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Taxation of
Mineral Resources

Books from
The Lincoln Institute of Land Policy
The Lincoln Institute of Land Policy is a school that offers intensive
courses of instruction in the field of land economics and property
taxation. The Institute provides a stimulating learning environment
for students, policymakers, and administrators with challenging
opportunities for research and publication. The goal of the Institute is
to improve theory and practice in those fundamental areas of land
policy that have significant impact on the lives and livelihood of all
people.

Taxation of
Mineral Resources

Constitutions, Taxation, and Land Policy
Michael M. Bernard
onstltutlons, Taxation, and Land Policy-Volume II
Michael M. Bernard
.'ederal Tax Aspects of Open-Space Preservation
Kingsbury Browne

Robert F. Conrad

Taxation of Nonrenewable Resources
Albert M. Church

Duke University

Taxation of Mineral Resources
Robert I. Conrad and R. Bryce Hool

R. Bryce Hool

Incentive Zoning
Jerald S. Kayden

State University of New York
at Stony Brook

Building for Women
Edited by Suzanne Keller
State Land-Use Planning and Regulation
Thomas G. Pelham
The Art of Valuation
Edited by Arlo Woolery

LexingtonBooks
D.C. Heath and Company
Lexington, Massachusetts
Toronto

R. HJ4169. Robert F Taxation of mineral resources. Bryce. joint author. Heath and Company All rights reserved. Includes index. Mines and mineral resources-Taxation-United States. Bibliography: p. electronic or mechanical. 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 . 1. II. Title. No part of this publication may be reproduced or transmitted in any form or by any means.C66 336. without permission in writing from the publisher. C. or any information storage or retrieval system. 2. I. Hool.To Helen and Emily Library of Congress Cataloging in Publication Data nrad. including photocopy. recording.2'7833385'0973 80-8392 ISBN 0-669-04104-1 Copyright © 1980 by D. Mining industry and finance-Taxation-United States.

Contents ('hupter 1 ('hllpter 2 List of Figure and Tables ix Introduction and Summary xi 1 Mining Taxes Output-Related Taxes Profits Taxes Property Taxes Discussion 1 12 Mining Decisions 19 13 18 19 Description of the Mining Process The Effects of Uncertainty Effect of Risk: An Example Summary ('hapter3 hapter4 Appendix 24 26 31 Effects of Mineral Taxation 35 Extraction Some Numerical Illustrations Integration of Taxes A Note on Taxation and the Concentrating Decision Effects of Taxation on Investment and Related Issues Summary 35 44 53 54 55 59 Policy Implications 63 Calculating the Net Impact of an Integrated Tax System Incidence Issues Recommendations Concluding Remarks 63 68 69 State Tax Collections 79 77 vii .

Contents ~hapter 1 'hapter 2 hapter 3 List of Figure and Tables ix Introduction and Summary Xl 1 Mining Taxes Output-Related Taxes Profits Taxes Property Taxes Discussion 1 12 Mining Decisions 19 Description of the Mining Process The Effects of Uncertainty Effect of Risk: An Example Summary 19 24 26 31 Effects of Mineral Taxation 35 13 18 35 Extraction Some Numerical Illustrations Integration of Taxes A Note on Taxation and the Concentrating Decision Effects of Taxation on Investment and Related Issues Summary Chapter 4 44 53 54 55 59 63 Policy Implications Calculating the Net Impact of an Integrated Tax System Incidence Issues Recommendations Concluding Remarks Appendix 63 68 69 77 79 State Tax Collections vii .

1-4 Effects of Output Taxes on Mine I 49 .viii Taxation of Mineral Resources Bibliography List of Figure and Tables 95 Index 103 About the Authors 111 Figure 2-1 Cycle of Mining Operations 20 Tables 1-1 Output-Related Mining Taxes 1-2 Profits Taxes 14 1-3 Property Taxes 16 Annual Price of Tin (1960-1972): Hypothetical Tin Deposit 27 Optimal Extraction Profile for Tin Deposit 28 -3 Extraction Profile Using Average-Grade Rule 29 -4 Optimal Extraction Profile with Lower Capacity 30 .1-5 Effects of Output Taxes on Mine II 50 -I Taxes on New Mexico Uranium Mines 65 -1 State Tax Collections 80 -1 2-2 3 ix . -I Hypothetical Mines and Price Profiles 45 J-2 Optimal Extraction Profiles for Mine I 46 l- Optimal Extraction Profiles for Mine II 47 .

On the basis of this analysis. the broad aim of this book is to provide a comprehensive economic analysis of the ffects of mining taxation on the extraction of mineral resources. if I he tax system is nonneutral. The analysis and recommendations will reflect the premise that. Although we shall deal specifically with the taxes imposed by state nd local governments in the United States. it may be difficult to detect whether market failure is due to the nature of the activity or to relative distorIi ns induced by the tax system. in particular. Second. consequently. bs and output. If. the environmental damage resulting from mining operations. a mining operation should be treated in a neutral manner. significant price increases for some minerals have often been viewed by states as an opportunity to collect additional tax revenue. Too many or too few resources devoted to mining will be costly to states in terms of . f r tax purposes. since the essential forms of the taxation are applied universally. We regard I his premise as appropriate for two reasons. a nonneutral tax treatment of the mining Ii ctor creates an inefficient allocation of resources. the effects associated with each of the various forms of taxes that are being applied. First. Accordingly. either in mining or some other activity. one must also recognize the degrees of diffiulty in the administration of the various taxes. the conclusions will have more general applicability. This increase can be attributed to three factors. From a practical standpoint. there is a need to conserve the resource base. for instance. we offer a set of recommendations for fax policy. has brought demands for just compensation. in the absence of proved market failures. Third. It is important to understand the implications of this taxation and. however. that is: like any other form of economic activity. First. The primary objective of this design is to minimize the distortionary incentives created by the taxation. notably the deterioration of water quality and land abuse. there has been a heightened awareness that resources are limited in quantity and. Second. local governments. it is determined that xi .Introduction and Summary There has been a substantial increase in recent years in the level of taxation imposed on mining firms by state· and.

but such a tax will not influence the quality profile. in practice. for example. The first two chapters establish the context for the economic analysis. consequently. Property taxes. property taxes have the advantage of stable revenue. in the long run. are also levied in various forms. We focus initially on the individual effects of the taxes and then consider the net effects of different taxes applied in combination. All variants lead to an increase in the cutoff grade of ore. Chapter 4 begins with an illustrative computation of the net quantitative effect of a state's tax system and then discusses tax shifting. or as a proportion of sales revenue. Profits taxes may be proportional (levied at a uniform rate) or progressive (levied' at an increasing rate) and are typically contaminated by special deductions. an output tax may be justified. a proportional profits tax is nondistortionary with respect to extraction. An ad valorem tax will not alter the quality profile but will induce a shift in extraction from present to future. such as depletion allowances. Of partIcular Importance here is the interaction of economic and geological factors. A true property tax. reduce the rate of return on capital and thereby serve to discourage investment and development expenditures. Severance taxes may be specified as a fixed nominal payment per ton of final output (that is. It is therefore appropriate for states to move toward a neutral tax policy and then to evaluate any alternatives from that position. Their disadvantage is the practical difficulty of property assessment. and extraction behavior is presented in chapter 3. At the same time. as a fixed nominal payment per ton of ore extracted. development. A per-unit tax on output creates a tendency to reallocate extraction from present to future and may also alter the time profile of the quality of ore selected for extraction. A change in tax policy will always have an impact on mineral development. and indeed all taxes. Recognition of the structure of mining decisions is essential to t?e rel~vance of economic analysis and policy prescription. in the short run. The core analysis of the impact of taxes on a mining firm's Investment. All severance taxes. However. to changes in prices and costs and. The analysis is also based on the assumption that mining firms respond. will effectively subsidize and thereby accelerate extraction. as well as the variations in response to a given tax as economic and geological conditions vary. . In the absence of deductions. or vice versa. and profits (or income) taxes. As administered. It concludes with a presentation of recommendations for tax policy. property taxes. A per-unit tax on ore is also an inducement to defer extraction. whereas a progressive tax will induce the mining firm to modify its profits profile in a manner that will depend n the time paths of prices and costs. if the resources are being depleted too fast because of an excessive property tax. in otherwise identical economic and geological conditions. whatever the price level). In chapter 2 we describe the main elements of the mining process itself. to changes in the net-of-tax rate of return on investment. An increase in the mining industry's tax burden will result in slower growth of mineral development in the state and. whose incidence across states is in relation to the total tax burden imposed by each state. payment of a specified number of dollars per ton. we construct numerical examples that display the variations in a firm's response to different taxes. This redistribution may be . it will tend to lower the cutoff grade and so increase total extraction. The particular taxes considered can be grouped in three distinct categories: severance (outputrelated) taxes. according to whether prices are rising at a rate less than or greater than the rate of interest.xii Taxation of Mineral Resources a state's resource base is being depleted too fast. reducing the size of economically recoverable reserves-the phenomenon of tax-induced high-grading. References to the methods adopted by particular states are supplemented by a detailed tabular survey of the taxes applied in twenty-two states with significant mining sectors. To expect otherwise is to exaggerate the realizable benefits of taxation. few of which show any evident connection to the economic definition of property value. before processing. The study is presented in four chapters. based on the estimated value of reserves remaining in a deposit. an additional tax may succeed only in deterring further development. Introduction and Summary xiii We now summarize briefly the main conclusions from the analysis and our policy recommendations. lower output and job creation. Each variant is distinct in its effects. To illustrate the major influences. This is the major long-run distortion of mining taxation in general. In chapter 1 we set out the major categories of mining taxation and discuss salient features of the several forms within each category.

and (c) the t~x ~a~e s~ould be UnIform. A proportional profits tax should be the cornerstone.dard price derived. Its primary advantages are recognition of cost as well as revenue. We are also grateful to all the state tax administrators for theIr helpful cooperation. for his encouragement of this research. or some combination of the two. these proposals and for the rejection of the alternatIves are detaIled m the final chapter. (c) development expenses should be subject to usual depreciation rules. Administration of the proposed tax is likely to be proportionately less costly for such states. avoidance of a high-grading incentive. The J. The use of a moving historical average profit margin will reduce the incentive for high-grading and accelerated extraction. from the price of concentrate wIth ~ deduction for processing costs. Cost depletion.uStlficatlOns. Extraction tends to be reallocated from future to present. We wish to thank Arlo Woolery. if necessary. 1. Acknowledgments Financial support for the research for this book was generously provided by the Lincoln Institute of Land Policy. Depletion allowances serve to subsidize extraction. . director of the Lincoln Institute. to collect the resource rents.xiv Taxation of Mineral Resources brought about by changes in the rates of extraction or in the qualities of ore extracted. 3. It also lowers the cutoff grade and increases total recovery. it encourages a shift in extraction from future to present. as prices are rising at less or more than the rate of interest. with a stan. together with the relative difficulties of administering the options. and ability. independent of the price. that is. since this does not bias the quality profile or induce any consistent quantity-profile bias. a fixed proportion of current revenue. Percentage depletion. The income-tax package should include these provisions: (a) percentage depletion should not be allowed. we recommend that it be an ad valorem royalty. We recommend further that (a) the tax should be imposed on ore. A property tax is recommended for states that rely on their mining sector for a stable source of revenue. prior to pro- Introduction and Summary xv cessing. (d) all other state and local taxes should be deductible. (b) ore prices should be quality-adjusted. acts as a negative per-unit severance tax. . but per-unit severance taxes also induce extraction-profile distortions. (b) capitalization of exploration expenditures should be required. and (e) taxable income should include only income derived within the state. 2. for. a fixed nominal allowance per ton of ore extracted. If so. or vice versa. in conjunction with the individual income tax. many states will probably impose a severance tax of some sort. the future income stream being obtained by applying a historical average profit margin to estimates of reserves and production. lead to the following prescription for the general design of mineral tax policy. The preceding array of potential distortions. cutoff grades will be lower and recovery higher than otherwise. Given the relative ease of administration. All severance taxes have the undesirable consequence of high-grading. Accordingly. The property-tax base should be an estimate of present value. acts as a negative ad valorem severance tax.

No costs. either at the mouth of the mine or after conI' ·ntration. This is especially a pi oblem in vertically integrated operations that purchase mineral olltput as an input into the production process (not necessarily in the line state). econd. mineral I r ction permanently reduces the natural wealth of the state. the output tax is perceived as collecting part of the value ( f extracted resources. This classification is lIso used in the subsequent analysis.1 Mining Taxes I here is I Ixation considerable variation across states in the types of mining currently employed and even in the names they go by. However. or depreciation need be calculated Illd valuation problems are relatively minor. the administrative costs are relatively small when compared to other forms of taxation. Output-Related Taxes )utput-related taxes are defined here as taxes imposed on a per unit II Isis on mineral output. Unlike other economic operations. on account of clearly defined units of taxation. These taxes are popular means of raising revenue for several rea( n .I tax takes two general forms: a fixed nominal amount per unit of 0111 put. To . The problem arises because \I m's-length market transactions may not occur. First. there are difficulties in assigning values for purposes of III output tax based on gross value. pr fits (or income) taxes. and property taxes. This type . Thus Olltput taxes are seen as providing a tangible link between the extrac- 1 . and a fixed proportion of the value of output (an ad valorem I IX). depletion. mplify the description and discussion of these taxes we divide them Illto three broad categories: output-related (or severance) taxes. They are most commonly known as severance taxes but II also referred to as production or mining privilege taxes. as Stinson (1977) notes.

.o I:: o "B ::> . § 0. Chapter 3 shows that severance taxes favor large operations of high-grade deposits whose profits can easily absorb the tax. . Finally.... they may alter the intertemporal extraction profile.. We question this argument in chapter 3.. the advantage of output taxes is that a legislature can link a tax to a specific purpose without allocating a fixed nominal amount of expenditure for the services in the budget. "'bOo ". plus a I-percent increase for every 3-percent increase in the wholesale price index (WPI).. is fairly easy to earmark for specific purposes.. Third." o. it has been suggested that these taxes are passed through in the form of higher prices to consumers of finished products. Like gasoline taxes used for highway trust funds.... This reflects in part the legislature's perception of cost differentials and the relative importance of a particular mineral in the state's economic base. p. and thus the tax is "exported" out of the state... that is. coal in Ohio is taxed at a rate of only 4¢ per ton.. bO . However. (Other economic factors also playa role. I ..." o . 0_ '" ~~ o u ::0 o 8 ~§ '" ... the recent decrease in the copper royalty in Arizona reflects a decline in copper prices. they increase the cost of extraction regardless of the size of the operation and quality of the deposit.<::v E-o-. and Montana) as well as allowing rates to vary with quality differentials (Wyoming and Alaska). o '"::> "@ > '" '"o . For instance.2 Taxation of Mineral Resources tion process and the perceived resource rents. The tax is thus viewed as a means of forcing the mines to "pay their own way" for public services and environmental damage. There is no inherent reason that other types of taxes cannot be similarly earmarked. output taxes are sometimes placed in special funds for land reclamation and other projects identified with the mining process. .. while coal in South Dakota is taxed at 50¢ per ton. Third. the revenue from such taxes. Some states lower tax rates for small producers (Wyoming.. Output-related taxes are not without their difficulties.. whose source is readily identifiable. For example. Second. The need for 3 Mining Taxes .Of . The taxes also vary across minerals in the same state... Alaska.. Table 1-1 compiles the types of output-related taxes in the states surveyed. It is evident that the taxes and rates vary widely across states for the same mineral. causing high-grading.) It is apparent that states are aware of the adverse incentives created by this output tax.:: u ::> .. p..... This claim is examined in detail in chapter 4.. the bypassing of ores that could be profitably extracted in the absence of the tax.

Property taxes are allowed as a credit up to 50070 of the severance tax due.- X til -i ~ .000 to 99. Considered a regulatory tax. Price determined by reference to market publications less out-of-state processing charges and transport costs.000 1070 increase for every 3070 increase of wholesale price index maximum 4070 gross value of the 4th year of operation 6O~ in open pit. tween state and local governments by set formula.000 cubic feet 10 mills/barrel or I mill/I. Remarks C/) CD d o c C/) CD ::D i» ::J CD :i!: o ::J 01 C/) CD til X -i <0 ::J ::J :i!: - o til .5070 of property taxes may be used as a credit. 30~ underground plus 2070 3070 4070 5070 15~/ton 2. s. and dimension stone Crushed stone (most varieties) Se'\-erance Severance Severance Iron are Barite. chemical-grade limestone. zinc ore. Funds go into state trust.000 to 299. bauxi te.3070/1.999 $100. 0. First 8.000 $25. manganese and manganiferous ores.OOO cubic feet 2¢/ton l5¢/ton 5070 of gross value if well produces more than 10 barrels/day. Lignite gets additional 50070 credit.Severance Severance Severance Severance Severance Severance Colorado Metallic minerals Molybdenum Oil and gas Coal Oil shale Severance Severance California Oil and gas Others (including diamonds.ton 0.ilica sand. All severance taxes are allocated be- Used to establish the Arkansas Oil Museum. titanium are. 87. and so on) out-of-state use). cinnabar. 4070 of gross value if well produces less than 10 barrels/day 5 mills per barrel 2. From 6/1/78 to 6/30/80 rate on copper mining and smelting is 2070.000 tons per quarter exempted.5070 of gross value Base and Rale 25070 credit for on-site methods.02070/barrel in 1977 5070 gross value I~/ton I. salt.000 over $300. and lead are Gypsum (sold fo Severance Conversion Special fund Severance Occupational gross income Name Gas Oil and gas Arkansas Oil All minerals Arizona State/Mineral Table 1-1 continued if gross revenue less than $25. 1070 of the 2.25070 of gross revenue in excess of $11 million Rate varies yearly.5070 is allocated by set formula.x.

l en CD X ~ -i CO ~ ~ ~ en n CD o en c CD :::D OJ CD. 50% to land reclamation trust.03/10ng ton 6¢/ton 3¢/ton 20¢/ton 10¢/ton 12.5% gross value 0. credit for property taxes up to 20% of taxes due. 75% to general fund. 50% to general fund. iron suifide concentrates Severance Severance 10% gross value Severance Solid minerals Minnesota Semitacomite concentrate Copper-nickel 5% gross value Severance Gas 4. Paid in lieu of property taxes. 20% to county where produced. All severance taxes distributed by set formula between states and localities.5% gross value 8% gross value (if average production is greater than I()() barrels I day) 5070 gross value Base and Rate Severance Name Florida Oil State/Mineral Table 1-1 continued Paid in lieu of property taxes.All are income-based $1.. 25% to land reclamation trust. Minimum 50¢/ton. 5¢/ton base if processed in state. Further credits if firm has own reclamation program. 118 to county where produced. 80% to state general fund. Up to I % additional may be collected by counties.5% gross value 7¢/I.25Iton plus 1. Revenue distributed to state and local governments by set formula. Remarks -.1 % increase of valuable content above 62% $1.6% for each I% valuable content above 62% 2% gross value Mississippi Oil and gas Tacomite. Rate can be reduced for' small wells and special circumstances. Rate increases with steel-mill products index. Slight tax for administration of conservation laws. ~ 0) .OOO cubic feet Severance None Severance Severance Severance Severance Severance Severance Severance Severance Severance Production Phosphates Idaho Kentucky Coal Oil Louisiana Sulfur Salt Sand and gravel Marble Coal Oil Gas Michigan Oil and gas 6%/barrel or 6% value 3 mills/cubic foot or 6% value 5% gross value Severance Occupation Other minerals Occupation 10¢/ton plus 1/10 of 1% of grade greater than 55% I% of value plus 2Y2¢/ton plus 10% of bases for each 0. ~ ~ - o ~ o ~ X - -.. 7/8 to state general fund..

