,3
8820
,080
19,9
2429
,394
35,8
9758
,171
59,7
1861
,945
.., tll
Occ
upat
ion
tax
9,31
27,
292
10,0
2215
,842
20,0
5524
,321
25,0
5710
,193
Tac
onit
e6,
358
6,88
510
,235
19,2
1818
,141
6,24
7]J
Iro
nor
e3,
664
8,95
89,
820
5,10
36,
916
3,94
6CD en
Roy
alty
tax
2,90
03,
392
3,89
03,
503
3,79
32,
853
0T
acon
ite
1,64
71,
840
2,47
71,
953
2,35
62,
770
3,03
91,
905
c ..,Ir
on
ore
421
1,43
71,
532
731
752
945
0
Co
pp
er,
nick
el2
22
22
3CD en
Tac
on
ite
ton
nag
ean
dad
diti
onal
tax
7,42
910
,948
7,00
210
,159
11,9
5230
,347
30,8
6848
,889
Mis
sour
i
Indi
vidu
alin
com
e(n
et)
168,
932
256,
801
315,
027
315,
481
311
,334
333,
843
389,
594
438,
604
):-
Ref
unds
-44
,461
-61
,037
-62
,74
1-7
2,4
39
-91
,983
Gro
ssco
llec
tion
s30
9,94
237
2,37
140
1,58
446
2,03
353
0,58
7"0 "0
Co
rpo
rati
on
net
inco
me
27,3
2250
,012
62,6
6454
,683
56,4
0583
,680
105,
772
111,
953
CD :::J
Co
rpo
rati
on
inco
me
56,4
0567
,439
87,1
6091
,224
0.
Ref
unds
-5,8
44
-9,
588
-6,9
30
-7,6
89
X
Gro
ssco
llec
tion
s62
,249
77,0
2794
,090
98,9
13
Pro
per
ty:
gene
ral
3,25
23,
899
3,56
83,
802
3,95
24,
364
4,49
24,
627
Mo
nta
na
Indi
vidu
alin
com
e(n
et)
42,3
8168
,082
77,0
6679
,029
88,5
9997
,520
111,
862
123,
621
Ref
unds
-11
,90
2-
14,2
12-
18,3
17
Gro
ssco
llec
tion
s90
,931
126,
074
141,
938
Co
rpo
rati
on
net
inco
me
9,54
611
,523
12,5
0715
,736
22,0
7923
,020
24,9
5729
,239
Pro
per
ty8,
596
7,49
26,
694
22,5
0710
,604
16,8
1315
,636
16,3
29
Gen
eral
22,4
6610
,546
16,7
3715
,636
16,2
49
Sev
eran
ce5,
131
4,47
45,
229
9,82
214
,685
31,3
4445
,753
44,6
6
Coa
lp
rod
uct
ion
2,93
32,
668
2,69
83,
315
5,39
622
,924
34,4
7033
,624
Oil
pro
du
ctio
n21
248
369
44,
256
6,18
06,
564
6,88
46,
Res
ourc
ein
dem
nity
2,21
02,
2
Met
alm
ines
tax
1,97
71,
314
1,82
82,
240
3,09
91,
845
2,17
81,
979
Nev
ada
Pro
per
ty11
,479
12,6
2114
,617
16,5
8117
,586
19,9
6422
,105
27,0
51
Gen
eral
6,57
67,
103
8,21
08,
287
IO,2
15
Rea
lpr
oper
ty5,
250
6,10
46,
538
7,57
27,
576
9,21
Per
son
alpr
oper
ty68
247
256
563
871
199
8CO
Sev
eran
ce:
min
epr
ocee
ds50
128
104
156
177
148
105
129
.....,
j
00
Tabl
eA
-Ico
ntin
ued
00
Tax
1971
1972
1973
1974
1975
1976
1977
1978
(pre
lim)
New
Jers
ey
Indi
vidu
alin
com
e(n
et)
19,5
7023
,258
25,5
2744
,035
45,9
4210
1,20
070
9,65
377
8,50
5
Co
rpo
rati
on
net
inco
me
112,
312
119,
528
170,
588
197,
591
202,
780
228,
996
332,
7-7,
538
9,22
7C
orp
ora
tio
nin
com
eta
x31
4,32
337
9,78
2
Pro
pert
y:S
peci
al:
busi
ness
pers
onal
prop
erty
50,8
4253
,442
57,7
4564
,235
70,7
4264
,742
80,4
9181
,176
New
Mex
ico
-i
III
Indi
vidu
alin
com
e(n
et)
X35
,815
44,0
8849
,501
57,9
4656
,575
58,1
9126
,639
45,9
92II
IR
efun
ds-1
5,5
64
-17
,21
4-2
3,3
24
-72
,11
6-
55,8
34.... 0
Gro
ssco
llec
tion
s73
,510
73,7
8981
,515
98,7
7510
1,82
6::::
l
Co
rpo
rati
on
neti
ncom
e10
,119
13,2
1115
,063
16,6
1018
,344
23,5
0429
,486
37,6
080 -
Pro
pert
y15
,893
15,0
3013
,230
13,8
3314
,466
13,8
4116
,095
19,8
51~
Gen
eral
13,9
9413
,210
13,4
8919
,023
Spe
cial
:oi
lan
dga
s::::
la>
prod
ucti
on47
263
12,
606
828
~ III
Sev
eran
ce35
,815
35,8
7836
,947
43,9
6371
,154
87,4
8510
2,78
314
5,82
6O
ilan
dga
s,3~
07018
,390
36,0
6446
,211
53,9
7574
,088
:::D a>O
ilan
dga
spr
ivil
ege
18,7
5226
,250
31,4
5736
,715
42,8
31CI
lO
ilan
dga
s0 c:
adva
lore
mpr
oduc
tion
3,24
63,
906
4,05
84,
419
5,03
4~
Oil
and
gas
cons
erva
tion
1,03
01,
456
2,22
52,
787
3,51
5("
) a>N
atur
alga
spr
oces
sors
1,31
91,
695
2,19
92,
719
3,21
0CI
l
Oth
er:
copp
er,
pota
sh,
uran
ium
1,22
61,
513
1,33
52,
168
17,1
48
New
Yor
k
Indi
vidu
alin
com
e(n
et)
2,55
0,20
72,
514,
557
3,21
1,93
03,
431,
993
3,58
8,58
43,
948,
808
4,52
6,97
54,
506,
245
Ref
unds
-71
3,6
31
-75
8,2
40
-96
0,6
11
-57
6,7
83
-1,1
38
,57
3»
Gro
ssco
llec
tion
4,14
5,62
44,
346,
824
4,63
9,41
95,
103,
758
5,64
4,81
8"0
."0
Co
rpo
rati
on
net
inco
me
572,
328
781,
010
874,
267
874,
379
967,
401
1,13
2,75
61,
295,
001
1,34
4,61
0a>
Co
rpo
rati
on
fran
chis
e43
3,82
560
1,36
969
3,94
870
6,17
476
3,26
987
7,19
01,
048,
021
1,08
0,59
6::::
l~ X
Nor
thD
ako
ta
Indi
vidu
alin
com
e(n
et)
16,8
7719
,506
27,3
1845
,435
67,6
4950
,477
55,0
3769
,171
Ref
unds
-3,0
95
-6,
143
-6,9
50
-5,
387
Gro
ssco
llec
tion
s70
,743
56,6
2061
,987
74,5
58
Co
rpo
rati
on
neti
ncom
e7,
723
8,87
210
,089
14,5
2619
,964