.00-30.000 400.6 % 2.15 % 0. 7.0 % 12.000 40¢lton or 90.017 12¢/ton or 30% G.50 7.0 % 3.1 % first $6.. 8.000 4% G.50-10.00 15. C 0 (1) :D en llJ . If contracts in force prior to 1977. 4% G.V. X -i llJ CD .001-500. Remarks ~ en (1) X -i llJ CO ::J ::J ~ en () (1) .Conservation Severance Severance Severance Severance Severance Severance Resource Excise Nevada Oil and gas New Mexico Uranium Oil and gas Coal Potash Copper Others Hard minerals Oil and gas % 1.000 tons exempt. = gross value.0 % 4.45¢/barrel or 5~/1 .000 100. 4% G.00 5-7.V..000 of gross value $25 plus 0.V. (1) ::J ~ 0 .86 % 1. First 20.V.000 and over Rate 0.0 0/0 7..V.5 % $3.. 3% G.00-15.000 500..V.24 1 Tax (marginal rate) 2..00 5 mills/barrel of oil or /50. G..00 750.00-50. 8.V.00-20.75% gross value .000 12~/ton or 5~lton or 20070 G.001 to 22¢/ton or 8¢/ton or 30% G. tax is 1.001-400.V.00-25.0 % 9.00 25.00 10. 9.575% 0.5% gross value in excess of $5.000 License Severance Micaceous ores Oil Si Gross Value 0-100.15 % 1.000 cubic feet of gas 20"0 of gross value 4 mills/ dollar Resource trust All minerals Severance Conservation 5¢/ton 2.000 cubic feet plus increase for change in CPl 38¢/ton plus increase for change in CPI (l8¢lton steam coal) Value/lb 0-5.000 of gross value 2.438% 22c/ton of cement 5~/ton of gypsum Surface Underground Btu/lb > 7.5% gross value • 1/3 0.125% gross sales • 1/2 0..00-40.00 40.00 30.. Distributed to various counties and state agencies by set formula. Used to rectify environmental damage.001-250.65% excess over $6.0 % 5.V.- ::J 0 llJ .00 20.001 to 34¢/ton or lO¢/ton or 30% G.000 250.5% gross sales • 112 0.25%. Base and Rate License License Severance Name Metalliferous ores Montana Cement and gypsum Coal -- State/Mineral Table 1-1 continued Funds from severance taxes go to state.

000 is exempt. Severance tax revenue goes into state general fund. The information was cross-checked as far as possible to ensure Coal Sources: Written correspondence from state tax administrators. Stinson (1978). National Academy of Wyoming All minerals Coal. Gillis (1979). -i ~ ~ ~ en (I) X Ql -i .2% gross value 2% gross value 1I1Jo gross value $1.5% gross value 5% gross value 2% gross value 2% gross value 4. and Steering Committee on the Impact of Taxation on Energy Markets.. Portion of tax must be prepaid.. Revenue to mineral trust fund.000 of gross value 3:85% gross value 2.75% of gross value 5% gross value Base and Rate Production Name North Dakota Oil and gas State/Mineral Table 1-1 continued . o .. Revenues divided between state and localities by set formula. Revenue to state general fund. Remarks consistency and to include the most recent tax laws. State tax statutes. uranium Oil Gas West Virginia Coal Limestone or sandstone Oil and gas Utah Metals Sulfur Severance Severance 4¢/ton Severance Ohio Coal Tennessee Oil Gas 65¢/ton plus 1I1Jo for every 3% change in WPI Severance Coal 7% of gross value 5% of gross value 0... Paid in lieu of property taxes.. gas Coal.03/long ton 5¢/barrel 5% gross value 3% of gross value Revenues to various funds. Note: This tax table was compiled using information from a variety of sources. . Not in lieu of property taxes...4¢/ton I¢/ton 3¢/barrel I¢/I.. First $50. Yasnowsky and Graham (1976).34% gross value 8... Paid in lieu of all other taxes.. Revenue allocated to various agencies by set formula... en (I) n en o c (I) :Il ~ (I) ~ ~ -- o ~ o Ql . Revenues divided between state and localities by set formula. Commerce Clearing House: State Tax Guide.. X Ql <0 Sciences (1979). uranium oil.. Paid in lieu of license tax...OOO cubic feet Severance Severance Severance Severance Production Production Production Severance Salt Limestone and dolomite Oil Gas Oklahoma Oil and natural gas Uranium Other minerals South Dakota Oil and gas Severance Mining excise Severance Occupation Occupation Occupation Occupation Occupation Occupation Severance 1.. Revenue to capital facilities account.63% in excess of $5.

Net-proceeds taxes ar~ SImIlar to profits taxes in that they aim to measure the net profIts from an operation. there is the issue of allocating corporate overhe~~ and nsation of corporate officers. output ~a~es. . tments. One is the cost of administration.1Iow a deduction for federal taxes (Alabama) while other~ do not ( izona). able 1-2 presents a summary of profits taxes m . The rates differ from a low of 2. output taxes go directly to the general fund and are paid in lieu of property taxes. Those that do (Colorado. The profits tax has an advantage over other types of taxes in that it considers both the costs of operation and the depletion of the resource base. Furthennore. I 13 state transactions may be of an intrafirm nature. which again implies that taxes are levied on a more equitable basis. lur example) increase the net effective rate of th~se taxes on. Illlllp "roperty Taxes d valorem property taxes are the oldest form of taxation imposed nn the mining sector. In Alabama. are paid by every corporate entity. Other states employ gross-proceeds methods. the ratio of total assets in the state to total corporate assets. property taxes induce the firm to extract the ore at a faster . estlI~ate these parameters. local t~ Issessors are not usually trained in the techniques necessary to. Finally. some states piggyback the federal taxes. rate than would be the case in the absence of the t~. tax revenues are used for a variety of purposes. In effect. Minnesota. some states add back other state taxes paId to the I ral government while others do not. So in the absence of special tax privileges granted to any industry. if imposed in a state. small marginal mines. Those that do not (Arizona. Third. As shown in table 1-3. This is an arbitrary procedure that will typically not reflect the profitability of a mine in a given state. which allocates income to the state on the basis of three ratios: the ratio of total sales in the state to total corporate sales. Second. Profits Taxes Profits taxes. as will be shown. the wealth of a mme IS very ?lfficult to eS~I­ Inate. States have partly attacked this problem by merely adjusting the tax base used for federal tax purposes (table 1-2). several states have reahzed these dIfficulties and in effect use other forms of taxes in lieu of property taxes. there is the intrafirm pricing problem for integrated firms. This is a severe ~roblem m the ~n­ II . nly Arizona attempts to estimate the present value of the operation. or orne form of net-proceeds tax. Also because costs are considered. mining enterprises are treated equitably under this tax. this advantage is partly offset by revenue fluctuations induced by changes in the federal tax laws. ~hile these are legltl. the lIline's operation and so increase the burden of taxatIOn on the mme. substantially reducing administration at the state level. tor where quality variations are reflected m t~e market pnce I III n Ybe difficult to detect on an intrafirm transactIOn. most states use the federal tax base WIth onl! ~nor It I 1I. I Finally.35 percent ( i' higan) to a high of 12 percent (Minnesota). they are dIfficult to prorate to differ• III 'tate operations. As noted. Taxes are paid only when revenues exceed costs. depreclaI Oil and expensing. while in North Dakota these taxes are earmarked for various categories of expenditure at both the state and local levels. The major distinctions between net-proceeds and corpo- . Finally.mate I I 'n es at the corporate level. there is the problem of allocating the income of a corporation that operates in more than one state. Thus there is no inherent bias against low-profit. The major allocation rule for income is known as the"ABC" rule. Ideally the tax shoul? b~ a tax o~ the "wealth~' ( f the mine.12 Mining Taxes Taxation of Mineral Resources Illt a secure revenue base is also reflected in the linking of tax rates to inflation indicators (South Dakota) and in the calculation of taxes using both a fixed dollar per ton rate and an ad valorem rate with collection of the larger amount (Montana and Alaska).the states ~urt ycd. However. Neither future prices and costs nor the geologIcal charactensti s of the deposits are known with certainty. the tax recognizes the ability to pay. and MIChlg~n) II I different methods in computing loss carry-forwards. However. In order for the tax to be applied equitably. From the state's perspective there are several difficulties with employing the profits tax. Also some states . To compound these difficulties. accurate books and procedures must be maintained. and the ratio of total employment in the state to total corporate employment. wi~h no m~r­ t price established for output.

. Some expenses for exploration.. Accelerated deduction for oil cost.75% income > 25. and sulfur = 23%. Current expensing of exploration and development. CIl CD X Q) -i CO ::J ::J ~ CIl CD c: .. Oil depletion. and Steering Committee on the Impact of Taxation on Energy Markets. Gillis (1979).. coal = 15%..5% 5.75% 5% 6% income> 15..8% income > 25. Stinson (1978). Minimum tax = $200 (reduced to $25 for gold).35% 12% Florida Idaho Illinois Kansas Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No Yes No No Yes Yes No No No No Yes Yes Minimum = $25. Remarks No No No Utah Yes Yes No West Virginia Sources: Written correspondence from state tax administrators.40/0 Rate Federal Income Tax Deductible Alabama Alaska State Table 1-2 Profits Taxes CD c.000 5. Depletion: oil = 38%.5% 4. Percentage depletion allowed.000 8% income > 200. Note: This tax table was compiled using information from a variety of sources.n . National Academy of Sciences (1979)..0% 6.o Q) -i ~ -' .000 6% income > 25.. The information was cross-checked as far as possible to ensure consistency and to include the most recent tax laws.Yes Yes Yes Yes No No No No 5% 6. State tax statutes. Current expenses of unsuccessful exploration.. ABC rule at frrm's option. Yasnowsky and Graham (1976).000 4% 9.000 9% Arizona Arkansas No Yes No Yes Yes No Federal Income Allow Federal Used as Base Depletion 5'-0 9.. Minimum tax = $100. (') o CIl ::D tu CD ::J ~ o - ::J Q) X .5070 income > 6.5% 4% 6% Yes No 5% Colorado Yes No No No California No No No No Yes (except shale) Yes Yes Yes Yes No No Yes 10. Commerce Clearing House: State Tax Guide. Oklahoma Pennsylvania South Dakota Montana New Mexico North Dakota Michigan Minnesota Louisiana Kentucky 6. federal depletion allowed for copper and nickel.000 2.

Severance taxes paid in lieu of property taxes. Table 1-3 continued Base Remarks Alabama None Production tax paid in lieu of property tax. Mississippi None Other taxes replace property tax. . New mines must prepay taxes to offset increased demands on local public services. Sources: Written correspondence from state tax administrators. The use of other types of taxes in lieu of ad valorem property taxes offers other advantages. and Steering Committee on the Impact of Taxation on Energy Markets. variety of so~rces. NatIOnal Academy of Sciences (1979). Note: This tax table was compiled using information from II. electricity. the tax is usually a statewide tax. and enforcement. and differences in interstate profit allocation rules. collection. Gillis (1979). local rates vary. Alaska None Other taxes paid in lieu of property tax. the counties providing the services could not obtain reimbursement when the mines were technically in a different jurisdiction. Second. schools. Base Siale/Mineral Remarks Local assessment Local assessment Gross value Local assessment 10¢ per $100 of assessed value None 2070 of five-year average net-production value State rate. and water. and executive compensation. The alternatives also present both administrative difficulties and adverse economic incentives. Yasnowsky and Gr~ham (1976). Progressive rates. Severance taxes paid in lieu of property taxes. First. research and development. but these drawbacks have been judged lesser than those of property-tax administration. Commerce Clearing House: State Tax Guide. Montana Nevada New Mexico Uranium Oil and gas Coal and other minerals (productive) Gross value Net proceeds Nonproductive properties North Dakota Assessed value None Oklahoma None Oregon Pennsylvania Utah Local assessment Local assessment 2 times average of net proceeds for 3 years nonmetalliferous 30070 capitalized net income for 5 years plus $5/acre Local 'assessment Arkansas alifornia olorado l7forida Ken lucky Louisiana Michigan Table 1-3 Property Taxes State/Mineral 17 Mining Taxes West Virginia Wisconsin Wyoming 25070 gross value less royalties 9070 gross value Profits Net proceeds 100070 gross proceeds 300070 of value of profits times 1/3 which is statewide assessment ratio. administration is transferred from the local level to the state. Under the old system. the disallowance of corporate overhead. the funds are allocated to the localities in a fashion that attempts to measure the costs of local services attributable to the mine. In effect. states have generally moved away from the old types of property-tax administration. Finally. thus ensuring equity among the state's mineral producers. State tax statutes. Mines in one county may use public services from another county: in particular.Taxation of Mineral Resources 10 rate-profits taxes are the use of cost depletion and straight-line depreciation. In summary. The state's larger and more highly trained bureaucracy provides scale economies in administration and more effective assessment. Arizona Oil and gas Other mines Gross value of production 60070 of full coal value Present value of planned extraction using five-year average profit margin. net proceeds are closer to the economic definition of profit from the mine than is the measure for corporate-income taxes. Stinson (1978). The information was cross-checked as far as possible to ensure consIstency and to mclude the most recent tax laws.

18 Taxation of Mineral Resources Discussion The preceding discussion shows the wide variety of tax methods used by states. Second. and that. This chapter describes the process and models it from an economic perspective. ' . this leads to a more diverse and sophisticated set of tax policies. If there has been previous mining activity in a region. and expends considerable effort keeping up to date on cost market and technological trends. since these states need to collect r~latively more revenue from the mining sector while ensuring the contmued economic viability of their resource base. The numbers on figure 2-1 should therefore be considered as only repreentative. only after a long and costly process. is essential for prediction of responses to changes in economic conditions. Proper recognition of the actual structure of mining decisions. old mappings. This may have been true in the past but chapter 4 shows that it is no longer the case. Specially equipped airplanes (or even satellites) are then used to photograph the region and to conduct magnetic and other geographical surveys. The appendix provides data on the size of the revenues generated by these taxes. if at all. States that have relatively large mmmg sectors must rely more heavily on mineral taxation to support state and local services. employ and ~rain tax administrators to deal exclusively with the mmmg sector. States that depend on the mining sector for a substantial part of their revenues al~o. trains assessors. Each phase is now described in some detail. and of the influence of geological factors. on account of geological differences. Some regard these taxes as a means of collecting resource rents and a method of tax exportation while others view . A third reason is the attitude of some states that state taxes are small relative to federal taxes. has its own mineral tax division. Description of the Mining Process Figure 2-1 presents schematically the major phases of a typical mining cycle. 1 Exploration A typical exploration program usually involves a three-step procedure: preliminary exploration and sampling. and estimation of reserves and recovery factors. 2 Mining Decisions The objective of the mining firm is to profitably extract and process the valuable contents of a mineral deposit. Geological maps and other material compiled by state or federal agencies are also used. detailed exploration. since state taxes are deductible from federal taxes. There are numerous reasons for this variance. state legislatures differ in their perceptions of the role of mineral taxation. First the size of the state's economic base (and thus the tax base) derived from the min~n~ sector is an important factor. This objective is achieved. with estimates of the time and cost necessary to complete each phase. ArIzona is a prime example: the state assesses all mineral property. ' mmes as corporate enterprises and attempt to treat them as such. and other factors. and other historical documents are studied. the time and cost requirements can vary subtantially across minerals and across mines of the same mineral. In practice. 3 19 . location. surveys. 2 The first step aims to determine areas of possible mineralization or anomalies over large regions. Presumably. the impact of state taxes on the economic behavior of a mine is small.

underground) and a concentrating process (flotation. 60. and depth of mineralized area. width. (2) fault tructure and other discontinuities. Cycle of Mining Operations The results of this work identify promising anomalies which are studied in more detail in a series of preliminary on-site inspections. enable a determination of the areas which hold the greatest prospects for mineralization and thus merit more intensive exploration. the mineral reserve estimates are modified in two ways. or overburden removal in openpit methods. ?eophysical. The final adjustment is made for losses incurred in the separation r concentrating process.20 Taxation of Mineral Resources Time to Complete Activity Activity Cost Exploration 2-4 years $10 million Investment 2-4 years $50 million Mining Decisions 21 include (1) length.. Proved reserves: ores that have been both delineated and measured. the objective of the drilling is to determine as accurately as possible the size of the deposit. along wIth detailed mappings. Regardless of the technique. For each mining method. Possible ore: no samples available. (4) moisture levels. 8 Dilution of ore also occurs in the mining process. 6 I. and (6) nature of overburden. These inspections consist of general geophysical or geochemical tests o~ chip s~mples from outcroppings or streambeds. that is. This results from the necessity of roof and floor supports in underground methods. Development Exploitation 2-4 years $100 million 10-20 years Profit Source: Adapted from Thomas (1973). (5) grade of ore. and other geological. Therefore. theoretical reserves. This estimate is adjusted for the fault tructure and other geological factors to obtain an estimate of how much ore can be extracted. p. ~ The samples are also used to determine what processes will be necessary to recover the valuable material from the waste rock. Probable reserves: tonnage and grades are computed from widely spaced samples and from geological projections. This pro~ess mvolves takmg samples of the area at various points and depths m order to map the extent of the deposit. minable reserves are adjusted by an timate of the extraction ratio (the proportion of ore left unmined) to derive net recoverable reserves. raw ore is processed at or . that is. (3) specific gravities. 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. This information from the samples is used to place the reserves into three broad categories. minable reserves. Figure 2-1. 7 Once the sample information has been analyzed. estimates based on inferences solely on geological structure and geophysical anomalies. Tliese tests. tonnage and grades are known within 5-percent error. The mining process itself may cause some ore to be left behind. 3. 2. a determination is made of alternative methods which might be used to extract and process the reserves. It is inevitable that some waste rock will get mixed with ore. Costeaning and shallow drilling are used for deposits with only a thin layer of overburden. errors in estimates are usually less than 20 percent. sepration) which are appropriate given the available geological information. 4 The methods employed in the detailed exploration phase depend on the type of mineralization and the geological characteristics of the particular deposit. the metallic content. This involves choosing a set of mining methods (open pit. the fault structure. In cases where the mineralized area is farther below the surface. To allow for this. diamond drilling is usually employed. and geochemical features·of the deposit. an adjustment called the "dilution factor" must be made to account for the increased tonnage which must be processed. 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. In most cases.