19,5
7221
,800
20,9
21
Co
rpo
rati
on
net
inco
me
6,11
98,
559
9,32
812
,566
11,9
65
Bus
ines
spr
ivil
ege
tax
8,40
711
,405
10,2
449,
234
8,95
6
Pro
per
ty1,
410
1,47
61,
353
1,46
31,
468
1,73
02,
605
2,62
5
Gen
eral
847
829
864
882
891
1,09
31,
222
1,24
8
Sev
eran
ce3,
166
3,30
63,
140
4,35
86,
880
12,5
9415
,418
18,6
19
Oil
and
gas
prod
ucti
on3,
166
3,30
63,
140
4,35
86,
880
8,28
39,
288
10,7
30
Coa
lpr
oduc
tion
4,31
16,
130
7,88
9
Ohi
o
Lic
ense
390,
676
326,
457
355,
470
421,
469
370,
748
335,
460
Pub
lic
util
itie
s
6,71
38,
202
Coa
lco
nsum
ptio
n
341
Str
ipm
inin
gad
min
.69
872
959
677
280
474
1
Indi
vidu
alin
com
e11
1,26
937
3,54
341
9,17
448
1,78
551
1,63
661
4,87
977
5,49
4
Ref
unds
-51
,681
-54
,730
-64
,68
3-6
9,5
58
-77
,04
8
Gro
ssco
llec
tion
s47
0,85
553
6,51
557
6,31
968
4,43
785
2,54
20:
>
Co
rpo
rati
on
net
inco
me
134,
698
167,
970
190,
584
267,
315
265,
052
315,
481
461,
393
CD
Pro
pert
y:sp
ecia
l60
,553
65,5
1575
,950
84,2
1991
,335
98,1
6110
8,34
711
9,61
7
Tab
leA
-1co
ntin
ued
<0
0
Tax
1971
1972
1973
1974
1975
1976
1977
1978
(pre
lim)
Ohi
oco
ntin
ued
Sev
eran
ce86
44,
141
4,10
13,
892
3,93
03,
918
3,80
0C
oal
and
salt
555
2,13
62,
012
1,92
82,
070
1,99
71,
937
Oil
4325
023
323
425
626
625
8
Ok
lah
oma
Indi
vidu
alin
com
e(n
et)
63,6
4897
,759
105,
054
120,
773
176,
208
200,
998
216,
833
252,
127
Ref
unds
-24
,83
7-
33,5
14-5
6,2
63
-60
,82
3--
lG
ross
coll
ecti
ons
201,
045
234,
512
273,
096
312,
950
ll> X
Co
rpo
rati
on
neti
ncom
e25
,207
28,0
1435
,434
40,3
6646
,053
53,4
3070
,635
91,3
75ll> -
Sev
eran
ce51
,280
73,3
4271
,456
96,9
8012
8,09
615
1,31
619
1,35
123
0,36
8:::J
Gro
sspr
oduc
tion
50,0
9972
,164
70,3
2695
,898
126,
858
150,
071
189,
180
215,
925
Gas
cons
erva
tion
11,8
07-
Pet
role
umex
cise
1,18
11,
178
1,13
01,
082
1,23
81,
245
2,17
12,
636
~ ~ CD "'"O
rego
nll>
Indi
vidu
alin
com
e(n
et)
226,
245
251,
226
300,
555
352,
396
427,
002
472,
147
561,
895
686,
248
::D CDR
efun
ds-6
4,5
95
-69
,54
7-7
7,5
40
-87
,10
7-9
5,4
05
(J)
Gro
ssco
llec
tion
s41
6,99
14%
,549
549,
687
649,
001
781,
653
0 CC
orp
ora
tio
nne
tin
com
e24
,517
40,6
0651
,131
85,7
3490
,691
66,6
5791
,104
125,
474
.... (')
Sev
eran
ce2,
538
2,38
12,
581
2,82
43,
084
3,45
83,
680
4,11
7CD
Eas
tern
and
wes
tern
(J)
Ore
gon
seve
ranc
e1,
880
2,14
11,
917
2,15
7
Pen
nsyl
vani
a
Lic
ense
593,
323
664,
741
726,
844
Ser
vice
min
ing
cons
erva
tion
387
409
421
»In
divi
dual
inco
me
(net
)13
5,06
773
0,64
11,
010,
825
1,11
5,61
299
5,40
91,
062,
210
1,17
8,07
11,
327,
816
"t:l
"t:l
Ref
unds
-9,0
50
-38
,098
-28
,36
0-2
4,8
37
-18
,78
3CD
Gro
ssco
llec
tion
s1,
124,
662
1,03
3,50
71,
090,
570
1,202,~9
1,34
6,59
9~ 0
-
Co
rpo
rati
on
neti
ncom
e43
1,69
648
1,60
049
7,21
254
0,10
360
1,01
661
6,87
266
5,99
378
6,97
6X
Pro
pert
y:sp
ecia
l33
,765
35,6
7239
,963
46,0
4647
,881
60,0
5462
,524
69,6
22
Uti
lity
prop
erty
30,8
4032
,307
,16,
317
42,4
2643
,731
55,2
9057
,527
64,9
67
Dom
esti
cco
rpor
atio
n3,
415
3,89
34,
495
4,25
04,
401
For
eign
corp
orat
ions
205
257
269
747
253
Sou
thD
akot
a
Sev
eran
ce31
053
687
2
Min
eral
and
min
eral
prod
ucts
310
536
526
Oil
and
gas
346
Ten
ness
ee
Lic
ense
156,
017
164,
284
Str
ipm
inin
gpe
rmit
s19
337
6
Indi
vidu
alin
com
e(d
ivid
ends
and
inte
rest
tax)
(net
)12
,383
13,5
9815
,103
16,4
6418
,436
22,1
3122
,385
24,8
57
Ref
unds
-62
-49
-11
9-1
10
6070
tax
(gro
ss)
14,9
5018
,011
18,6
4521
,181
4070
tax
(gro
ss)
3,50
33,
880
3,71
33,
699
Pen
alti
esan
din
tere
st45
289
147
87<
0
Co
rpo
rati
on
neti
ncom
e59
,455
77,8
0410
2,97
811
2,97
412
6,71
512
8,62
115
6,04
217
0,84
8-'
"
Exc
ise
(inc
ome)
128,
621
150,
935
164,
8
Sev
eran
ce:
coal
tax
810
1,59
51,
818
2,05
22,
128
coTa
ble
A-I
cont
inue
dI\
)
Tax
1971
1972
1973
1974
1975
1976
1977
1978
(pre
lim)
Tex
asP
rope
rty:
gene
ral
63,8
3761
,589
57,1
9150
,811
44,9
0136
,668
42,7
5544
,598
Sev
eran
ce30
7,92
431
1,97
933
9,75
752
3,74
566
6,87
680
0,69
390
7,28
195
9,68
6N
atur
alan
dca
sing
head
gas
108,
809
114,
380
124,
902
171,
068
257,
325
364,
588
474,
318
517,
844
Cru
deoi
l19
2,47
419
0,78
520
7,52
234
4,83
240
2,55
342
9,10
542
6,37
343
5,22
3S
ulfu
r4,
291
4,61
14,
959
5,51
64,
787
4,79
04,
480
4,63
6O
ilan
dga
sre
gula
tion
2,35
02,
203
2,37
42,
329
2,21
12,
210
2,11
01,
983
-i
Ql
X Ql ....