Preliminary negotiations w!th potential buyers are InItIated to determine quality and quantity characteristics which form the basis for long-term contracts. and crude cost estimates.22 Taxation of Mineral Resources near the mine site to separate the valuable material from the waste. 12 The information from the engineering and marketing studies is then combined to select the most profitable method of operation. Before any ore is extracted and processed. detailed stud~es are. processing plant. MarketIng studies are made to determine price projections and ~c. In addition. Capacity and technology are in place. under alternative methods of operation. to lower overhead and defer incremental expansion costs until conditions warrant them. Not all of the mine is constructed at once. The results of this stage include estImates of recoverable ore and material available for sale. <:>ne part of this process is a series of engineering studI~S WhICh determme the best technology. overall costs would be increased as a result of keeping developed areas not currently in operation in safe and productive condition. At this stage the firm is constrained by all its previous decisions. development expenditures of different parts of the mine are sequenced in a manner consistent with the longrange development profile. in addi. Finally.and costs. Based on these and other criteria. the exploration process is a method where various areas are selected for intensive examination to determine the nature of reserves. the average grade of ore. 11 The engineering detail is quite specific in order to determine capital and labor r~quirements. alternative methods of financing are evaluated and banks are contacted to obtain loans. The internal rate of return is calculated for comparison with other investments. In addition to estimating the reserves in the deposits. A "quick" assessment of the mine's profitability is made to decide if the expense and time necessary to complete detailed feasibility studies are warranted. the technology and plant size are chosen which yield the greatest estimated present value of profits. Once financial arrangements are made the construction and development stage is begun. This assessment is based on current price projections. the mine. tlOn to reserve estimates. Extraction After all this time and expense involved in exploring and constructing the mine. The fimll decision on the type and scale of the mine to be constructed is based on a number of criteria. First. 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.c~ss to markets. The procedure commonly used is to determine the profits from an Mining Decisions 23 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 of profitability. various adjustments are made to account for losses in the mi?ing and recovery process itself. however. by the characteristics of the ore. economic considerations would dictate a sequence of incremental expenditures. 9 Investment If exploration has been successful. Thus it is better to sequence mine development so that some areas are developed as others are exhausted. Some valuable material will be lost as a result of the separation process and so a further adjustment must be made in order to estimate the tonnage of material which will be sold. sensitivity studies are made to determine the effect of changing conditions on profitability under alternative mining methods. Finally. additional investment costs would be incurred early in the operation which have no immediate payback. a determination of the mine's profitability must be made. This determination is usually a two-step 10 procedure.initiated. If the chances for profitable operation are promising. limiting the amount of ore that can be currently extracted and determining both overhead . the present value is calculated using discount factors that reflect attitudes toward risk. If too many areas are developed relative to capacity. The method used in the process is determined. Rather. in part. scale. and processing techmques. Minimum returns may range from 12 to 25 percent. Finally. extraction of ore can proceed and a positive cash flow generated. This adjustment in known as the "recovery rate. and storage and transportation facilities must be constructed. the undiscounted payback period is calculated to estimate the time necessary to recapture the initial investment. as well as ordering the reserves for productIon." To summarize. Even if it were technically feasible to develop the entire mine at once.

capacity is in place and there is a history of operations to aid in reevaluation. Since not all decisions are made and reevaluated at once. information acquired at one level can be used in the reevaluation of plans at other levels. They relate to (1) length of the I lanning horizon. Second. prices and costs) a~e unknown and cannot be perfectly predicted. At the current extraction level. Finally. First. The cash flow gener~ted fro~ current operations is used to repay debt. Mining Decisions 25 tracted and processed this month?14 Such a procedure does not 'liminate risks. Third. In addition. and its quality.24 Taxation of Mineral Resources and variable costs. for example. The structure of the ore body is an estimate and the technological implications of alternative investment strategies are unknown. This segmentation allows each decision to be considered separately. 16 A further consideration of practical importance is that modifica- . if an attempt were made to account for every possIble eventualIty. begm operations and exploration activities in other mines or reinvest in the current operation. which in turn are treated as given when extraction plans are made. is used in evaluating possible changes in capacity and modifications to development and future exploration activity. days w rked. The mining process follows a logical sequence from exploration to exploitation and thus it is natural to segment the decisions according to each phase. simpIinations or rules of thumb have to be used. Therefore. and (3) lIverages (of various magnitudes) of such variables as costs. 13 These risks are compounded by the time lag between exploration and . These simplifications vary from one decision to another. Further. At the current extraction stage. Further~ore. The investment determines the technology and capacity. The only variables which can be controlled at this level are the quantity of ore processed. Governments can change tax and environmental policies at some future date.valuated in light of new developments and changing market condItIons. One consequence of this decision structure is that uncertainty is reduced at lower levels. the manager cares only about short-term variations in prices and costs. • Although the firm is constrained by all its previous decisions the extraction process is still dynamic in nature. Prices and costs must be projected far into the future so that annual averages must be used to make any projections at all. should there be more exploration' how much development is warranted. in contrast. there are socIal and political uncertainties which may be beyond the control of the operator. (2) areas of the mine under consideration. and how much ore should b. This means that funds must be committed for a substantial period of time before any profits are forthcom~ng. This segmentation of the process results in a hierarchical decision structure which allows for revisions as time proceeds. the tonnage and quality f f mal output may not be known until the ore is extracted and proce ed. information gained from current extraction. the firm would spend too much money and time to warrant an investment. IS For instance. exploration does not provide complete information about the nature of reserves. and tonnages of ore processed. For example. I rojections must be made.extracti~n. For example. An m:estment decision made today will not generate sales untIl three to fIve years hence. pay returns to eqUIty. exploration provides reserve estimates which are used in the investment decision. The initial investment decision. must be made without the benefit of this information. Until hafts are developed (or overburden removed) the exact delineation f ~. Production schedules must be established for a six-to-twelve-month period and must be r:e. urrently developed areas are the only consideration and the planning period may be less than a year. This procedure also enables variables which must be determined at one level to be treated as exogenous at another. thereby affecting the profitability of the operation. but it allows incorporation of new information and I • valuation of options based on previous results. and by the costs of obtaining and processing informa~lOn. the future economic conditions (in particular. Prices ten years from now are of no concern. The Effects of Uncertainty Uncertainty in mining operations arises from three sources.articular areas is uncertain. The areas of possible extraction have been developed and the properties of the ore are known. the tonnage and quality of a deposit are not known with certainty. • he investment decision is made on the basis of these estimates and annual averages of prices and costs. based on samples and past experience. trade-offs must be made between accuracy of prediction and the risks assumed by the operators. such as profits and revised ore estimates.

26

Taxation of Mineral Resources

tions to long-run decisions take time and incur adjustment costs. For
instance, if prices are higher than expected, a larger capacity and
more development may be needed to exploit this trend. But an
instantaneous adjustment is not possible and there is always the risk
that, by the time any change has been effected, the interim evolution
of events will have rendered it unprofitable.

Effect of Risk: An Example
For an illustration of how uncertainty can affect the decisions made
in mining operations, consider the hypothetical tin deposit described
in table 2-1. The price of tin for 1960-1972 is also reported in the
table. If the operator knows all geological and economic factors with
certainty, the only problem is to choose an investment which will
yield the greatest present value to the firm. Such an investment and
the corresponding optimal extraction profile are reported in table
2-2. The calculations are based on an investment cost of $200 million, extraction cost of $10 per ton of ore, a capacity of 2 million
tons of ore per year, and a lO-percent discount rate.
Two properties of this plan should be noted. First, the ordering
of the grade selection profile corresponds to the ranking of discounted prices (see column 3 of table 2-1). The best two grades of
ore are extracted in 1965 when the price discounted at 10 percent is
the highest. The reason for this behavior is that more metal per ton is
obtained 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 should
be 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 million
tons of reserves left in the deposit, because the remaining reserves
cannot be profitably extracted; that is, they are below the cutoff
grade. For instance, if the 25-percent ore were extracted in 1972, a
$2.25 million loss would result. Therefore, even in the absence of
uncertainty, it may be optimal from the operator's perspective to
leave some ore behind. 18
When uncertainty is incorporated into the decision structure the
planned operation may change substantially. For simplicity, it will be
assumed that the characteristics of the reserves are known, so that

27

Mining Decisions
Table 2-1
Annual Price of Tin (1960-1972): Hypothetical Tin Deposit
Annual Price of Tin
Year

Price (qflb)

Price
Discounted @ /0%

1960
1961

101.40
113.27
114.61

92.18
93.61
86.11

116.64
157.72
178.17

79.67
97.93
100.57

164.02

84.17

153.40
148.11
164.43

71.56
62.81
63.39

174.13
174.36
177.47

61.03
55.56
51.41

1962
1963
1964
.1965
1966
1967
1968
1969
1970
1971
1972

Ranking of
Discounted Prices
4
3
5
7
2

I
6
8
10
9
II
12

13

Hypothetical Tin Deposit
Grade

(%)
2.80
2.60
2.40
2.20
2.00
1.60
1.20
0.80

Tons
(millions)

Grade

I
I
I
I
I
I
I
I

0.70
0.65

(%)

0.60
0.50

Tons
(millions)
2
2
2
2

0.40
0.30
0.25

4
4

0.20

8

8

Source: American Metal Market (1978), p. 243.

uncertainty arises only because of lack of information about future
prices and costs. One procedure commonly used to project prices and
costs is extrapolation along a linear trend. 19 Suppose that an economic analysis of historical data reveals that pri~~s and costs r~se at a
5-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 and
increase each by 5 percent a year through the planning period.

28

Taxation of Mineral Resources

Table 2-2
Optimal Extraction Profile for Tin Deposit
Year

A verage Grade
Extracted (%)

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Total

Table 2-3
Extraction Profile Using Average-Grade Rule

Undiscounted
Profit (million $)
-200.00

1.00
1.80
0.70
0.60
2.30
2.70
0.65
0.50
0.40
0.40
0.30
0.30

29

Mining Decisions

20.56
61.55
12.09
7.99
125.10
172.42
22.65
10.68
3.70
6.31
0.90
0.92
244.87

Discounted
Profit (million $)
-200.00
18.69
50.87
9.08
5.46
77.68
97.33
11.62
4.98
1.57
2.43
0.31
0.29

Year

A verage Grade
Extracted

Un discounted
Profit

1959
1960
1961
1962
1963
1964
1965
1966
1967

1.28
1.28
1.28
1.28
1.28
1.28
1.28
1.28

-200.00
33.50
35.17
36.93
38.77
40.71
42.75
44.89
47.13

200.00
29.13
26.59
24.28
22.17
20.24
18.48
16.87
15.41

119.85

- 26.83

Totals

Discounted
Profit

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).

80.31

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 increase
the discount rate. 20 In the present example a IS-percent discount rate
will be used, representing a 50-percent premium over the rate in the
absence of uncertainty. Finally, operators often assume that the
average grade of ore will be extracted in each year. Since prices are
not known, an optimal grade-selection profile cannot be determined.
The average-grade rule is used to simplify the calculations and to
lower the range of possible extraction profiles, in order to keep down
computational costs. When a detailed plan is made, the firm may
alter this assumption.
The net effect of these three adjustments is to lower the present
value of the investment. This is clear from an examination of table
2-3, where the present value is negative. Note also that the planned
mine life has been reduced to eight years. This is a consequence of
the 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 of
future earnings from the planned extraction. Although undisc.ounted
annual profits consistently rise (because of the m~thod of. pnce and
cost extrapolation), their present value constantly f~lls. Fmally, the
average-grade extraction rule further reduces the .estlIDate ~f present
value because it does not allow the matching of hIgher quahty of ore
with higher discounted price. (In the present example, the best ore
should be extracted in 1965.)
The fact that this scale of operation produces a loss does not
necessarily mean that the mine will not open. There may be another
plant size which can generate a positive. present .value. Such a pla?t
size and corresponding optimal extractIOn profile. are presented m
table 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.actIOn
but 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 .large
investment, because capacity is smaller relative to econo~llcaIlY
recoverable reserves. The mine manager may furtht:r restnct the
decision by arbitrarily imposing a fixed planning horizon. 21

30

Taxation of Mineral Resources

Table 2-4
Optimal Extraction Profile with Lower Capacity
Year
1959
1960
1961
1962
1963
1964
1965

A verage Grade
Extracted (%)

2.4
2.4
2.4
2.4
2.4

1966
1967
1968

2.4
2.4
2.4
2.4

1969

2.4

Totals

Discounted
Profit

-25.00
4.56
4.78
5.02

-25.00
3.96

5.28
5.54
5.82

3.02
2.75

32.32

31

Summary

Undiscounted
Profit

6.11
6.41
6.73
7.07

Mining Decisions

3.62
3.30

2.51
2.30
2.10
I.91
1.75
2.22

Undiscounted payback period: 4.97 years. Present value using Hoskold method: 1.17.

These examples highlight several basic points about the effects of
uncertainty on the operations of the mine. First, investment and
extraction are not all-or-nothing decisions. The optimality of plant
size is relative to given economic and geological conditions. In general, uncertainty reduces the amount the firm will be willing to invest
at the beginning of the operation. This results in higher extraction
costs, lower total recovery and, in most cases, a shorter planned life.
Second, the acquisition of information over time may suggest a
subsequent reevaluation of the plan. The examples cited are limited
to 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 the
mine may be longer (shorter) than anticipated. However, the firm
must 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 economic
behavior.

The preceding description of the mining-decision process was
intended to highlight the economic artd geological variables which
influence the behavior of a mine operator. An understanding of this
decision structure is important in determining the effects of public
policy, particularly taxation, on the overall development of the mining sector in a particular state. At different stages of the mining cycle
the firm is operating on different cost curves and using different
assumptions to make decisions. Therefore, a tax imposed on a mine
that is fully developed may have different effects than the same tax
on a mine which has yet to be completed. Also a tax may have no
effect on the extraction profile once the investment is made, yet
might change the future development of the mine.
A second important aspect of this decision structure is the joint
influence of geology and economics. Each mine is unique and, even
if economic conditions are the same for all, decisions will typically
vary across mines. Accordingly, a public-policy initiative, such as a
tax, may produce different responses. Geological factors cannot be
overlooked.
Finally, it should be emphasized that the decision structure used
in mining is not peculiar to this industry. All economic agents must
confront uncertainty and limited computational capacity, and this is
reflected in planning structures. 22 Individuals plan for retirement and
plan next month's budget. The decisions are clearly interrelated but
they are not made simultaneously. There are also analogs to the
exploration and the long lead times necessary to obtain a positive
return that characterize mining. For instance, the drug industry
spends large sums on research (exploration) for new drugs, much of
which is spent on abandoned projects (dry holes). This research is
conducted with the knowledge that a competitor may make the discovery first and control the market (if a cure is not found in the
interim which makes the drug obsolete). Finally, the time from initial
discovery to positive cash flow is on average quite similar to lead
times in mining. So while risks exist at all levels of the mining problem, they must be taken in context and evaluated relative to risks
inherent in other economic activity before appropriate policy can be
formulated.

For an analysis of the financial considerations see Lindley et al. Ibid. (1970). See Preston (1960) and Patterson (1959) for a complete description. For a description of diamond drilling see Koch and Link (1971). (1971) describe such factors. 20. and Link et al. 8. See Conrad (1978b) and references cited therein. Gentry (1971). or a variant of it at this level. (1970) for a detailed d s 'ripl i n of the use of this type of data. (1974) f r alt rnative descriptions. see Lane (1964). Brown (1970) describes the nature of such risks. and Laurence (1974). Just (1976). See Thomas (1973) and Allais (1957) for details. 10. . 2. but this model is a standard rule of thumb. Gentry and O'Neill (1974). c Harris (1970) and Bennett et al. The industry traditionally employed the Hoskold formula. 22. 3. ee Roff and Franklin (1964) and MacKenzie et al. 5. 9. 17. . 11. and Frohling (1970). 6. See Patterson (1959) for a description of this. U. Beasley. Byrne and Sparvero (1969) and Maximov et al. and Thomas (1973). This section is only an introduction to the complexities of the mining process.32 Taxation of Mineral Resources Notes 1. 13. For a more complete description see McKinstry (1948). 15. Frohling and McGeorge (1975). Peterson has noted this to the authors. Hoskold (1877). such as those described by Agterberg and Kelly (1971). See Cigno and Hool (1980) for a discussion of this. Thomas (1973). and Reim (1973) for a discussion of the trade-offs between accuracy and cost. See Cooper. Koch (1971). Bennett et al. 4. Details of this process are found in Lewis and Bhappu (1975). The determination of where to drill may be based on mathematical methods. see Walduck (1976) lind Thomas (1976). Truscott (1962). See Thomas (1973) for a discussion. onrad and Hool (19790) for a proof. Davidson. 21. (1976). Bellum. Pfluder (1968). Hazen (1967). 19. Tatum. (1973) describe such processes. Mining Decisions 33 18. 7. and Halls. 12. and Lewis (1969). 14. 16. Cutoff grades are generally more complicated. For a mining en in r's p r pective on the grade-selection problem. The economics underlying this model are developed in Conrad (1978a) and Conrad and Hool (1979a).