Uta
h0
Indi
vidu
alin
com
e(n
et)
61,8
8474
,096
88,5
4790
,032
104,
919
140,
562
153,
562
188,
894
::J
Ref
unds
-17
,66
8-1
6,3
72
-17
,92
2-2
5,4
06
-31
,03
00 -
Gro
ssco
llec
tion
s10
7,70
012
1,29
115
8,48
418
3,67
421
9,92
43:
Cor
pora
tion
neti
ncom
e(f
ranc
hise
)11
,085
12,6
3629
,575
20,1
7318
,002
24,5
0124
,866
29,4
48::
J CDP
rope
rty:
Gen
eral
13,0
8914
,634
9,49
23,
409
258
204
197
186
$i3S
ever
ance
4,67
13,
938
3,91
35,
292
6,23
811
,723
8,93
18,
926
::DM
ine
occu
pati
on3,
374
2,50
62,
383
2,87
134
24,
731
2,49
02,
283
CDO
ilan
dga
spr
oduc
tion
1,29
71,
432
1,53
02,
421
5,89
66,
992
6,44
16,
643
CIl
0 C ..., (')
Vir
gini
aCD CI
lL
icen
se12
4,74
112
9,85
612
6,60
3S
trip
min
ing
perm
its
309
373
352
Indi
vidu
alin
com
e(n
et)
312,
984
365,
984
441,
900
468,
967
547,
125
614,
575
714,
086
874,
817
Ref
unds
NA
-13
7,1
49
-14
8,1
36
-17
1,5
53
Gro
ssco
llec
tion
sN
A75
1,72
486
2,22
21,
046,
370
>C
orpo
rate
neti
ncom
e64
,705
77,6
4296
,618
106,
406
117,
065
130,
417
159,
152
164,
790
"C "C CD ::J 0-
Was
hing
ton
X
Pro
pert
y11
6,52
513
2,35
013
1,78
591
,245
156,
641
271,
528
303,
165
349,
229
Gen
eral
66,9
5776
,064
72,5
7127
,715
87,5
3018
8,25
420
5,79
523
4,98
8
Wis
cons
in
Indi
vidu
alin
com
e(n
et)
507,
146
594,
697
727,
885
802,
995
873,
723
959,
923
1,14
4,07
31,
324,
679
Ref
unds
-98
,46
1-1
00
,80
6-1
11
,37
7-
122,
548
-15
6,
Gro
ssco
llec
tion
s90
1,45
697
4,53
01,
071,
300
1,26
6,62
11,
480,
898
Cor
pora
tion
neti
ncom
e88
,792
116,
805
136,
107
160,
269
153,
407
190,
419
251,
657
284,
979
Pro
pert
y86
,386
93,0
5491
,295
92,0
8712
6,70
791
,910
100,
874
Sev
eran
ce:
prod
ucti
onta
x(t
imbe
r/ir
onor
e)26
131
347
542
150
465
169
860
2
Wyo
min
g
Pro
pert
y9,
725
9,66
07,
570
9,79
76,
315
7,04
59,
049
17,5
89
Gen
eral
8,53
78,
490
6,11
56,
659
8,79
417
,355
Sev
eran
ce4,
877
5,07
55,
307
5,08
618
,543
40,9
7446
,969
66,0
21
Min
eral
exci
se,
4070
NA
38,7
9143
,732
44,1
16
Min
eral
exci
se,
2070
NA
1,52
51,
925
3,76
6
Coa
l28
399
717
,716
Coa
land
gas
conv
ersi
on30
737
531
542
3
Coa
land
gas
prod
ucti
on4,
877
5,07
55,
307
5,08
6CO W
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Index
"ABC" rule for income, 12Accessibility, market, 22Ad valorem: output tax, 38-39, 43, 60;
property tax, 13, 16,40-41,54,59-60; tax rate, I, 12,48, 52
Adjustment costs, 26Administrative: costs, I, 12,63,76;
ease, 36; scale economies in, 16;taxes, 44
After-tax discounted profits, 36-37,40-44,52-54
Agencies, federal, 19Airplanes, factor of, 19Alabama, 3, 12-14, 16,80Alaska, 2-3, 12, 14, 16, 80All-or-nothing decisions, 30Allocation of income and profit, 16,64,Allowances: depletion, 42-43, 54, 64,
67; exploratory, 57Alternative taxes, 44Arizona, 4, 13-14, 16,76,81; copper
royalty in, 2; mineral tax division in,18
Arkansas, 4, 14, 17,81Arkansas Oil Museum, 4Assessment(s): property, 40-41;
"quick," 22; ratio, 16, 76Assessors, local tax, 13Assets, 72; corporate, 12
Behavior, profit-maximizing, 59Benefits: from exploration, 56; tax, 59Bonanzas, 58Bonuses, lease, 58Budgets and budgeting, 2, 74Bureaucracy, problems with, 16
California, 5, 14, 17, 81Capital; expenditures, 57,71; gains,
58-59; intensive process, 58;inve ted, 58, 70-72; and net income,41; owner, 68-69; ral f r IlIrn n,
Index
60, 68, 73; taxes, 68; use of, 22, 76Cash flow, 23-24; positive, 31; value of,
55-56City taxes, 74Coal, production and uses of, 2-3, 5-11Collection, factor of, 16,36Colorado, 5,13-14,17,82Compensation: corporate, 13;
executive, 16Competition, economic, 58Concentration, process of, 21-22,
54-55,72-73Conservation, environmental, 73Constant-price ease, 48Consumer Price Index (CPI), 73Consumers: prices to, 2; of products, 60Contracts: long-term, 22, 60;
"save-free" clauses in, 68Copper, royalties on in Arizona, 2Corporate: assets, 12; compensation,
13; employment, 12; enterprises, 18;income, 12, 16,70; overhead, 13, 16,72; profits, 13, 16; sales, 12; tax base,65
Cost(s): adjustment, 26; administrative,1,12,63,76; depletion, 16,53,71;earnings, 20; expansion, 23;extraction, 2, 30, 38, 52, 56; localservices, 16; marginal, 45; operating,12,64
Cutoff grades, factor of, 36, 39, 41, 43,45,66
Data, time-series, 69Decisions: all-or-nothing, 30; hierarchy
of, 25; investment, 25; long-run, 26;making of, 26-28, 54
Depletion: allowances, 42-43, 54, 64,67; cost, 16,53,71; factor of, 1,77;of resource base, 12
Deposits, quality of, 2Depreciation, I, 13; straight-line, 16
105
106
Development: long-range, 23; mineral,69,77; new, 24; policies, 20, 59; andresearch, 16,72
Discount: prices, 26; profits, 35-37,40-44, 52-54; rates, 28
Distortions, effects of, 44, 66Documentation, historical, 19Downside risks, factor of, 42, 70, 72Drilling, diamond and shallow, 20Drug industry, 31
Earning power: cost, 20; future, 29Economics and the economy: adverse
incentives, 16; competition in, 58;condition changes in, 19,24; factorof, 26, 44, 52; market, 57, 69
Electricity, use of, 16Employment, 72; corporate, 12Enforcement policies, 16,63, 70Engineering studies, need for, 22Environment: and conservation, 73;
damage to, 2; policies on, 24Equity, issues of, 43-44Estimates of mineral reserves, 19,22Executive compensation, 16Expansion, costs of, 23Expenditures, capital, 57, 71Exploitation, problems of, 20, 24Exploration: activity, 69; allowances
for, 57; benefits from, 56;capitalization of, 71; programs of,19-25,59
Exportation, tax, 18Extraction: cost of, 2, 30, 38, 52, 56, 66;
mineral ore, 1, 23-24; process, 1-2,28,35-39,44; quantity ratio of, 21,63; values, 1
Fault structures, importance of, 20-21Federal: agencies, 19; taxes, 12-13, 18,
57Fees, management, 72Fire protection, 74Fixed-payments and taxes, 36, 39Florida, 6, 14, 17Flotation process, 21Funds, highway trust, 2
x tI 11 I Min r I Resources
a, -7, -1 I, 16-17, 43Ga oline laxe.. 2Geochemical properties, 20, 55Geography, factor of, 19Geological factors: characteristics of,
19-21; composition of, 70; influenceof, 26, 30-31,44-46, 52-53, 55; andmaps, 19; structure of, 41
Geophysical anomalies, 20-21Georgia, 82Gross-proceeds methods, 1, 13-16
Hierarchical policies, 25, 35High-grade ores, 72Highway trust funds, 2Housing, factor of, 73
Idaho, 6, 14,82Illinois, 14,83Incentives, 70; adverse economic, 16;
distortion of, 44; tax, 57Income: allocation of, 64; capitalized
net, 41; corporate, 12, 16,70;intrastate, 72; property, 76; state, 69;subsidies, 71; taxes, 1, 16,65,70-74
Indexes, price, 2, 39-40, 73Indiana, 83Inflation indicators, 12, 37Inspection policies, 20Integrated: firms, 12; tax systems,
53-54,63-68; vertical operations, 1Interest, rate of, 54Interstate profit allocation rules, 13, 16Intrafirm transactions, 13Investment(s), 20-23, 59; and capital,58, 70-72; decisions, 25; incremental, 67Iowa, 83Iron ore, 3-4
Kansas, 14,84Kentucky, 6, 14, 17,84