Since the major concern of tax policy has been the induced extraction distortions. Numerical examples are then developed to demonstrate how the impact of a given tax may differ across mines. the overall planning problem for a mining operation is segmented in a hierarchical fashion. Extraction The following notation will be used to facilitate the analysis. the objective of each segment is the same: to maximize the present value of extracting and processing ore. 1 The analysis begins with a consideration of the effects of each individual tax on the firm's behavior. This integration is essential in view of the fact that most states do impose a variety of taxes on the mining industry. However.3 Effects of Mineral Taxation Tn this chapter we investigate the effects of the various types of taxes commonly employed in the United States. As described in the previous chapter. Finally. the taxes are considered in combination to exhibit the possibility of reinforcing or offsetting effects. it is appropriate to begin by analyzing the extraction decision. discounted profit in any period is given by where 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 (a function of ore and not of output) 35 . In the absence of taxes.

and consequently the higher the after-tax discounted profit. the lower the tax payments will be in real (present value) terms..--=----=-------'- (l I + where 'Y = severance tax in dollars per ton of ore.. This type of tax is discussed below. this popularity has resulted fro~ the relatIve ease of administration and collection . Recall that chapter 2 showed that the firm will extract the best grade of ore when the expected discounted price is greatest. the present value of the tax decreases through time. Severance Taxes Seve~ance taxes are generally of three types: a fixed payment.As noted in chapter 1.T) [XIXI . T ---> ifa<a* We now consider in turn the effects of the various mining taxes. This means that the operator has an incentive to reallocate extraction from the present to the future.. an ad valorem tax on total revenue results in discounted after-tax profit =Mel -- Pt cutoff grade MCI = marginal cost of extraction Ores whose average quality is below the cutoff grade will not be extracted since this would result in a reduction in profit. in nominal terms. the longer the firm can defer extraction. The cutoff grade is calculated as a where a *= * = PI a t XI .. such as North Dakota. S This type of tax may also affect the ordering of grade selection if discounted prices are expected to rise. that is.-2 (l + rr+ ' . Since the tax is fixed in nominal terms.:. and a proportion of the sales price or total revenue. If a fixed payment per ton of ore extracted (that is. However. Twenty-nine states currently employ some form of severance tax.. Finally. After-tax discounted profit for a firm which pays a severance tax Imposed per ton of output is III 37 ~ (PI . after-tax discounted profit is r = discount rate Il Total output sold is defined as at X.C I (Xl) (l + r) I (l + r)' T (1 + T r)I+1 > .. independent of the grade. at the mouth of the mine) is imposed. if the price is expected to rise. per ton of ore extracted. . The fixed fee per ton of output is seen to decrease the expected price in each period by the same dollar amount.C I (XI) . that is. A severance tax on output effectively reduces the price received by the firm by the same nominal amount in each period. measured relatIve to the standard quality of metal output (concentrate) Effects of Mineral Taxation where T = severance tax in dollars per ton of output. where (3 « 1) = proportion of revenue collected as tax. it may well be the case that . (Some states.hat such taxes can be used to collect rents that accrue from extractmg a nonrenewable resource. T. This formulation allows for the effect of grade variation on total production. that is. have attempted to offset this effect by allowing the rate of tax to increase with inflation.'Y XI rr ----'-----'------'---=---. Therefore.. such a tax may alter the period with the highest effective (net-of-tax) discounted price. 4 . per ton of final output.) For instance. a firm which produces the same tonnage of output over the life of the mine before and after the imposition of the tax will have to pay the same amount of tax in nominal terms regardless of when it is extracted.. in nommal terms.3 and the behef t. Note also that total cost is a fun...tion of the total tonnage of ore processed.36 Taxation of Mineral Resources at = average gr~de of ore extracted in period t. a fixed payment.

but will have no potential effect on the grade-selection profile.. If the tax is imposed on ore.-1 (1 + r)t (1 + rr+ but.6 Since each of these taxes is collected regardless of a mine's profitability.. while if discounted prices are expected to rise. The effect of an ad valorem output tax is different again from those of the other two output taxes.T MC t + for the fixed-fee tax on concentrate 'Y a* = . examples being North Dakota and Minnesota. If discounted prices are expected to be the same. the downside risk associated with mining is increased. no distortion occurs.. ~ (1 - 7 + r)1 > Pt+l(1 7 + r)t+1 Effects of Mineral Taxation 39 its tax payments on the same tonnage of output by extracting less ore in periods of higher discounted prices and more ore in periods of lower prices. because of inflation. revenues from fixed-rate output taxes do not keep up with the real costs of government services. However.38 Taxation of Mineral Resources Pt P t+ 1 .'t. This phenomenon is known as "taxinduced high-grading" and has been noted extensively in the natural resources literature... The tax is therefore linked to some price index in order to compensate for such losses. There are two problems with .. If the raw ore were not processed..Pt+1 7>----'------'---------. Such a tax increases the cost of extraction and processing by a constant amount instead of lowering the price received per ton. It will. the lower the proportion of raw ore sold after processing. Suppose.. that is. This means that the firm can lower for the fixed-fee tax on ore PI MC a* = ...:. Given the risk-averse behavior of most mining operations. This tax reduces the discounted price received in each period by the same proportion. A Note on Variable Severance Taxes Variable per unit severance taxes have been introduced in some states. the firm would reallocate extraction from the present to the future as in the per unit case. This will occur if (and only if) + r)Pt ... (1 r a* = MC t Pt .:-..(3)~ for the ad valorem output tax An increase in the cutoff grade means that marginal ores will now be left in the ground. 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. However. the greater the impact of a tax imposed at the mouth of the mine. this tax may alter the extraction profile.(1 . have no effect on the grade-selection decision since the ranking of discounted prices is unaffected. Suppose also that a state is considering a tax of $10 per ton to be imposed either at the mouth of the mine or on output of concentrate. it is a tax o~ both valuable content and waste. If discounted prices are expected to fall through time. The total tonnage of economically recoverable reserves is therefore reduced. The usual justification for such taxes is that. the effects of a $10 per ton tax on output would be identical to a $10 per ton tax imposed at the mouth of the mine.. most minerals. Each of these three output taxes creates the further distortion of increasing the cutoff grade.' .. that is.:. for example. A proportional tax on revenue will collect a higher tax per unit the higher the price. then for every ton of raw ore extracted the firm must pay $5. the firm must pay $10.. even coal.> . the firm will extract more ore early and less in later periods. If the tax is imposed on concentrate.- A fixed fee per ton of ore extracted will similarly induce a reallocation of ore extraction from the present to the future. Therefore. with the tax. there~ fore. that it takes two tons of raw ore to produce one ton of concentrate. an increase in risk will generally shorten the life of the mine because of lower investments and high-grading.

Such indexatIOn ~Ill therefore remforce the distortionary effects noted above' that IS. in effect. there is no clear relationship (and. and state and local practices vary. the larger the tax. This gives the firm an incentive to increase extraction in early periods and decrease extraction in later periods. the Wyoming tax base is 100 percent of gross proceeds at the mine. This problem is particularly acute in the later years of operation when marginal ores are being extracted. But such a base is impossible to determine since it depends on future prices and costs as well as the geological structure. to the cost an~ price structure of anyone mine. If a tax must be paid on ores remaining in the ground. extraction will be reallocated and recovery wIll be reduced. If the index is not related to pnce (as m North Dakota and New Mexico).s In the long run. it may be cheaper for the firm to extract and process low-grade ore than to pay the tax indefinitely.ty of reserves remaining in the deposit and the average rade at the tIme ?f assessment. In effect. states have resorted to arbitrary and sometimes complicated methods to calculate the tax. The tax paid is a proportion of thIs value. Finally. an ad valorem output tax and has no relationship to the traditional concept of property taxation. . the tax serves as a subsidy to rapid extraction because each ton of ore extracted increases after-tax present value by the tax rate times the present value of the taxes that would have to be paid if the extraction were delayed. such a value is impossible to estimate.erty taxation is the oldest form of taxation used by tatc and localItIes for collecting revenue d r ' 7 The tax b ase 'IS usua11y C In d a th. After-tax dIscounted profit is then (1 where + rr u = millage rate at X t = output equivalent of ore remaining in the deposit in period t li R = output equivalent of total ore reserves before extraction began ~t-I ~j=o aj~ = cumulative output of extraction to date FO = assessment function (Theoretically. If the index is a function of the price. the tax I~creases regardless of costs. For instance. Consequently. To deal with this problem. a negative one) between historical extraction and the current mineral content of the deposit. This tax is. some states have replaced property taxes with severance and net-proceeds taxes because of the difficulty of fair assessment. are permanently reduced. if anything. Utah bases assessments on 30 percent of capitalized net income for the previous five years.) Note that the assessed value is directly negatively related to previous extraction. This market value depends n the quantl. none of which is known with certainty.40 Taxation of Mineral Resources this p!ocedure. This type of tax may also increase mine recovery by lowering the cutoff grade. when capacity is variable. An ideal property-tax base would be the net present value of the deposit. First. This means that once the ore is extracted and sold the tax base. lower investment as a result of taxation may lead to an increase in the cutoff grade.e market value of reserves. The effects of the tax are complicated by the inability to accurately assess the property. A tax based on historical profits will always overestimate the value of the mine in this case. there is the choice of the price index with which ~o adjust the tax rate. ' Property Taxes Ad valorem pr~p. This tax has the opposite effect to the property tax. We therefore leave this as a general function. F(·) is the present value of remaining reserves. because the higher the historical profits. firms may have to pay hIghe: taxes e:en though profits are falling. In addition to the obvious problem of using historical values to project future profitability. cu~off grades will rise. How- Effects of Mineral Taxation 41 ever. the problem is further compounded because a change in the index is only remotely r~lated. and therefore tax payments.

Ct(X) . Percentage depletion allows a fixed proportion of current revenue to be deducted to compensate for exhaustion. Second. that is.-:-----(l + r) t where h = deduction allowance as a proportion (0 :. However.Ct(Xt ) . d = cost depletion allowance (in dollars per ton of output) As shown. to the~e .. In effect. In effect. the same 10 analysis applies for nonfuels.effects. After-tax discounted profit in this case is P Cit X t . for federal taxes development expenditures may be deducted in this manner..k)([~ + 1----=7() Cit X t = (l + c: (X. When profits are positive.) Therefore.k)[(l + kh 1 _ k'Pt Cit . Most of the debate over percentage depletion has been in the context of oil and gas. 1) of revenue.. The amount of the deduction is based on estimates of the costs (or present value) of the mineral property and estimates of the recoverable tonnage of ore. the effects of the allowance are the opposite of those discussed with respect to ad valorem output taxes. cutoff grades will be lower and recovery higher than would be the case without the allowance.Ct(X)] =---_-----::=-----:. when profits are positive. it does not affect the downside risks because taxes are paid only when profits are positive.9 Cost depletion is a fixed nominal allowance per ton of ore extracted.) Extraction tends to be reallocated Progressive Profits Taxes Renewed interest in progressive profits taxes has occurred for at least three reasons. it should be noted that in most cases this allowance IS not lImIted to the total costs of the mine.:. a subsidy for extraction. particularly with respect to small marginal operations.C t (X1 ) -k[P t CitXt ~ Ct(X) .. First.42 Taxation of Mineral Resources Proportional Profits Taxes and Depletion Allowances It has been well established that a pure proportional profits tax does not affect the behavior of the mine once an investment is made.dCitX t } I (1 + rr kd (1 . In addition. In addition. There are two types of allowance currently used by various states: cost and percentage depletion. )] r)t where k = profits tax rate 43 Effects of Mineral Taxation from the future to the present. the profits taxes employed by the federal government and the various states are not pure profits taxes. governments have sought a means to increase their share of profits in good years (perceived windfalls) without imposing ex~essive taxation in lean years.. in effect. a negatIve ad valorem output tax. (It should be noted that any form of expensing that is deducted on a unit-of-production basis will have this effect. the effect of the depletion allowance is to raise the net-oftax price received per ton by kd/(l . However. governments have been concerned about equity issues. no distortion will occur. h :. the ability-to-pay principle has been .k). because of the various deductions which are available to the corporate sector in general and the mining sector in particular. After-tax discounted profit with cost depletion is Il = P t CitXt . For example. It therefore acts as a negative severance tax (an implicit subsidy) per ton of extraction and its effects are accordingly the exact opposite of those of the per unit output taxes. This means that it is entirely possible for the sum of the deductions taken through time to exceed the costs of acquisition and development.k) and is. the allowance attempts to allow a deduction for the reduction in reserves on a unit of production basis.k{PICi I XI . (The total deduction is usually limited to some proportion of profits. this allowance increases the after-~ax price of output by a fraction kh/(l .hPt CitXt] t Il = (1 + rr t (1 . The most common deduction available to the mining industry is the depletion allowance. If that limit is reached consistently.

but this incentive will always exist! 3 45 Effects of Mineral Taxation Taxation of Mineral Resources deposits are considered. while extraction is highest. with r > 0. Alternative price profiles to be used in calculations 1. the tax will induce the firm to shift output (and therefore profits) from periods with higher tax rates to those with lower rates.44 used to argue that large. the average grade of ore extracted can be increased or decreased. two hypothetical mineral B. (XIX. or the firm can change both extraction and grade to reduce taxable profits in some periods.CI(XI ) . it is important to emphasize the distortionary incentives that are present in such a system. The optimal life of mine II is only two years with either price sequence and none of the 1 percent ore is ever extracted or processe. It is unlike a proportional profits tax in that the firm.600 + . there has been a search for alternative taxes which do not have the distortionary effects or large administrative costs of other types of tax which have been in use (particularly ad valorem property taxes).250!ton output P. but the fixed costs (and thus the average costs) of extraction and processing are different. The recent Wisconsin net-proceeds tax is a case in point.000 tons ore (10 tons output) Minimum of average cost curve: $90 @ 450 tons ore Marginal cost: . Z Mine II Grade tonnage 4070 450 tons ore (18 tons output) 2070 550 tons ore (II tons output) 1070 1.T(P.250 + .38. Calculations will be made for the two different price profiles to show how alternative economic conditions can affect the outcome qualitatively as well as quantitatively. respectively.90 tons ore Grade: 2070 Tonnage: 1. = $5. As shown. can change its marginal tax rate in each period and thus the total taxes that it will pay.d (that is. Mine I is composed of a homogeneous ore body.2X.IX. = $5. Total cost = $20.IX.OOO!ton output every year 2. the firm chooses its own marginal tax rate in each period. by choosing the quantity-quality mix.(X» (1 + ry where T(·) = profits taxes paid in period t.@·256. a function of the level of profits. the optimal hfe of mme I IS three years with either profile. P. The exact magnitude of the distortion will vary according to the specific design of the tax. Such differences may be due to different techniques or different geological structures.OOO/ton output all other years .000 tons ore (20 tons output) Total cost = Marginal cost: . P z = P 3. when the nominal price is increased. it is below the cutoff grade). The effects of this type of tax depend on the firm's expectations regarding the time paths of discounted prices and costs. Description of mines to be used in calculations Mine I Minimum of average cost curve: $51. more efficient firms should be made to bear a larger proportion of the tax burden: 1 Third. T8 > O. In general. Extraction steadily declines when prices are coustant in nominal terms. Extraction can be lowered in periods with high expected profits and increased in other periods. 14 The essential characteristics of each deposit are detailed in table 3-1. = $5.are reported i~ tabl~s 3-2 and 3-3. This form of the profits-tax function shows that taxes paid by the firm increase with profits at an increasing rate. $6. while mine II has three distinct grades with tonnages varying by grade. 12 Regardless of the method employed.C. . 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. In effect. The optimal extraction profiles for mines I and II under both price profiles (and in the absence of any taxes) . Note that. There are several ways of accomplishing such a transfer.2X. The marginal costs per ton of ore extracted are the same for each mine. After-tax discounted profit in any period with a progressive profits tax is defined as PI (XI XI . in the second year when nominal prices increase in the second and thud years. extraction of the 2-percent ore is reduced in the Table 3-1 Hypothetical Mines and Price Profiles A. Two alternative price profiles are also noted in table 3-1.2 Some Numerical D1ustrations To illustrate how geological and economic factors combine to determine the tax response of a particular mine.

22 Output (metal) Optimal extraction profile when current price is $5.09 6.09 Discounted Profit 56.000.983.18 18.84 Undiscounted Profit 6.000Iton in each period 50.318.639.000.84 342.84 317.58 45.295.35 Discounted Profit Optimal extraction profile when current prices are: PI = 5.09 14.639.735.217.781.000Iton each year 348.250 20.642.367.65 6.00 4.00 Undiscounted Profit 19.031.735.000.00 4..48 A verage Grade .1.09 Undiscounted Profit 333.238 29.90 Un discounted Profit Output (metal) A verage Grade Extraction (ore) 1 42.10 2 Totals 1.94 Extraction (ore) Table 3-3 Optimal Extraction Profiles for Mine II under Various Price Profiles Totals 3 2 I Year Totals 3 2 I Year Optimal Extraction Profiles for Mine I under Various Price Profiles Table 3-2 - ~ o ~ -.99 15.15 6.34 1.000.97 6.000.93 16.750.84 7.68 Output (metal) Extraction (ore) Year 46.919. P 2 = P 3 = $5.038 .816.0384 .00 1 2 49.020 488.500.00 29.98 6.00 323..00 10.639.020 500.02 12. P 2 = P 3 = $5.00 500.000.632.00 15.180.00 511.23 13.J :::J - s:u X s:u o -I W (1) :::J 3: o en (1) (') in -- en (1) d c ::D (1) en W (1) :::J 3: o :::J o s:u X ~ (j) .250 Year 54.18 Discounted Profit Optimal extraction profile when current prices are: PI = $5.00 15.46 16.94 333.84 Discounted Profit 54.762 10.019.621.34 57.445.09 17.00 Totals 49.068.750.18 49.750.059.00 1.68 15.13 49.93 16.00 Output (metal) Optimal extraction profile when current price is $5.118.00 6.118.22 Extraction (ore) --- 20.68 16.000 .

."..§ ~ .:s r-: a- -s:: '" s:: . ~ s:: .... '" . as shown.0 \Ci r-1000\1l('') 0'" <. ~ s:: .-N N ~ IC ~ 00 N N N N-" .:s" ~ . while more ore is extracted in year three when prices vary.:s .Q '" ~ lO:: .. 0'" Cl:: .:s ~ Q:.. the distortions will occur regardless of the size of the tax.. Thus a $10 tax per ton of ore is equivalent to a $500 tax per ton of output in this a e.000 in each year the taxes have identical effects.:: ~ s:: .. The effects of each tax on the extraction profile of mine I are reported in table 3-4.. However... if lak s fifty tons of ore to produce one ton of concentrate. when price do not change through time a per unit tax is equivalent to an ad val rem lax..ll:! '§ -= ~ 0 $ ~ ~ s:: ...§ .!:/ ~ 8 8 o. ~ :! ~ .~ . . II V) "'" "'" _ .... ~ a- ~ ~ "'" :i . ::::l- ~ ~ . . Note that the life of the mine is increased by one year in the constant-price case. The effects of the three output taxes are quite different again when the grade varies within the deposit.!:/ ~ ~ ~ v\ N 0 ~ 8 ~ .'" .~t"l ~ ~O\r-\O <"l <"l ~ Ii: ~ ~ .. ~ a- N N 0N 0:: N N <"l '"r--r-..:: 0 II ~ ~ E-.. This conservation effect is the best-known property of such taxes. a comparison of the two per unit taxes with the ad valorem tax (part B of table 3-4) shows that the output and ad valorem taxes are no longer equivalent.. :s 00 V) "'" 00 -0 -0 00 ""! IC B- 8 0 N S :2 fA ~ e"t:l e . ~ i§ Q..:s C) '" . -("f'10\r- ~s:: ~ ~ ~ ....> ...5 Ii: <"l V) 0\ 00 II Q. S ..9 t:. II .:!i "l . . However.s:: s:: .5 Ii: ~ ~ s:: .:s v\ 00 ... Q..... "<l: ~s:: V) 0 ~-. and the response of the firm is correspondingly different.00 _ § ..:s 0 <.§. . There are two reasons for this....:s . 00 "'"..Q =- ..:s gi ~ . ~ . 00 <"l ~ ~ :§ II Q.S= --e = ~ ~ riIil Q '"~ ~ -CIS ~ = 0= Q" -~ 0\ 'Ci 0 N V) 0\ 00 <"l ~:i~oO 0 "'~" ...."'" r-- 8 V) 00 0\ N r-: 8 00 <"l <"l V) 0 N <"l N ~ ~ ~ <. ~ o 00 to N a. '" ~ '" ..0 <"l ~ s:: s:: '" ~ 8 ~ i§ Q:.. as shown in part A of the table. When prices increase the ad valorem tax collects more revenue per ton than either of the per unit taxes. '" N t:. e ::::l- ~ '" .~ ~ ti :f N a- 00 '" ~ 0\ <"l ~ :§ :s i§ . ~ IC IC <"l "! ::: 8 0<"l ~ 00 N <"l <"l <"l ~ -~ e '" .. II . a tax of $500 per ton of concentrate produced.... This increases the average grade of ore extracted in the first year but decreases total output in that year..0 . 0 ~'" '" ....:s s:: .9 ~ ... IC ~ ~ ~ .n 0 N 00 V) ~C""'\N 0 0\ s:: 0 ~'" _ s:: .:.~ ~ t:. E-< cj ~ 0 - fA <f- t:... ~ ~ '"l(j ~ '" <ll ~ ....:s 8 N ~ -s:: ~ ...r-N MMM :2 00 g 00 0\ ~ s:: ·9 i§ Q:.:s 8 . . II -9 ~ i§ '" '" <ll 0 - N <"l E-< E-< ~ 0 Z ... However. '" ~ .48 x tl n f Min ral Resources first year and increased in the second. ...§ ~s:: s:: -s:: '" § "11 ~ r-a.. ... a lO-percent ad valorem tax collects $500 per ton from sales..> . These numbers are used for illustration only. Th econd reason for equivalence in this case is the uniformrad di lribution. ~ t: ~ c ::i ~ '.... One is that...~.:s C) §'" ::i .. This remains true when prices vary through time...Q ~ ~ s:: .0 ~ B. and a tax of $10 per ton of ore extracted. The taxes considered are three forms of output taxes: a 10percent ad valorem tax on output. while part B reports the profile which results from imposing the $10 per ton tax under the same price Effects of Mineral Taxation ~ E-. when prices are $5.=.. ~ ..§....!:j 8 oa. Finally. The results for mine II are reported in table 3-5...- II :§ $ .>Cl:: N N ~_'" .. Q..n <"l ~ N IC V) ~ .....§.>Cl:: V) r--.000 per ton...~ 0 <.g N "<l: r-- V) 8 ~ ~ ~ ~ CIS.:s 0 <.:s '" ~ Q:.ll:! '" ~t.~ Il(")r-~\O g ~ 0 Q:.0 <"l r-- r-- r-- V) . each tax induces the firm to reduce extraction in the early periods and increase it in the later periods.5 Ii: . N f'f') v E-< -.00\ 0\ o..:s C) :s ~ s:: V) V) N V) V) <"l 00 "'" 80N §'" ::i -<i -<i B- 8 ~ ~ s:: ~ ~ ... Since the ore is 2 percent throughout the deposit.. '" .... When nominal prices are $5...r-<"l 0\ ~ "'" N r-- r-- . ~ ~ . Q.Q ~ .9 t:. ::::l- ~ ~ '" G . 00 r- s:: . ~ ~~ ~ $ '" .. it is only valid when grades do not vary.9 ~ .> ~ ... Part A of the table shows the optimal extraction profile with the 10 percent ad valorem tax and the $500 per ton output tax in the constant-price case. '" ~'" '" . Thus part of table 3-4 shows again that the $500 per ton output tax and the $10 per ton extraction tax are equivalent... :sB- s:: N 00 r-- V) -0 -0 -0 8 0N . I l"l 8 ....> .9 t:.. ~ <... "l Q:. ~ = ~ .. 0 ::i ... ~ '" <ll 0 . <"l ~ ~ s:: .. I:ci ~ '" N <"l ~ ~ oJ :::l <ll > :2 .. ~ ~ ~ <.!:/ 49 t"('r'IO'\\O E-.:s 8 ~ 00 - r-- V) 00 IC ..-1 .... ~ . 00 0'" <. ~ "<l: a- 0 N ~ :§ ~ .: <. Therefore...