Labor requirements, 2, 68-69, 72Land reclamation, 70; funds for, 2Laws, federal tax, 12Lease bonuses, system of, 58Loans and loaning principles, 22
Index
Local: services, 16, 18; taxes, 63, 67Louisiana, 6, 14, 17, 84Low profit mines and mining, 12
Magnetic processes, 19,22Maine, 84Management policies and fees, 72Maps and mapping, 19-20Marginal: extraction costs, 45, 66;
mines, 12, 76; taxes, 66Market(s): accessibility to, 22; changing
conditions of, 24; depressed, 70;economy, 57, 69; failures, 77; prices,13,71,73; studies, 22; transactions,1; value of reserves, 40
Maryland, 84-85Maxwell, J.A., 74McClure, Charles E., Jr., 71Michigan, 7,13-14,17Mineral: development, 69, 77;
extraction, 1; rights, 60, 69; taxation,
18Mineralization, type of, 20-21Mining and mines: low-profit, 12;
marginal, 12,76; operations, 24-26;profitability, 22; recovery, 41;.risksinherent in, 71; sites, 38; taxatIOn, 1;underground, 73; wealth of, 13
Minnesota, 7,13-14,39,86Mississippi, 7, 17Missouri, 87Moisture levels, factor of, 21Monopoly accusations, 60Montana, 2, 8, 12, 15, 17,87
Natural resources, policies on, 55,58-59, 71
Nebraska, 9Negative severance tax, 42Net proceeds taxes, 13-16,41,44Net-of-tax: prices, 52; rate of return, 58Nevada, 9,17,87New Jersey, 89New Mexico, 9, 15, 17,40,63,65-67,
69,73,89New York, 90
107
Nondistortionary profits tax, 56, 59Nonrenewable resources, 36North Dakota, 10, 15, 17,90,37,39-40,
74
Ohio, 10,90-91; coal in, 2Oil, 3-11,16-17,43; shale, 5Oklahoma, 10, 15, 17,90On-site inspections, need for, 20Open-pit mining methods, 21,73Oregon, 17, 90Ores: bypassing of, 2; dilution of, 21;
extraction of, 23-24; grades of, 21,72; iron, 3-4
Output-related taxes, 1-12,52,72-74;ad valorem, 38-39, 43, 60
Overburden, nature or, 21, 24Overhead, corporate, 13, 16,72Ownership: of capital, 68-69; property,
57-60,69; resource, 71; of surfacerights, 57
Payback periods, undiscounted, 23Payments: fixed, 36; royalty, 64; tax, 56Pennsylvania, 15, 17, 91piggyback federal taxes, 12.Plants: processing, 23, 38; size of, 23, 30Police protection, 74Policy making and makers, 59. See also
DecisionsPolitics and political uncertainties, 24Pollution, problems of, 70Price indexes, 2, 39-40, 73Prices: consumer, 2; discounted, 26;
housing, 73; increases in, 68; market,13,71,73; net-of-tax, 52; projections
of, 22, 27 .Processing: plants, 23, 38; techmques,
54-55,72-73Production schedules and taxes, 1, 24,
68Products: consumers of, 60; finished, 2Profitability and profits, 25; after-tax,
35-37,40-44,52-54; corporate, 13,16; discounted, 36-37; interstateallocation, 16; intertemporalextraction, 2; margin formulas for,
~------
108 Taxation of Mineral Resources Index 109
76; mining, 22; nondistortionary, 56,59; progressive taxes on, 1,43-44
Property: assessments, 40-41; income,76; owners, 57-60, 69; taxes, I,13-16,40-41,54,59-60,64,74-77
Proportional profits taxes, 42-44Public: policies, 31; services, 2, 16, 74
Quality, paterns of, 2, 24, 55, 63Quantity: of extracted ores, 63; and
quality mix, 44"Qu ick" assessments, 22
Ral of return, 23, 58-59; on capital, 60,68, 73
Recovery: factor of, 19,22; mine, 41, 55Refining proces es, 72Rents: collection of, 36; of
natural-resources, 58-59; taxing of,57-59
Research and development, 16,72Reserves: nature of, 22, 25; probable,
21; recoverable, 29, 56Resources: depletion of, 12; natural, 2,
55,58-59,71; nonrenewable, 36; andrents, 2; owners, 71; value of, I
Revenue: raising of, I; source of, 74;tax, 52
Rights: mineral, 60, 69; surface, 57Risk(s): assumption of, 24-25;
downside, 42, 70, 72; effect of,26-31; mining, 71; offset of, 56-57;sharing of, 58
Royalties: copper in Arizona, 2;payment of, 64; percentages, 58-59
Sales, 72, 76; corporate, 12; taxes, 74Satellites, factor of, 19"Save free" contract clauses, 68Schools and education, 16,74Security Exchange Commission (SEC),
76Sensitivity studies, 23Separation processes, 21-22Services: budget, 2; local, J8; publi ,2,
16,74
Severance taxes, 1-2,36-39,53,70;negative, 42; rate of, 64
Shale oil, recovery of, 5South Dakota, 10, 12,91; coal in, 2State: income, 69; taxes, 13, 18,66Stinson, Thomas F., IStorage facilities, 23Straight-line depreciation factors, 16Studies, feasibility, 22-23Subsidies, 59; implicit, 42; income', 71Sulfur, 6Surface rights, ownership of, 57Surveys, geographical, 19
Taxes and taxation: absence of, 12,35,45,67; ad valorem, I, 12,38-39,43,48, 52, 60; administrative, 44; alternative, 44; and assessors, 13;benefits of, 59; city, 74; corporate,65; exportation, 18; fixed-free, 39;gasoline, 2; incentives, 57; income,71; integrated system, 31, 53-54,63-68; laws on, 12; local, 13,63,67;marginal, 66; net proceeds, i3-i6,41,44,52,58; nondistortionary, 56,59; output, 1-12,37-39,43,52,60,72-74; payments of, 56; piggyback,12; production, progressive profits,1,43-44,56,59,73; and rents, 57-59;revenues, 52; sales, 74; severance,1-2,36-39,42,53,64,70,73; special,I, 12; state, 13, 18,66; in Wyoming,41
Technology, 22, 25; record of, 76;speci fie, 23; trends in, 18
Tennessee, II, 91Tests, geochemical, 20Texas, 92Time: assessment, 40-41; paths, 44;
series data, 69Tin, deposits, of, 26-27Tonnage of material, 21-22, 25Trade-off, 24, 55, 63Transportation facilities, 23TruSI funds, variable, 2
Underground mines and mining, 21, 73Uranium, to-II, 63-65Utah, Il, 15, 17,41,92
Value(s): assigning of, I; of cash flow,55-56; of extracted resources; I, ofmarket reserves, 40
Virginia, 92
Washington, 93Waste, problem of, 22Water, factor of, 16West Virginia, II, 15, 17Wholesale Price Index (WPI), 2, 73Windfalls, 43, 73Wisconsin, 17,93; net-proceeds tax in,
44Working days, 25Wyoming, 2, II, 17,93; tax base in, 41
About the Authors
Robert F. Conrad is currently assistant professor of economics atDuke University. He received the Ph.D. in economics at the University of Wisconsin, Madison in 1978. Prior to his current position,Professor Conrad was a visiting lecturer in economics at Northwestern University and worked in the office of international tax affairsat the U.S. Treasury Department.
Professor Conrad has served as a consultant on mineral taxationpolicy for the governments of Canada, Ireland, and Indonesia. Hisother research interests include capital taxation, taxation of multinational firms, and health economics.
Bryce Hool received the Ph.D. in economics from the University ofCalifornia at Berkeley, after receiving the B.Sc. in mathematics andM. Comm. in economics from the University of Canterbury. He iscurrently an associate professor of economics at the State Universityof New York at Stony Brook and was an assistant professor at theUniversity of Wisconsin at Madison. His other published research isin the areas of general equilibrium theory, monetary theory, andmacroeconomic theory and policy.