.62 40.102.590..00 475.500..27 40.00 0 45.00 2 Totals 27.91 4.50 40.250 450 450 Extraction (ore) 1 2 Year B.23 Discounted Tax 8.00 . $10lton ore: constant prices 450 Extraction (ore) I Year A.00 I .02 475.18 9.00 18.()() Undiscounted Profit Discounted Profit 42.> o (]l .000 and P 2 = P 3 = $5.500.50 47.075.000.812..00 9.91 4..102. (]l ::J 0 ..000..62 Undiscounted Profit Discounted Profit 45.500.02 .818.18 Discounted Tax 13.000.00 18.18 500.00 0 45.02 Output (metal) Year A verage Grade 27..50 9. 0 ::J ~ 0 - ::J 0 .04 450.50 Totals D.50 45.000. 10% output tax: PI = $5.> X Q. -i Q.00 4.500 45.OOOandP 2 = P 3 = $5..575.386.00 925.23 9.00 Output (metal) A verage Grade 27.00 42.000.318.00 42. --t Q.00 2.91 9. 10% output tax: and $5001ton output tax Table 3-5 Effects of Output Taxes on Extraction Profiles of Mine n 40.50 Extraction (ore) I 2 Year 27.50 .00 4. C 0 (J) CD ~ .00 18.00 Output (metal) .318.> X Q.00 4.00 Totals 925.00 9.27 45.00 .450 900 2 Totals 900 Totals 9.. ::J ~ 0 Ul () CD .500 Undiscounted Profit Discounted Profit 4.27 2.500...04 .> Q.02 Output (metal) 27.250 .00 Discounted Tax 13.500. (J) CD () .510.318.02 A verage Grade I 2 Year $500lton output: PI 922.00 47.510. 450..000 and P 2 = P 3 = $5....04 A verage Grade C.000.250 ..102.000.312.312...00 Un discounted Profit Discounted Profit 40.00 9.27 2.602..93 40..04 450.00 Discounted Tax ::IJ m .93 1.232.45 Output (metal) Extraction (ore) = $5.50 Undiscounted Profit Discounted Profit 42.> CD .00 2.500 0 40.500 0 40.04 A verage Grade .91 4.000. $10lton ore: PI = $5.18 Discounted Tax 13.50 18.00 472.886.090.000.090...45 18.00 2.50 Extraction (ore) E.090.

)] + ry The depletion allowance increases the net-of-tax price while the p~r unit tax decreases the net-of-tax price.C.C. the tax revenues to the government are lower when there is a $10 per ton tax on extraction. depending on the geological structure unique to each deposit and the general economic conditions. = (1 (1 . The analogous offsetting would result with percentage depletion and an ad valorem severance tax with the rates suitably chosen.k)[(Pt + ry + ~d_-kT)at (1 Tat X I X. A combination of taxes often employed is an output tax and an kd . 2 percent is now the cutoff grade. that is.000 in tax revenue is generated in the first year when the tax is imposed on output. none of the 2-percent ore would have been extracted. the dlstortlOn effects would again be offsetting. when prices change. If the severance tax is allowed as a deduction for profits-tax purposes. but the tax revenues differ for the reasons cited above. Parts C. However. These taxes are used for a variety of purposes. the smaller the valuable content and therefore the larger the tax in terms of its value. since the profits tax is neutr~l in the s~ort r~m. If the tax had been higher. Therefore. and each tax has its own set of distortionary effects. . so that a $10 per ton tax on ore is equivalent to a $500 per ton tax on output. then for a complete offset the unit tax would have to be equal to the allowance. The best grade of ore is extracted and exhausted in the first year while only 450 tons of 2-percent are are extracted in the second year.(X. Integration of Taxes Several states and localities impose more than one tax on the mining industry. altering the effect on extraction. If = T. while hypothetical. Although the extraction profiles are identical under either tax. Again it takes fifty tons of 2-percent are to produce one ton of concentrate. Note also that extraction is reduced in both periods. 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~e from income for profits-tax purposes. used m combination the allowance and the output tax tend to offset one another. the dollar value of the tax paid changes. Note that $9. The mine operator will be indifferent between extracting 450 tons and extracting nothing at all. the effects of a tax across mines could range from little or no effect to a 53 Effects of Mineral Taxation complete closing of an operation. if the profits-tax rate were 50 percent and cost depletion $10 per ton. These examples. an equivalent output tax on 4-percent ore would be $250.500 is taken when the tax is imposed on extraction. This occurs because the net-of-tax price received per ton of 2-percent ore is exactly equal to the cost of extraction and processing at the minimum of the average cost curve.(X. This is because of the grade variation. Note that the extraction profiles are identical in parts A and B. highlight the important fact that economic and geological factors in conjunction determine the consequences of any tax or set of taxes. The extraction profiles for the two types of output taxes are identical (the distortionary effects of the taxes are the same).52 Taxation of Minerai Resources assumption. the tax revenues are equivalent when the 2-percent are is extracted. In actual situations. As shown. For example. This is confirmed by the fact that after-tax profit is equal to zero in the second year when only the 2-percent ore is being extracted. Any other tonnage would produce a loss. a $5 per ton output tax which is not deductible and a $10 per ton output tax which is deductible would each result in no distortionary effect in the short run.)] - TI. The lower the grade. When are is 4 percent. only twenty-five tons of ore are necessary to produce one ton of concentrate. while only $4. If a per unit tax were used with percentage depletlOn. and E of table 3-5 show how the effects of the taxes vary when nominal prices are not constant through time. This means that. then they exactly offset each other and no distortionary effect occurs. . It is thus of interest to determine how these taxes in combination affect the firm's behavior.X. This demonstrates that a per unit tax on extraction imposes a smaller burden on high-grade than on low-grade ores.k)[(Pt + kd ~) a. the ad valorem tax has a greater effect on the extraction profile than do the two per unit taxes. discounted after-tax profIt m any period is (1 . Again. D.

whereas an ad valorem output tax has the opposite effect. there would be an offsetting tendency regardless of the expected rate of increase in prices. In this case. Another combination of taxes used is a profits tax with a form of depletion allowance and the ad valorem property tax. after-tax profits to the firm must remain sufficiently large to justify future extraction. They complement each other and thus induce faster exhaustion than either tax individually.1. This does not imply. maxl~um r~co. Along with the geological and geochemical pr~perties o~ !he deposit. The taxes paid reduce the present value of cash flow and thus make the investment less attractive. To understand this process. In summary. A complete offset in each period would require changing rates.C. When the output tax is ad valorem. in addition to the possible effects of a tax (or combination of taxes) on the extrac. The pnce received is a function of the quality.(XI ) . the effects on extraction of taxes used in combination can be offsetting or reinforcing.uF(aR . I . gr~atest possible tonnage of ore from the ground.J whereNPV = net present value I = g ~ size of initial investment - T. both the depletion allowance and the property tax tend to increase extraction in early periods.X.{3P l ex I X. I' A per unit output tax reduces the quality of concentrate while increasing quantity. Care must therefore be taken In deslgmng tax policy so that losses are minimized at both the extraction and concentrating h~vels. The concentration (or processing) stage of a mining operation involves the separation of valuable material from waste. Maximum recovery means not only extractIng the. J J (1 + r)t J~O If prices are not expected to rise at a rate greater than the rate of interest (as is usually assumed). economic variables play an important role In deterffilm~g the trade-off between quantity and quality of output.Taxation t Minerai Resources 54 ad valorem property tax. the level of processing is part of the decision structure and can be affected by taxation. which will tend to offset the tendency of the property tax to increase early extraction. the output tax tends to reduce extraction in early periods. 55 Effects of Mineral Taxation trade-off must be made between increasing the quality of concentrate produced and the total recovery of metal from the raw ore. Effects of Taxation on Investment and Related Issues A firm considering an investment in a mining opera~ion tr:at~ a~y form of taxation as a cost of doing business in a particular JUnsdlCtion. This means that. because the base of the property tax is constantly changing. however.very IS not being achieved. that a government can select a set of taxes with offsetting effects and raise an arbitrary amount of revenue. These results are important because one of the goals of natural resource policy has been to ensure maximum rec~very from the deposit.) . Finally. neither pure profits taxes nor per unit extraction taxes distort the concentrating decision. depending on the nature of their respective distortions. If valua~le matenal IS u~­ necessarily discarded at the processing level. In order for there to be no distortion in the long run. Efficient operations can usually increase the quality of concentrate only by decreasing the amount of metal recovered. aftertax discounted profit is PI II. consider the follOWIng expreSSIOn for the net present value of a mineral investment A Note on Taxation and the Concentrating Decision II I 1=0 (l + r) T The previous analysis has implicitly assumed that the quality of final output is exogenously determined.'16 In practice. while costs change with intensity of processing. In general. Note that if a per unit output tax were employed in combination with a property tax.1-1 ex. There is no simple formula for a combination which will produce no distortionary effects. the tax will tend to decrease investmen~. exlXI . tion profile. If a sufficiently high level of taxation is imposed the firm may prefer to cease operations entirely. a NPV= -1+ 1.

and the tax benefits will be exported with price reductions to other states.x . It is true that a pure profits tax will not affect the extraction profile. from an economic perspective. Taxes reduce the expected. these deductions do not change the total taxes paid over the life of the mine. Firms can reduce risks by (1) forming exploration companies that legally separate the risks from other sources of income. In this case. but transfer income to other parties. Like all economic agents. and (3) firms need to finance development with de~t ~n early y. This aspect of the system has a number of implications for tax policy. and generally shorte~s t~e ex~ected life of the mine. In general. other things equal. or extend exploration to submarginal prospects.vestment the firm would prefer an output tax which collects $1.000 in present value terms.fIcatlOns for these privileges are (1) mining is more nsky than other Investments. profitability and thus reduce the investment for a given level of nsk. Expensing Provisions ~ining firms. but that is not the only issue when investments are b~ing determined.:ill therefore tend to decrease the size of investment in rrnmng activIties. in a market economy the benefits may not affect the operations at all. For instance. the original owner of the property collects a payment from the extractive firm for the right to explore and develop his property. 19 The firm may also increase the price it is willing to pay for the right to extract the resource. is a capital expenditure made to capture a future stream of benefits. Also the same level of taxation will have a greater deterrent effect the more risky the investment. in addition to depletion and ~epreCIatlOn. and (3) exploring a number of deposits in a variety of areas at one time. The tendency to discourage extractlOn IS reInforced by uncertainty. ~ome of the JUStI.000 ill present value terms to a nondistortionary profits tax that collects $2. . Development.56 Taxation of Min ral Resources rr~ = gross-of-tax cash flow in period t T( = tax revenue collected in period t Fr~m this si.. to spread the risk within the company. since title to subsurface minerals is usually recognized as part of the ownership of surface rights. (2) development is mine-specific with no s~lvage value. like exploration. 18 One of the objectives of granting liberal allowances for exploration and development is to attract mining investments into a particular area. Rather. ~ny ta. There is no doubt that the benefits from exploration are uncer- Effects of Mineral Taxation 57 tain. decreases the tonnage of economically recoverable reserves.. Taxing Rents In most countries legal title to subsurface rights has been vested in the state. they change the timing of tax payments from early to later years. Given this ability to adjust for uncertainty. a mine may sell the product at a lower price in order to ensure a market. . The United States is exceptional in this respect. potential returns but have correspondingly high risks. This is true of profits taxes as well as other taxes dIscussed earlier. First. mining firms choose a strategy that will offset these risks. the firm will not change its behavior. exploration is an investment made by a firm to obtain a stream of future benefits.mple formulation of the net present value it is clear that ~n Increase In tax payments reduces the present value and makes the Invest~ent less attractive. In calculating profits taxes. However. However. good accounting and economic practice dictate that such expenditures be amortized or depreciated to offset these costs as benefits are received.ears and therefore need a sufficient cash flow to repay pnncipal and Interest. This ~eans that deposits which have low returns but are relatively safe illvest~ents may be preferred to deposits which have very hIgh . excessive governmental tax inducements will either transfer resources from other sectors of the economy to mining. thereb'y d~~rea~ing the present value of the tax payments. are able to take advantage of special provisions regardIng expl~ratI~n and development. For example. by buying interests in property owned by another firm and selling partial interests in their own. there is little doubt that for the same In. As such. Again a tax incentive may not increase investment at all but instead be shifted to somewhere or something else. (2) pooling risks. In sum. This reduction increases the unit cost of extraction. the effect of these incentives is diluted once the interactions in a market economy are taken into account.

policymakers must be aware of the implications of and distinctions between a tax on rent and a tax on the return to capital. the state could tax the owner's capital gain from the sale. Capital gains from the sale of mineral properties and royalties paYments which accrue to resource owners are part of the income-tax base. Therefore. and investment by reducing the rate of return to capital. The tax could not (and should not) be exported or shifted to purchasers in other states. the ability of the government to collect rents by taxation is complicated in practice. the resource owner collects a "rent" because of his ownership. A subsidy will have the reverse effect. rent is a paYment above the minimum amount necessary to bring forth a given supply of a resource. to enable some risk sharing between the owner and producer.ting. and the tate would be collecting the rent. by definition. Some analysts have argued that states and localities should collect the rents from resource extraction. if the property were sold outright. quantity. for example. and ease of extraction. combined with the long lead time for pOSItive returns. 20 Based on the above discussion. mining firms will typically collect some of the economic rent that would otherwise go to landowners.a tax on pure natural-resource rent would involve only a transfer of Income from the owners of the property (usually residents of the state or the state itself) to the government. Competition would ensure that this payment would vary across mineral properties according to quality. without calculating the net-of-tax rate of return. 21 Given also the paYments to the owners for the right to extract ore. It should be emphasized that large profits may. However. For instance. From the analyses of those who would supposedly tax resource rents.58 Tax tlon f Min ral Resources That is. in va:ious activities is the same. a complicated system of lease bonuses and percentage royalties have developed. It is clear. only a pure profits tax is nondistortionary in the short run. However. be borne entirely by the property owner. taxing rents implies that the incidence of the tax should be borne by the original owner and not by the extractive firm. Also no estimates are available for the amount of tax collected in this manner. Part of the confusion over taxing rent is the tendency to correlate large profits with rent. the supply of the resource would be unaffected. profit-maximizing behavior is assumed. Because of uncertainty. is misleading and unfair. be~r little relationship to the rate of return on invested capital. an ad valorem . discourage exploration. A rent tax will have no effect on the firm's behavior (because the owners of the firm do not bear the burden of the tax). this type of taxation is hardly what they had in mind. A true fax on natural-resource rent would be borne by the state's residents (if they own the land) and not by large firms. . Therefore. Another consequence of the emphasis on profitability when discussing the taxation of mining firms has been the neglect of the fact Effects of Mineral Taxation 59 that taxes paid by the firm are only part of the tax revenue generated by mining activity. Most states impose income taxes 01) individuals and firms or collect paYments from state-owned lands. It was also shown that taxes applied in conjunction may have offsetting effects. This fact. Summary The preceding analysis examined in detail the response of the mining firm to the major forms of taxation. Modern mining is a hlghl~ capltal-In~e~SIVe process. The firm's behavior would be unaffected. Since the property rights for minerals are usually vested in private hands. suggests the need for sizeable profits in some years. In summary. the essential point is that naturalresource rents accrue at teast in part to the initial owner of the mineral rights. If price-taking. CapItal IS allocated in a competitive economy until the rate of return f~om inves. While simple in concept. Instead. however. Further. Little analysis has been done on the effects of this aspect of taxation on the trade of mineral rights or the behavior of owners. ceteris paribus. any tax will. Because of uncertainty. Thus industry spokesmen have some justification for claiming that a comparison of annual profits. and would have no effect on the profits of the mining firm. it is the owner who collects this paYment without contributing to product. A tax designed to collect natural-resource rent must then. development. while a tax on the income to capital will reduce investment. states are already imposing a form of taxation on the owners of the resource. most of these payments are not lumpsum. at each stage of the mining cycle. that the sum of the direct taxes paid by mining firms will underestimate the tax benefits to the state. any association of profitability (even of so-called bonanzas) with some notion of rent is tenuous at best.

22 They argue that a state with large reserves can increase the level of taxation without affecting the industry in that state. But as long as a state does not hold a complete monopoly of the resource. They offer such mechanisms as hold-free clauses in long-term contracts as supporting evidence. that the firm's long-range strategy will be unaffected. So a tax on rent should be borne accordingly by landowners and not capital. 5. Contracts do expire and buyers will always seek the least expensive source. The same shifting can occur with subsidies as well. .the rent payments to landowners. 8. 13. some rent is collected by firms as well as consumers of the product. 1979b). While rents are easy to define. an understanding of how rents are generated and their relationship to profitability. The long-run implication ofthis is discussed in chapter 4. The writings of Harberger (1974). Invariably. rich deposits collect more rent. It is true that large. 3. and McDonald (1967) all pertain to some aspect of thls debate. For a formal analysis of this problem see Conrad (1979b). See Long (1976) and Sorenson and Greenfield (1977). only the results are reported here.d~vel~p­ ment of severance taxes resulted from the cost of fairly admmlstenng the ad valorem property tax. This is contrary to the short-run high-grading effect claimed by McGeorge (1970). but in the longer run development and investment will fall. 22. In the short run behavior may not change. 23. 16. 17 See Conrad (1979b) for discussion. 9. but in a market economy it is the owner of the land who collects at least part of the expected value of the rent. but only as a short-term phenomenon. however. 21. However. Ibid. See Hansen (1977). Davldson (1970) argued that depletion allowances mai~IY ~ncrease . regardless of the effect on extraction. These examples are found in detail in Conrad (19790). Some writers have claimed that price-taking behavior is inappropriate for the analysis of tax policy at the state level. The model used to evaluate these taxes is developed in Conrad (19780) and in Conrad and Hool (19790. Increases in the level of taxation increase the cost of doing business. This does not imply. Thus as noted above. Effects of Mineral Taxation 61 2. A national firm will always try to shift the tax burden to someone else. 11. 23 States must therefore weigh short-run revenue gains against long-term losses from excessive taxation.. 14. . is essential for designing tax policy. Such a tax would have no effect on the firm's level of profitability unless it obtained the mineral rights for free. some decrease in investment will result. See Conrad and Hool (19790). (1978) and Conrad and Hool (1979b). See Warren (1944) for discussion. Steiner (1959). This effect has been established by Hotelhng (1931) and Lockner (1965). See Conrad (1978b) for a proof. Notes 1. 20. This claim may well be justified. 4. The validity of this point is discussed below. 15. ing the issues of taxing rent and taxing the return to capital. Lockner (1965) and Stinson (1978) noted that the. 6. Another implication of this analysis is the importance of separat. with no effect on the fum s behaviOr. Its ability to do so will depend on the relevant elasticities of demand for final goods and inputs. The formal proofs are found in these texts. See Peterson (1976) for a discussion. See Boyle (1977). 7. References to this effect are found in Gillis et al. since the tax can be exported to consumers in other states. 12. See Boyle (1977). if any. they are impossible to measure. . 10. DaVldso~ (1970). This is consistent with the discussion in chapter 2. See Conrad and Hool (1979b) for details. 19.60 Tax tl n I Min r I Resources property tax and an ad valorem output tax can offset each other. 18: See Convery and Conrad (1979) for further discussions. some response by the firm is inevitable. .

In this context. It was shown that taxes will typically alter the pattern of quality and quantity of extraction but. The representative calculation presented below is for a uranium mine in the state of New Mexico. In addition to these losses. Calculating the Net Impact of an Integrated Tax System The first step in the analysis of tax policy is to obtain a measure of the taxes paid by a single firm. New Mexico was chosen because of its variety of taxes imposed on mining. For illustrative reference.4 Policy Implications In the previous chapter we examined the potential effects of various taxes on the decisions of mining operations. 63 . administrative issues are discussed along with the use of particular taxes to meet specific goals. the citizens of the taxing jurisdiction must bear the costs of administration and enforcement. unless excessive. this measure must account for the combined effects of the entire state taxation system. The choice of tax policy is often complicated by a trade-off between the ease of administration and enforcement and the magnitude of the distortionary effects. The best way to illustrate the interactive effects of an integrated tax system is with a numerical calculation for a particular state. This chapter analyzes some of these trade-offs and offers some policy recommendations for consideration. Rather. Since states generally use more than one tax. A discussion of the incidence (who bears the burden of the tax) follows. we begin with calculations of the impact of the tax system of a given state. will not force an operation to close completely. It is also important not to overlook the fact that all state and local taxes are deductible for federal tax purposes. investment and total mineral yield will tend to be smaller and the life of the mine shorter as a result of taxation.

7: 65 Policy Implications 5OJo Value 0. aCertain adjustments for nonbusiness income.C(Q) . The second Imphes that no royalty payments are made.through clause taxed at 1.fQ . The information was cross-checked as far as possible to ensure consistency and to include the most recent tax laws. For producing underground mines.0% 4. the effective payment to the state from each tax (excluding the income tax) is 95¢ per $1.5% $3. Mexico. the property tax.taxes paid to New Mexico by the mining operation are expressed III general terms as + aPQ + rPQ + dPQ +eQ +fQ where P = price of yellow cake Q = output of yellow cake C( Q) = total cost of operations h = federal depletion-allowance rate ) 1 Income Remarks Rate Tax T = te(PQ .00 $10.64 T x tlon f MIn r I Resources The t:u'es imposed on uranium operations in New Mexico are reported. rate is total sales less state. The price of uranium concentrate (yellow cake) is $29. in computing its income tax.25% until 1985.00 actually paid (for example.00 $40. . bCapital equipment valued at book value. Sources: Written correspondence from state tax administrators. 1.05)(.0% 7.0% 3. The firm owns the deposit.rPQ . Yasnowsky and Graham (1976).hPQ .00. 2.50 $ 7. Allows deduction for state and federal royalty payments.eQ . Total. National Academy of Sciences (1979).1 percent [(.00 $20.00-25. The fi:m is incorporated in New Mexico and has no multistate operatIOns.7. the following assumptIOns are made. Thus when profit is positive. and income tax from the last period.00 $30.0% 5. Gillis (1979).0475% of value Continued care fund 1O¢/lb Propertyb Varies with location Marginal Rate 1. Commerce Clearing House: State Tax Guide. Note: This tax table was compiled using information from a variety of sources.0% 9.00-35. Rate is 19/100 times 25% value. 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 Because New Mexico uses federal taxable income as its corporatetax base. federal. Base is total value.5. Contracts prior to 1977 with no pass.dPQ .011] of total revenue is excluded from the tax base. the firm pays a dollar in property taxes but recoups 5¢ by the deduction). federal.0% 1. Also because of the federal depletion allowance. it explicitly allows a deduction for all its output-related taxes.22) = . Payments made until each mine pays $1 miUion.0% 12. and Steering Committee on the Impact of Taxation on Energy Markets.00-30.2025 per pound of yellow cake. Allows deductions for state.00-20.50-10.75% of value Severance Conservation 0. State tax statutes. III table 4-1. Table 4-1 Taxes Imposed on New Mexico Uranium Mines 1. and Indian royalties.00 $ 5.00 $25.00 and over Resource excise 0.00-50.a therefore grants depletion allowance of 22%.6% 2. 2 The first assumption removes the problem of allocating income to ~ew. 3. 1 4. which uses the three-factor formula. and Indian royalties times one-fourth times one-third.24 Uses federal tax base. Stinson (1978). To simplify the calculation.00 $50.00-15. The property-tax assessment is $0.00 $15.04 per pound. Royalties are deductible from several other taxes.aPQ .

This shows that New Mexico will collect $2.027 (MG).MC . higher than it would have been in the absence of state taxes. or 6. the . Suppose that the cost per pound of extracting and processing is $2.94070 The introduction of taxation has reduced the internal rate of return by over 45 percent.0075(29. It serves to illustrate the fact that a tax which is small in relationship to the price (or to operating profit) can have a sUb~tantial impact on the rate of return.C I - = 27040 24000 _ 1 = .67070 However. suppo.0694. When incremental investments are contemplated. Several authors made calculations of the lffipact of such mea- .1267. By allowing the deductions.04) + . which effectively reduces the taxes paid by the firm t thc tate by an additional 46 percent.04 . the federal government is in effect paying 46 percent of the taxes for the firm through lost tax revenue.000... But there will also be long-run effects on investment. The ad valorem taxes reduce the net-of-tax price.035(29. First. the cutoff grade becomes MT = . It will cost the firm $24. the internal rate of return in the absence of taxatIOn IS rl = PQ. The discussion to this point has concentrated on the short-run effects of the tax system.. These taxes are partly offset by their deductibility from the federal tax base. This revenue loss thus reduces the long-run distortionary effects of the taxes.04[. The net effect amounts to a tax of 5. while the per unit taxes increase the cost per pound processed.04) . the rate of return is = 27040 r 2 ..04 6 .7 percent of marginal cost.0075(29.33070 This amounts to an increase of over 20 percent in the cutoff grade. Since the state taxes are deductible for federal taxes.73 less 5 percent of marginal cost of extraction and processing.r + 1 _ th MC = a P[I - = 8.tax will serve to reduce the rate of return.000475(29. While the above example is highly slmphfled. To illustrate. the impact of the tax y tern.000475(29. The last equation shows clearly how the net-of-tax price and costs are affected by the output-:related taxes.e fIrm is considering opening a new shaft at the mine. or 12.04) .000 pounds of yellow cake at a cost ~f $2.se th.66 Taxation of Mineral Resources Substituting the numerical values for tax rates and prices into the expression for T yields the following formula for the tax paid per additional ton of output.04) + .10 + .-29. there is the reduction in the state's own tax revenue due to the use of the federal base. on this firm in New Mexico i $1. In the absence of the tax the cutoff grade would be a * = -MC p = 2 . net of federal tax deductions.9412] a. . The total tax burden of both federal and state taxes is. they are deductible for state income taxes as well. Policy Implications When all the state and local taxes are incorporated.06 percent of the value less 2.2025) + .000 this year to sink the shaft III order to extract all the ore next year. the tax system increases the cutoff grade.10 .2025 = $2. there is the effect of federal deductibility on the impact of state taxes paid by the firm. when New Mexico taxes are introduced.05(29. Note that the depletion allowance tends to offset t~e decline in the net-of-tax price.1374 _ 1 24000 = 25666 24000 _ 1 = ...!o 67 + e +f _ 2 + . Other investment criteria may be used. Assuming a price of $29. but the qualitative effect of the taxation will be t~e sa~~.3025 d t] 29.73 . This calculation highlights several important issues. Other things equal. for each pou nd of concentrate sold.04) + . . Second. however..47 .05(MC) whcre MT = marginal tax and MC = marginal cost of extraction and processing. per pound of yellow cake.035(29.04 for y~llo~ cake next year.. the taxes III combination will reduce current extraction and lower total yield. Third. Therefore. 89 t.04) .04) .22(29. The ore III thIS new area will produce 1.

and (3) how many more jobs would be created. However. What are observed are profit levels and mineral development when prices increase. Incidence Issues It has been claimed by several authors that increases in the level of state and local taxation will have little or no effect on the behavior of the mining firm. the reserves located in the state must be a substantial proportion of total reserves. state and local tax policy should be formulated in full awareness of the fact that higher taxation will reduce the rate of growth of mineral production. it is difficult to convey to citizens and legislatures because it is largely unobservable. decreasing investment and income in New Mexico and increasing it in other states. As prices rise. or the ratio of taxes to current profit. decrease economically recoverable reserves. if the rate of taxation were lower? A recent study by Genetski and Chin offers some empirical support for our prediction. In the long run it is the rate of return to invested ~apital. the state (or group of states) must have some domInance over the resource. and cause a relative increase in mineral activity in other states.cr~ase which is not exported may be borne by capital and labor WIthin the state. However. However. tax payments per ton of output. When factors are immobile the part of the tax in.5 percent. The ability of a mining firm or the entire industry within any state to export or shift the incidence of a tax depends on a number ~f factors. this implies that an increase in taxation in. The real issues from a policy perspective are (1) how much more mineral development would occur. in the form of higher prices. at least part of the burden will be borne by resource owners and the state through lack of future development. While this conclusion is simple in concept and inevitable in a market economy. 4 To substantiate this these authors cited "pass-through" or "save free" clauses in con~racts and increased investment in some states despite increased levels of 5 taxation. Recommendations A rational mineral tax policy must be based on a well-defined set of criteria. The appropriate measure for evaluating the long-term Impact of a tax system is therefore the net-of-tax rate of return to capital. (2) how much more would be paid to property owners for minerals rights. This ~eans that. ' A second factor is the elasticity of demand for the resource. 3 These figures do allow ~ c?mparison of tax impacts across states but they are misleading IndIcators of how a set of taxes can potentially affect the level of investment activity. In the long run both capital and labor can move. investment and exploration activity will be lower and jobs will be lost as a result of a tax increase. in the long run. 7 This is due to the ability of buyers to sign new contracts WIth lower-cost producers or to change production methods in order to substitute less expensive alternatives for the taxed resource. This argument is based on the presumed ability of the firm to shift the burden of the tax to out-of-state purchasers of the resource. 9 Vsing cross-section time-series data. The conclusion is then drawn that state taxation has little or no effect on the firm's behavior. If the demand is inelastic. Minerals are used as inputs into other productive processes a~d It IS ~ener~lly agreed that in the short run the elasticity for most mmerals IS qUIte small. states can expect little or no effect from tax increases in the short run. 6 First. the long-run elasticity is substanti~lly larger. that is. whi~h will determine the willingness of capital owners to Invest In mIne:al projects. Some goals of mineral tax policy are (1) revenue stability (particularly for schools and local government). Therefore. New Mexico relative to other states will encourage capital and labor to move to other states over time. However a dominant position is not sufficient for shifting to occur. Therefore. 8 In summary.factor which must be considered is the mobility of factor~ of productIOn. say.68 Taxatlonf Min r J Resources sures as tax payments per ton of reserves. mineral development will increase as long as the increase in taxation does not capture all the return. through time the ability to export taxes through price' mcreases wIll become much more difficult. they found that the burden of taxation by state had little effect on state income in the same year. (2) ease of adminis- . In the context of minerals. when they introduced a threeyear time lag to allow for adjustments to tax changes they found that an increase of 1 percent in a state's relative tax burden decreases a state's relative income by 0. a substantial portion of the tax can be exp~rt~d. Polley Implications 69 Mines close and the capital and jobs will be exported instead of the tax. A third .

but it induces excessive high-grading and increases down ide risks. Under the current allocatlOn sys~em used by several states. an income tax on corporate income can be designed so that it is neutral with respect to incentives within the corporate sector. a severance tax per unit f output is a relatively stable source of revenue and is easier to dminister. other taxes are generally privilege taxes or a form of use charge for publicly provided goods. Development expenses should be subject to usual depreclatlOn rules. tates differ with respect to both the type and geological compoition of each mineral and their willingness to pay for tax administration. Only cost depletion should be allowed. d 2. so will have relatively little effect in terms of reserve loss. The Income Tax A well-designed income (profits) tax should be the basis for any minerai tax policy. and (5) neutrality of the tax system. They are thus part of the cost of doing business in the state and should be recognized as such. no income allocation rule). good accounting and economic principles imply that such expenses be deducted as income accrues. our recommendations deal with the general structure of the tax system. (4) consistency with a state's development goals and the relative importance of mineral development in the achievement of these goals. because it will collect part of the rent from both sources. (This is probably one reason why a regional tax policy has never developed. Particular modifications can then be incorporated by each state according to its specific circumstances. In addition. econ mic conditions change and tax policy should be flexible enough to odj u t to new conditions without excessive inducements or disincentive . The following provisions should be part of the income-tax package. Taxable income should be defined to include only income accruing within the state (that is. From the preceding discussion.) However. has been ~hown either to act as an income subsidy for mining fir~s or t? md~ce excessive investment in mining activity. The expensing privileges for explorat~on and ~evel. an income tax designed to ensure neutrality b tw en mining and other sectors may be impossible to administer b au of its complexity and may not generate adequate revenues in p ri ds of depressed markets. 10 For instance. (3) control of external effects such as pollution and land reclamation. it is possible that firms which suffer losses l~ a state must nevertheless pay income taxes there becaus~ of profIts generated elsewhere. . Finally. a state income tax should only recogruze l~come and costs which accrue in that state. Third. In addition. . Finally. as used in the United States. The income tax has the further advantage of not increasing the downside risks as much as other taxes. it is clear that no single tax can imultaneously achieve all these goals.one state may be able to reduce their tax liability there by deductmg losses from operations in other states. In effect the state should not care how the rents are divided between resou. In theory. II The preVIOUS dlscusslOn also showed that the allowance will generally increase early extraction and reduce the life of the mine. All other state and local taxes should be deductible. a cording to the circumstances particular to each state. 3. On the other hand. Capitalization of exploration expenditures should be requlf~ . Percentage depletion.ts. The deductibility of other state taxes will allow a partIal mItIgation of their distortionary effects. Therefore. 1. the income tax is a levy on the return to invested capital. Finally.ce owners and extractive firms. Recent theoretical literature al 0 suggests that more than one type of tax may be preferable to a single tax. McClure (1977) recently . 4.o~ment have been claimed to be justified by the risks mherent m mmmg and the lead times necessary to recapture the invested capital. Likewise. since costs are considered explicitly and taxes are paid only when profits accrue. From a corporate perspective. if there is also an individual income-tax system. the same basic criteria will apply to each state. Therefore. Policy Implications 71 the state is assured of collecting part of the natural-resource rents. 5. . Neutrality therefore dictates the elimination of percentage depletlOn. these risks should be reflected in market pricing. different weights will be assigned to each goal. However. the tax does not induce high-grading in the short run. no other industry is permitted to deduct an amount greater than its investments cos. Therefore.70 x tI 11 f Min r I Resources tration and enforcement. . .. In addition. firms with high profits m..

The net-proceeds tax. whose incidence may be regressive. their revenues. we recommend that the tax be at a umform rate.f the pn. It is entirely possible. the bias with such an allocation will not be nearly as great as under the current system. Some of the above recommendations are at variance with current federal practice. our recommendations are intended to serve as guides for minimizing distortions while generating revenue. If in spite of this such a tax scheme is to be used. ' Finally. 12 Second. this tax is totally discriminatory. Finally.that can serve as the base of the tax. and so on. at the mouth of the mine if possible. States will have to determine what proportion of corporate overhead. First.a~d the pnce uncertainty. independent of costs. either from an analysIs of the contract provisions or from an independ~nt source. the tax should be imposed at the earliest possible point. to preserve the neutrality and the intended incidence of an income tax. a win?fall should be defined only with regard to the rate of return on capItal. it should be related to the price of the specific mineral and should acknowledge price decreases as well as increases. a price increase may be accompamed by c~st increases such that the price increase is associated with lower profIts rather than a windfall. While some high-grading is inevitable there is no justification for imposing a uniform per unit tax on all ore. if any. One solution is to deter~ine first the arm's-length price of concentrate. In addition. the tax should be related to the value of the ore.) . it ~hould do so consistently. and management fees can be deducted within a state. that is. Unl~ss it can be proved that such a tax is functionally related to a market failure its use is discriminatory and should be avoided. The difficulty in obtaining price information is due to the fact that most metals are not sold in their natural form. an? then allow a deduction for processing charges to arnve at a net pnce per ton. but the cost of environmental damage bears little relationship to the market price. one rate for underground mines ~nd one for open pits) but the rate should be independent o. and will thus partly reduce the incidence on capital and labor. Given this. tax the sale of homes and property more heavily when housing prices are high regardless of maintenance and upkeep expenses. First. extremely popular tax instruments and their use will apparently continue. While some of these decisions will inevitably be arbitrary. A tax related t~ th. States that currently use federal taxable income as the base will consequently incur a greater administrative burden if they adopt such measures. The usual justification for progressive severance taxes IS that fI:ms do nothing to bring about a price increase and thus collect a w1Odfall. and the third may be difficult to obtain. Second. an arm'slength price in general does not exist. such as concentrating and refining.72 Tax tlon f Min r I Resources showed that the formula currently employed acts to make the income tax a series of taxes on each of the three factors included in the formula (sales. DIff~rent rates may be imposed for different minerals or for alternatIve mining techniques (that is. This procedure will yield the value of ore in concentrate . This is especially true with regard to the last recommendation. as well as increase. is similar in effect to an income tax with the characteristics we prescribe. Such a tax will always create a larger high-grading effect for the same revenue than a tax which is related to value. Policy Implications 73 the second may require independent analysis to ensure proper enforcement. Three pieces of information are necessary to administer such a tax: the tonnage. employment. That is. Rather. This argument has three basic flaws. (This is the same method used 10 determining income from mining which serves as the base for percentage depletion. the grade. they are inputs into a concentrating process whose output is then marketed. such taxes increase the downside risks associated with mining since they do not recognize costs. Output-Related Taxes Any output-related tax will discourage investment and induce highgrading. and not ~he price.ce. They are. that a price increase may only reflect a mI~Imal rate of return. given the risks of mining . however. If a state legislature feels it has a right to tax windfalls. only intrastate income should be taxed. Therefore. and assets). Therefore. This move toward taxes of the net-proceeds type is an indication that states are willing to bear some additional costs to ensure. which has become increasingly popular. research and development.e consum~r price index (as in New Mexico) or the wholesale pnce 10dex (as 10 . As noted above ~n output tax may be appropriate for environmental conservatiod. and the price. it should increase the rate of taxatIOn on wheat farmers when wheat prices are high. This will minimize the effect of the tax on other stages. The first is easy to obtain.

real property may be a preferable base since it is less subject to periodic fluctuations than are other tax bases. The dIfference between the regular income tax and the property tax is that the former is a tax on the realized stream of income. The tax rate is usually determined after the budget for the next fiscal year has been projected. which we feel is both feasible and more accurate than oth r methods. Instead of projecting prices and costs. This is due less to the nature of the tax than the way it is administered. and (4) traditional local asses~­ ment. a property tax could be designed in such a way that the impact and incidence of the tax would be identical to a tax on realized income. Over time. any tax can be a stable source of r venue. on the other hand. iven this. Each of the taxes outlined above is unsatisfactory in this respect because the tax revenue is a function of mineral prices (and costs in the case of income taxes). In this approach. Therefore. That is. is paid on the future stream of benefits generated by the asset. That the tax rate should decline when prices fall is suggested as the natural counterpart to the taxation of supposed windfalls. For example. Property Taxes One of the more important goals of state and local tax policy is to provide a stable source of revenue to finance a minimal level of public services such as schools. which have historically been cyclical. If there were no uncertainty. while the latter is a tax on the expected future stream of income. Property taxes. (2) net proceeds (in effect a tax on current realized income). factors are mobile and an increase in the rate of taxation will encourage movement. Such indexes are composites of national averages and thus could overestimate or underestimate the effect of the general level of inflation on a particular region or mine. do offer such stability. Of these four methods. Since this is the process typically used. 14 Uncertainty. police. In addition. because the immobility of real property precludes a shrinkage of the tax base. But again it must be emphasized that the stability of the base itself is not to be identified with the stability of revenue. a property tax based on market value is an income tax which. From an economic perspective the market value of a fixed asset is the present value of income generated by holding or using the asset. The valuation procedure we recommend is based on the Arizona method. In addition. the value of the property is its market value. in most cases. In this sense.74 Taxation of Mineral Resources North Dakota) has a tenuous relationship to the profitability of any mine. proponents of the property tax have emphasized its revenue stability due to the inelasticity of the base. Such flexibility would reduce somewhat the discriminatory bias of the tax. However. rather than income or sales taxes. quite indepcnd nt f lh base. the tax base is not secure and thus cannot be the explanation for the stability of the revenue generated by the property tax. Therefore. mineral-price profiles tend to be more uncertain than those of other types of real property. high property taxes have been a factor contributing to an exodus from certain regions of the country. States and localities have realized this problem and have developed numerous ways to cope with it. Individuals and firms have moved to the suburbs to escape city taxes (while still taking advantage of city services). This view has been challenged both theoretically and empirically"3 It has been shown that the supply of real property is inelastic only in the short run. (3) estimates of the present value. Therefore. Local stores followed and shopping centers developed. however. the present value of the operation is calculated on the basis of estimates of reserves and production. These uncertainties combine to make property valuation more difficult in this sector. Historically. is a complicating factor and t~e difficulties it creates are most apparent in the mining sector. and fire protection. a profit-margin formula is used to . the tax rate is set to collect a specific amount of revenue. Finally. The key to the tax's revenue stability lies in its administration. in the longer run. th measure is far from perfect and the estimates must be derived with care. the estimate of the present value IS most likely to reflect the true worth of the deposit. they cannot be relied on to provide a stable revenue base for the provision of public programs. the reve- Policy Implications 75 nue is stable by definition. Maxwell (1965) suggests that local governments resort to the property tax. mines are not subject to frequent sale and the characteristics unique to each mine make comparisons difficult across mines. Unlike other forms of real property the extent of mineralization in a mine is never known. Theoretically. until it is extracted and processed. Among the tax bases currently in use are (1) a fraction of total revenue (in effect an ad valorem output tax).

and th. This distorts the long-run allocation of investment. the state has the obligation to correct them. Griffin and Shelton (1978) adopt this argument. the assessment ratio should be. ~Ill be reflected m the calculation.the s~me for mining as for other industrial sectors. 2. at least in part. the effect of depletion will be largely beyond the control of anyone state. Otherwise. by. State and local tax laws may distort the current allocation of investment within and between states.t. ore early to keep down the estimated value of future extraction Ho~ever. (It is our impression that some problems exist in the Arizona system and that property values in orne cases may be subject to arbitrary methods. If the firm were to maximize the current return. Income taxes and federal deductions have been ignored in this calculation. A m~rgI?al mme is. definition. ~~e m~thod does have one major disadvantage: the cost ~f adrmrustratIOn.16 In the long run. the assessment ratio must be determmed. in order to a sure that assessments are fair. Second. For another example see Shelton and Morgan (1977). While it is true. a proper evaluation of the effects of other adjustments cannot be made. The profit-margin formula is based on the average margins for the preceding five years to even out fluctuations. In the absence of proved market failures. much information is necessary and several unknowns must be estIma~ed. by the use of historicai prof~t mar~ins. 4. Tax calculated by the New Mexico Taxation and Revenue Department. For one example. However. In the absence of proved market failure. the basis of the tax system should be neutrality. and so the method could be employed without much addItIOnal expense. these relative distortions will not substantially affect the longrun availability. Concluding Remarks The recommendations outlined above reflect the view that for tax purposes. . this alone is not a sufficient condition for excessive inducements for or taxes on mineral activity. any state that has an active minmg s~ctor should be collecting this type of information at the state level m a~~ event. However. it is consistent and IS based on the same principles as used in the industry itself. employ higher ratios for mining. In addition. mineral development should be treated in the same manner as any other form of economic activity. see the New Mexico Taxation and Revenue Report. If market failures are present. profit margms would be higher and would thus serve to increase the future value. In order for the method to be accurate and consisten. Third.. this effect is offset. and tax policy may be an efficient means by which to modify the system.the ta~ base will not discriminate against marginal mines. it alleviates the burden of projecting future costs and prices. 3. that the minerals found within the boundaries of a state or locality are finite. There still exists an incentive to extract more. A balanced approach is necessary to ensure that the minerals sector develops along with other sectors. in a sense. Comprehensive field reports are written annually on each operatIOn to ke:p. Notes 1. However. and higher qUalIty. one with a lower profit margin. First. it recognizes costs and thu IS ~ better measure of income from property than are sales. Once the base is estimated.76 Taxation of Mineral Resources c?nvert the extraction profile into an income stream which is then dIscounted to obtain the present value. Anzona mcluded. Also statIstics are compIled from financial and professional Itterature and Securities and Exchange Commission reports. The onus is on state and Policy Implications 77 local governments to justify such a distortionary in entive which deters development and cuts jobs in the mining ector. because there are too many alternative sources. Finally. . Some states. Average price calculated by the New Mexico Taxation and Revenue Department (14 February 1979).ates.a current re~ord of technology and capitalization r. this means that the burden of the taxation borne by mining activities should be the same as that borne by other sectors. it is not as distortionary as other ~axes. so that the scarce resources can be put to their most productive use.) It is clear that such a method can only be employed by a state agency with the resources ~o devote to such a task. while Long . ourth. where the impact of taxes is calculated to be about 6 percent. It uses a histor~cal average margin which weights the good year with the bad. I' '!'his method has a number of advantages. and IS therefore better in this respect than current net proceeds.

6. See also Link (1978). Sorenson and Greenfield '(1977) claim that a state can tax mining and capture at least part of the comparative advantage of a state's mine with no effect. 9 September 1979. See Fiekowsky and Kaufman (1976). for this to occur the tax must be shifted. For a detailed analysis see McClure (1978).I X tl . 13. 9. 14. 8. Appendix State Tax Collections . 15. 12. See Conrad (19780) and the references therein. 11. See Harberger (1974) for the classical statement of the distortion introduced by percentage depletion. Minerai Resources (1976) uses it as a justification for a regional tax policy on coal. Long (1977) supports this view. See Atkinson and Stiglitz (1976). because reserves are the least mobile factor. 10. 7. 16. McClure (1978) argues that in the long run the tax will be borne almost entirely by resource owners. See Conrad (1979b) for a discussion of downstream effects. This procedure is outlined in the Arizona statutes. Cited in the Wall Street Journal. However. 5. See Mieszkowski (1972).

803.080 160 12.150 44.031 2.384 Corporation net income NA NA 202.023 238.334 2.679 1.349 199.667 76.338 -41.022 89.484 43.235 63.744 163.488 -819.283 81.715 107.430 17.933 -864.045.495 9.515 14.794 1.781 27.929 58.823 28.083 1.911 3.381 30.427 254.547 57.121 1.781 -35.537 59.834 510 1972 Individual income (net) 53.046.530 1.504 173.642 21.995 107.284.043 34.416 1.356 47.172 11.191 613 169.258.585 17.c: 0 en (1) ::c Ql .978 27.029 251.379 994 497 Alaska 25.354 21.181 214.553 97.528 5.158 75.592.080 -455.622 77.390 5.929 803.343 70.884 47.147 83.635 8 27.197 35.347 2.573 -588.269 1.767 270.161 74.363 6.046 1.341 210.140 23.197 54.139 108.568 26.498 26.558 10.808 .962 222.765 559 1973 66.060 824 2.964 NA NA 49.391 10.784 106.737 Individual income (net) Refunds Gross collections Corporation income Severance Petroleum and gas 1.566 26.957 1978 (prelim) 99.939 36.631 11.987 65.834 102.661 2.503 11.764 29.392 59.255 42.704 1..801 1974 Individual income (net) Refunds Gross collections 39.212 13.270 30.158 52.698 39.231 118.577 14.593 27.046 142.126 68.901 77 579.241 Individual income Refunds Gross collections Arkansas 419.047 157.355 25...905 316.393 2.697 1.35.570 6.213 112 4.513 181.667 3.705 53 145.492 606 2.788 129.537 49.503 661.095 33.076. Ql X Ql -i 0 ex> .842 136.264 6.530 4.958 261.287 6.440 169.112 5.973 3.052 24.269 1976 466.620.566 31.886.843 3.554 1..957.380 432 1971 Corporation net income Corporation: general Property General Severance Production privilege Oil and gas Coal tonnage Iron ore tonnage License Oil companies Alabama Tax (thousands ofdollars) State Tax Collections Table A-I ~ ex> Co X ::J (1) » "0 "0 en (') (1) .799 306.633 2.360 8.076 843 31.050 Corporation net income 86.798 7.542 77 6.307 75.408 70.243 California 83.877 52.600 115 33.948 5.442 866.964 17.056 10.870 11.219 8.710 14.873 180.688 -21.429 223.869 -17.766 3.641..627 139.071 2.425 224.975 10.895 53.094 33.742 46.591 -24.874 69.830 1.078 91 4.187 Property General Special 162.210 56.040 8 2.331 3.595 1.735 19 32.231 1.465 94.607 35.248 1.779 178 1.435 9.760 3 8.537 1.038 1975 35.282 27.253 26.643 189.627 3.908 29.521 26.619 26.916 37.560 6.0~9 37.620 1.30.703 153 10.14.447 25.491 Arizona Sales and gross receipts Mining Individual income (net) Refunds Gross collections Corporation net income Property (special) Oil and gas reserves Oil and gas properties Severance Oil and gas production Oil and gas conservation 6.950 8.878 2.266.128 117.804 137.507 1 28.307 55.331 2.254 .871 976 103 4.704 1.597 90.499 114.757 7.252.686 3.788 -634.554 1.367 2.828 .994 92.321 5.700 1977 126.689 93.772 51.020 23.079 1. (1) ::J ~ 0 - ::J 0 .469 361.582 73.758 23.838.540 190.336 4.456.632 1.447 1.528 67.534 14.670 60.485.016 9.345 6..961 40.452 1.843 672 317.870 7.416 121 Property General Severance General 83.644 10.772 409.262 1.889 177.158 3.840 1.192 NA NA 531.396 2.182 109.665 11.625 126 1.771 4 26.334 2.469 45.451.695 12.825 31.053 172.532..455 6.31.103 156.530 8.161 147.556 533..632 1.939 -36.068 2.130 710.522 2.143 11..407 1..

487 56.115 280.630 405.210 -74.563 57.046.259 405.111 800 24.675 -92.568 2.805 1.161 85.595 375.475 577.701 437 235 92 143 228 148 80 257 179 78 325 252 73 372 295 77 283 216 67 289 242 47 446 380 66 412.463 28.183 -16.914 1.008 -111.837 94 185.206 447.528 126.196 86.593.526 192.594 -44.148 14.467 1.697 58.889 457.462 23.885 495.932 333 46 2.048 7.094 25.745 250.008 567 430 Iowa Individual income (net) Refunds Property General Special Severance: petroleum production Indiana Individual income (adjusted gross-income tax) Refunds Gross collections Corporation net income Supplemental net income Adjusted gross-income tax Individual income (net) Refunds Gross collections Corporation net income License Mines and minerals Dlinois Property General Special Severance: mining privilege Individual income (net) Refunds Gross collections Corporation net income 481 192 73 152 268 115.39.158 242.013 1.838 2.276 473.823 604.432 1.040 -73.444 358.506 144.247.575 -7.909 38.099 119.602 1.) ex> .095 1.191 4.561 833 63 182 38 2.612 203.918 -110.037 20..320 2.286 25.212 -61.371 1.324.039 1977 12.976 9.912 154.824 -27.244 -22.098 384.131 306.202 -9.204 490.91.084 24.590 132.108 3.993 36.034 31.114 340.409 -61.498 1975 50.725 531.475 846 217 45 1.188 .119 455.83.867 597.333 25.066 1978 (prelim) 16.539.944 229.071 NA NA 9.743 10.162 112.697 843.181 52.638 1976 12.123 170.069 328.700 479.888 505.055 4.097 21.546 1.259 40.607 86.914 28.435 413.107 894.216.076 98.257 5.000 519.695 -72.849 77.610 400.863 320.916 .427 52.361 1.505 605 33.471 24.352 6.353 413.410 312.050 -27.251 773.344 202.580 284..739 649 580 508 475 315 203 221 15.198 66.432 -43.752 138.855 239 388.650 1.691 4.387 400.387 29.2.665 68.527 1974 39.024 91.046 1..269 1972 143.136.872 69.785 1973 174.045 1.370 404 64 1..341 -155.413.130 23.989 1.741 3.742 113.859 23.074 88.470 -32.327 583 273 203 394 425.629 373.068 122. :::::l ~ 0 - :::::l 0 III X - ~ III I\.639 -101.755 88.828 226.903 23.986 6.984 218.899 -51.926 1.665.916 283.688 945 23.328 561 435 89 37 2.461 1971 Individual income (net) Refunds Gross collections Corporation net income Georgia Indivklual income (net) Refunds Gross collections Corporation net income Refunds Gross collections Property Severance Oil and gas production (gross income) Oil and &as conservation Coal tonnage eolerado Tax Table A-l continued :0 W ex> X ~ :::::l ""ro » en ro .368 -126.327 338.676 720.669 376.353 43 284.892 21.642 15..100 77.752 88.C0 0 en ro III ro .057 Property 114.361 -115.592 1.438 80.242 22.688 Idaho 239.894 72.740 20.083 173.793 -72.896 417 58 4.037 1.506 1.230 1.311 10.326 31.225 .393 95.900 183.758 23.762 482 76 2..400 10.557 -108.998 166.760 21.353 294.928 81.995 449.086 132.504 -8.139.920 -116.226 1.486 538.

592 2.200 32.688 31.523 51.046 26 476.669 Individual income (net) Refunds Gross collections Corporation net income 61.459 9.912 92.081 1.160 -66.369 132.958 2.287 231.564 147...831 565.364 179.510 282.763 18.456 122.574 2.112 Individual income (net) Refunds Gross collections Corporation net income Corporations 704 128.633 39.449 --52.956 34 95.782 31.498 269.957 168.435 13.345 186.111.741 108.416 1974 364.976 83.953 508.430 40.740 349 97.435 186.967 3.558 10.061 192. 0 C/l <D :0 - .295 57.741 5.392 -226.338 212.721 106.313 205.317 14.590 133.614 202.807 10..941 5.876 331 138.030 55.117 244.359 Iowa continued Tax Table A-I continued X 01 (X) ~ ::J > "0 "0 <D C/l <D C') c:: .394 2.139 1.372 2.202 10.005 112.614 .417 79.854 515.031 2.104 116.251 5.551 157.004 12.938 52.527 113.153 25.216 156.295 163 390.494 390 128.361 1975 59.004 131.659 413.160 127.190 -12.866 134.59.131 24.250 10.495 275.819 4.771 5.894 Gross collections 77.061 147.588 8.357 301..546 .044 -12.800 1973 47.065 1978 (prelim) 449.366 75.307 35.872 1.003.776 5.459 28.109 1971 28.299 495.781 94.642 20.320 351.041 1.887 77.285 69.972 11.803 972.940 2.499 405 182 33.459 808 License Strip mining permits Kentucky 112 138 464 75.496 13.878 548.580 44.291 75.181.238 103.792 4..571 117.143 -10.829 259.718 140.956 109.749 47.354 81.314 216.295 884.114 122.912 -76.385 2.167 806.984 116.603 78.495 253 37.603 -11.242 79.765 395 113.727 517 78.597 147.785 249.976 456.728 665.746 2.224 .626 67.961 91.892 816 516 149 151 785 402 237 146 711 446 118 147 687 432 120 135 664 405 138 121 Severance Natural gas Oil production Oil proration 72.652 256.028 11.179 358.976 444 13.254 43.030 267.448 83.241 903 51.600 132.806 116.767 174 182 Maryland Individual income (net) Refunds Gross collections Property General Corporation net income Maine Individual income (net) Refunds Gross collections Severance Oil and distillate Gas Sulfur Property: general Corporation net income Individual income (net) Refunds Gross collections License Drill and renewal permit Louisiana Severance Coal Oil production 29.268 95.997 NA NA 790.766 53.177 -19.078 418 99.513 116.232 338.043 170.928 225.781 105.181 13.862 292.605 85.885 3.613 1977 60.31.903 38.330 9.089 98.730 -11.288 1972 37.226 159 5.091 Property General Kansas 700 458 106 136 16.264 18.405 Property General 53.156 Corporation net income 108.477 2..062 23.364 .214 2.320 466.301 92.483 250.874 210.993 5.821 14.093 26.514 389.445 11.870 99.385 37.694 114.157 -19.725 544 122.422 416 70.636 533 114.345 82.821 33.213 76.248 147 67.413 3.171 -22.044 8.254 256.53.503 10.867 234 192.458 193.216 35.681 2.158 424 91.597 408 37. D) ::J CD 3: ::J X ~ (X) .34.024 1976 410.294 11.480 34.830 9.640 80.712 112.594 841 547 149 145 241.416 272.299 3.390 64.324 -44.225 209.095 2.641 NA NA 87.033 -8.749 53.848 84.496 91.844 405.364 2.276 -24.190 13.698 10.561 13.520 182.398 1.933 573.308 28.740 -197.

180 3.371 315.381 438.312 1.408 187.801 10.66 33.398 -157.090 83. :::J s:: .946 2.210 2.314 12.405 56. nickel Taconite tonnage and additional tax Severance: mine proceeds Property General Real property Personal property Nevada Severance Coal production Oil production Resource indemnity Metal mines tax Property General Corporation net income Montana Individual income (net) Refunds Gross collections Property: general Corporation net income Corporation income Refunds Gross collections Missouri Individual income (net) Refunds Gross collections Minnesota 123.037 372.924 6.621 .347 61.2 1.218 5.358 3.029 -11.647 7.212 126.942 48.388 9.066..924 10.507 22.931 15. X :::J ):"0 "0 CD en CD 0 en 0 .122 48 19.889 30..027 56.o· -i CO 0'> .576 6.792 59.094 55 288 126.952 3.953 1.624 6.100 203.392 1.541 33.604 .178 22.568 3.532 2 29.668 483 1.844 18.680 67.083 22 258.957 15.405 -5.664 2.647 115 192 586..057 18.200 303 72.689 98.933 -254.932 7..082 111.033 333.546 14.143 115.020 16.066 12.396 6.621 128 9.576 55 52.252 68.902 90.737 31.364 3.160 -6.356 1.698 694 1.211.587 389.344 22.479 50 4.437 2 2.461 309.022 6.424 118 370.916 3.964 8.131 2.215 112.329 16.235 170.326 -13.9.. 2.913 105.45.641 859.099 17.141 6.193 6.694 5.520 23.215 1975 1974 168.c CD ]J CD tll ..546 8.256 849.104 472 156 77.900 2..239 16.403 2.853 -27.969 6.945 10.593 701.257 1.979 27.315 4.038 263.983 530.470 6.311.581 6.905 945 3 3.845 19.572 638 148 88.369 2.617 5.636 45.249 44.813 16.753 34.224 -7.017 80.930 94.105 8.273 36.492 4.953 91..772 87.507 6.842 6.389 83.523 7.466 9.481 .843 -62..030 59.446 72.594 -72.039 752 2 3.718 25.074 24.737 956.840 10.584 311 .419 52.18.321 19.437 80.897 20.685 5.770 731 2 35.103 6.503 2.636 15.954 45.004 94.596 5.885 8.564 1.492 4.249 54.404 195.868 315.588 77.958 3.297 101.884 2.159 11.035 77.210 7.256 2..820 3.899 3.933 212 1..802 3.215 9..528 1978 (prelim) 59.250 682 104 11.229 2.477 421 2 36.702 79.948 33.14.485 976.269 199.429 Property General: loan taxes Special: rolling stock Interest and penalties lndividual income Refunds Gross collections Corporation net income Refunds General (gross) Property General Severance Occupation tax Taconite Iron ore Royalty tax Taconite Iron ore Copper.436 -28.394 15.822 3.182 14 196.240 16.254 98.260 Mary/and continued Corporation net income General corporation 1973 1972 1971 Tax Table A-I continued tll' X tll .599 22.171 24.853 1.538 565 177 79.002 80.61 .j CO 0..322 42.21 998 129 111.027 30.235 9.520 .905 -19.760 18 292.486 34 272 2.095 -27.977 11.91 .085 101 234 50.386.514 1977 256.292 1..047 49.968 90.074.793 3..162 112 483.079 10.355 22 807.741 401.441 70.952 58.051 IO.576 711 105 97.317 141.683 62.604 10.103 3.586 7.765 293.108 -169.844 62.247 3.738 109 198 109.862 .868 139 20..216.627 4.890 2.439 462.055 10.474 2.012 27.065 1976 190.646 1.334 .465 1.664 50.845 1.828 14.080 7.287 7.552 .44.938 29.802 112.439 .655 2.736 22. 0 :::J .

358 3.477 .470 18.132.407 10.267 693.975 -576.683 576.987 27.030 15.166 3.494 -77.7-7.681 470.419 15.089 8. 3 ~ 070 Oil and gas privilege Oil and gas ad valorem production Oil and gas conservation Natural gas processors Other: copper.826 81.542 511.468 891 1.410 847 20.573 5.190 3.369 67.476 829 1.064 26.210 14.5 314.543 111.463 882 1.048..401 763.584 -758.358 4.831 1.130 12.527 1973 3.485 46.745 170.460 8.037 -6.715 828 19.199 102.506 572.723 69.222 1.730 536.550.906 1.226 4.889 15.639.51.5.140 3.584 84.093 1.246 1.570 112.833 18.624 874.174 .202 341 741 370.154 36.234 19.295.695 3.930 2.742 228.526.269 71.080.992 .631 4.245 -1.994 23.975 36.619 10.335 4.575 -17.758 35.818 36.347 775.855 373.872 7.963 18.879 -69.825 50.606 16.328 10.591 44.161 267.210 1.566 9.456 1.756 877.515 419.611 4.387 74.942 1975 4.742 202.088 35.457 698 390.588 25.324 81.956 21.489 29.258 119.824 13.713 421.970 75.785 .513 1.515 3.947 13.283 4.200 1976 4.034 3.168 5.145.946 -15.437 772 596 729 326.649 -3.244 19.486 26.353 864 1.596 1.116 98.526 6.528 19.393 315.557 2.815 53.893 15.878 35.815 13.636 -64.676 355.419 2.780 45.594 8.610 1.214 73.834 101.625 1.748 6.311 6.948.235 197.515 64.230 16.608 45.191 -23.048 852.510 64.248 2.800 12.880 4. "0 - ::::l 0 III .063 49.54.491 332.55.211 31.227 379. Ohio Severance Oil and gas production Coal production Property General Individual income (net) Refunds Gross collections Corporation net income Corporation net income Business privilege tax North Dakota New York Individual income (net) Refunds Gross collection Corporation net income Corporation franchise 335. uranium 44.312 Corporation net income Corporation income tax New Jersey Individual income (net) 1972 1971 Tax Table A-I continued :::D CIl a> (") ~ c: 0 CIl a> III ~ a> ::::l ~ 0 » X 0:> CD ~ ::::l a> "0.457 2.880 6.306 3.730 1.783 5.211 10.841 13.842 23.789 70.719 145.501 57.176 389.174 3.030 1..211.095 70. X -i III 00 00 .288 6.558 16.481 265.328 433.851 19.588.058 2.826 74.240 4.335 190.119 8.119 Corporation net income Property General Special: oil and gas production Severance Oil and gas.572 9.390 18.564 73.6.103.431.095 13.965 8.610 57.469 60.306 3.442 Individual income (net) Refunds Gross collections New Mexico Property: Special: business personal property 50.514.319 87.140 3..405 14.743 3.418 9.964 8.138.319 481.730 7.504 58.752 13.466 13.948 781.877 55.269 804 614.787 2.021 1.617 461.148 2.166 2.171 .Property: special Individual income Refunds Gross collections Corporation net income License Public utilities Coal consumption Strip mining admin.505 1978 (prelim) 1.553 98.435 17.605 1.644.515 119.950 61.318 19.207 45.950 134.010 601.379 706.775 80.219 167.023 37.808 -960.639 -72.315 91.250 631 472 43.001 1.225 2.088 42.558 684.783 53.921 11.993 -713.035 1974 3.323 709. potash.344.344 56.782 778.698 65.143 56.620 874.346.996 101.559 11.653 1977 967.052 108.506.

731 3.687 2.840 1.050 1.178 1.052 22.759 1971 Individual income (net) Refunds Gross collections Oklahoma Severance Coal and salt Oil Ohio continued Tax Table A -1 continued X -'" <0 0- ~ CD » "t:l "t:l (J) CD (') .540 549.368 215.181 3.950 3.818 126.824 730.290 4.245 Individual income (net) Refunds Gross collections Oregon 352.099 Severance Gross production Gas conservation Petroleum excise 46.621 1.599 786.131 -49 18.128 22.147 -77.016 47.612 -9.212 481.963 .595 112.012 233 1974 120.248 -95.455 164.917 2.691 427.804 59.507 601.967 4.621 128.401 253 1.263 273.141 1.898 25.351 189.823 312.107 649.512 3.383 1.171 191.893 257 726.974 810 102.084 90.033.053 128.807 2.180 70.648 35.090.848 164.734 135.653 230.636 91..096 126.~9 15.928 234 1975 28.595 416.930 2.978 77.238 1.071 53.950 3.606 24.672 32.38.210 -28.245 151.014 4.474 686.426 3.16.980 95.434 176.385 -119 18.010.844 421 2.825 2.857 -110 21.918 1.662 1..396 -64.178.880 289 128.8 2.054 55.436 -62 14.098 1.895 -87.680 91.405 781.346.464 310 536 665.33.495 269 310 1.699 87 170.042 150.323 387 3.317 35.366 96.635 216.127 -60.783 1.284 376 526 346 18.715 1.202.456 70.503 45 156.858 40.181 300.549 1.045 3.104 561.117 125.164 51.925 11.622 64.527 4.430 200..937 258 1978 (prelim) 593.415 205 39.327.880 4.993 62.881 43.067 2.741 409 1.103 46.071 -24.524 57.547 4%.641 2.997 266 1977 3.581 40.326 63.Corporation net income Excise (income) Severance: coal tax Individual income (dividends and interest tax) (net) Refunds 6070 tax (gross) 4070 tax (gross) Penalties and interest Tennessee License Strip mining permits Severance Mineral and mineral products Oil and gas South Dakota Property: special Utility property Domestic corporation Foreign corporations Corporation net income Individual income (net) Refunds Gross collections License Service mining conservation 24.082 1.101 2.409 .998 .054 864 555 43 1972 97.872 60.833 -56.713 147 156.645 3.360 1.381 2.555 1.517 Corporation net income Pennsylvania 51.207 Corporation net income 71.096 3.837 201.342 72.935 2.538 Severance Eastern and western Oregon severance 85.696 995.208 -24.017 193 536 872 16.991 1.598 540.250 747 616.131 251.124.800 1.141 2.136 250 1973 105.570 69.600 431.011 3.103 497.837 1.307 33.046 42.001 3.070 256 1976 12.002 -69.765 30.375 252.816 -18.976 13. C 0 (J) CD ::D ll> "'" CD ~ ~ :::J - --l ll> X ll> <0 0 .130 73.514 234.157 664.115.892 1.316 150.280 50.657 472.773 4.062.458 66.226 226.

715 547.085 13.071.621 959.419 126.448 188.745 1974 312.791 1.372 121.571 77.795 874.377 1.983 129. 0 ::D CD CIl $i3 ::J CD 3: 0 - ::J 0 Ql .229 234.144.874 1.995 -98.984 3.211 800.373 4.809 192.300 873.805 86.741 309 11.291 2.913 2.575 -137.811 1975 523.116 3.075 4.073 .724 130.792 66.924 61.575 9.797 7.588 429.407 92.122.562 -25.021 44.165 205.530 12.530 349.203 108.474 4. X Ql I\) .806 974.149 751.456 727.292 2.374 1.671 3.562 -17.657 91.254 126.766 17.634 3.173 90..406 183.295 421 136.817 -171.732 1.238 342 5.923 -111.877 4.866 197 153.967 441.315 6.086 -148.380 190.901 666.318 426.931 2.049 8.611 2..068 344.409 5..723 4.096 124.506 1.668 107.641 87.089 251.686 1978 (prelim) 124.668 1976 507.659 6.291 257.065 18.087 504 160.553 1.492 3.900 365.925 997 315 40.374 339.307 5.461 901.959 2.441 24.355 9.643 29.885 156.105 4.894 -31.245 27.432 11.723 -100.480.Severance Mineral excise.902 207.757 57.697 91.046.266.660 8.988 164.537 261 1.884 114.926 2.283 6.490 6.210 907.421 20.501 204 140.528 188.589 17.844 435.618 116.790 159.086 5.598 959.307 5.856 373 8.522 4.876 50.075 5.350 Utah 311.281 42.086 5.642 64.636 14..877 307 17.325 402.030 219.032 -17.406 96.350 76.115 9.383 1.919 -16.370 714.329 44.707 651 153.794 7.054 475 116.957 468.222 614.324.589 1972 Property: general 1971 Severance Natural and casing head gas Crude oil Sulfur Oil and gas regulation Texas Tax Table A-I continued co -i X CO W 0- > "C "C CD ::J CD CIl (') C .871 2.705 132.924 517.516 2.548 1.896 104.146 131.755 1977 594.547 74..832 5.064 106.716 423 46.490 602 100.700 171.969 43.979 9.938 2.191 1973 61.984 4.922 158.725 8.480 2.603 352 186 8. 1.992 24.787 2.785 4.525 283 375 18.674 474.386 313 88.530 802.979 63.269 91.679 -156.636 1.136 862.731 6.152 303. 4070 Mineral excise.837 307.570 9.910 698 190.790 2.543 NA NA 5.417 271.785 72.110 44.002 258 6.045 6..525 66.693 36.125 NA NA 117.553 4.484 364.974 38.898 284.297 88.223 4.107 93. 2070 Coal Coal and gas conversion Coal and gas production Property General Wyoming Property Severance: production tax (timber/iron ore) Corporation net income Wisconsin Individual income (net) Refunds Gross collections Property General Washington Individual income (net) Refunds Gross collections Corporate net income License Strip mining permits Virginia Severance Mine occupation Oil and gas production Property: General Individual income (net) Refunds Gross collections Corporation net income (franchise) 29.

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Index .

12 Deposits. time-series. 72. 12 Behavior.64. Allowances: depletion. 14. 12. long-run.71. ease. 16. 57 Alternative taxes. 1. 68-69. 39. 36. 16. exploratory. 16 Competition. 36. 68. mineral tax division in. 4. expansion. of resource base.82 Compensation: corporate. 58. 2. 44 Arizona.53.81 Arkansas Oil Museum.17. 25.81. 73. 60. 4 Assessment(s): property. 17. 70-72. 31.76. 13. extraction. 26. 16. 13 Assets.48. taxes. 45. 5-11 Collection. 12. 60. factor of. process of. 52 Adjustment costs. 16. 59 Bonanzas. administrative. lease. 58-59. factor of. depletion. problems with.36 Colorado. factor of. royalties on in Arizona. I. 12. 26. 14. 30 Allocation of income and profit. 1. 5.71. 13.40-41. 67. environmental. 30. 12. income. scale economies in. 12-14. 41. 60. investment. 2 Depreciation. 30. 68. 44 After-tax discounted profits. 2 Corporate: assets. 3. 12. ratio. gains. inve ted. 23.52-54 Agencies. production and uses of. 67. 57. 17. 48 Consumer Price Index (CPI). 54-55. 74 Bureaucracy.63. factor of. 76 Assessors. of products. 2. 13-14." 22. 18.63. 54. 2-3.12. 16. 73 Constant-price ease. hierarchy of. 13.13-14. federal. 40-41. 52. I. making of. 18 Arkansas. 14. overhead. 72. use of. 16. 42-43. cost. 13. 58 Budgets and budgeting. local services. 36-37. profits. 69 Decisions: all-or-nothing. 16. 5. tax. intensive process. executive. property tax. 26 Administrative: costs. 64. quality of. tax rate. 41. 43. 19 Alabama.72-73 Conservation. 73 Consumers: prices to. 59 Benefits: from exploration. 20. earnings. employment. tax base. 74 Coal. 59-60. 16. 22. sales.66 Data. 38. 56. marginal. enterprises. value of. 76 Cash flow.71. 12. 13. 16. 81 Capital.64 Cutoff grades.76. 13. 58 Concentration. operating. 16. 58. 58 Bonuses. 43.77.76. 21-22. 4. 16. 16 California. positive. 16. 16 105 . 16. 25. straight-line. and net income.80 Alaska. 26-28. 16. 65 Cost(s): adjustment. 12. expenditures. compensation. 22. 54 Depletion: allowances. owner. 60 Contracts: long-term. corporate. 64. 19 Airplanes.54. 2. copper royalty in.53. "save-free" clauses in. "quick. 12. 40-44. ral f r IlIrn n. taxes. profit-maximizing. 80 All-or-nothing decisions. 68 Copper. market.Index "ABC" rule for income. 23-24. 2-3. local tax. 55-56 City taxes.70. 22 Ad valorem: output tax. 56. 12 Accessibility. 54. 38-39. 2. economic. I. 45. 42-43.

2 Oil.37. composition of. 16. 20 Drug industry. 1 Interest. 16. 58.87 Ohio. 69. 13. economy. 14. 71 Exploitation. 41. 2. nature or. 57. 30. historical. market. 12 Lease bonuses. 74 Policy making and makers. recovery. 1. 12-13. 30 Police protection. 39 Florida.41. 18. 69 Electricity. 2. 13. 38. New Jersey. 10. 17. 2 x tI 11 I Min r I Resources a. 43-44 Estimates of mineral reserves. 6. 20 Open-pit mining methods. and research. price. 57. 57-60. 77. 27 .73. 15. 15.24. damage to. 84 Low profit mines and mining.A. 55. state. 26.77. 2. 71. 58-59. 24 Exploration: activity. 22. use of. of surface rights. 44. increases in.40-44. 38. process.63-68.73. 70.70-74 Indexes.39.52.65-67. 77.risks inherent in.73. 66. -1 I. marginal. 19 Downside risks. Negative severance tax. allowances for. 26. 29 Economics and the economy: adverse incentives. tax. 66 Documentation. subsidies.44 Products: consumers of. vertical operations. underground. 13-16 Hierarchical policies. programs of. funds for. rates. 36. 2. 37 Inspection policies. 67 Louisiana. 70-72. taxatIOn. 22. 19-25. 17. and capital. management.70. 16. 21. 17 Flotation process. 25. 12. new. federal tax. 21 Monopoly accusations. 43. 19 Geological factors: characteristics of.. 20-21 Georgia.22 Maine. 25. 73 Idaho. costs of.39-40. 71 Michigan. intrastate. 35-37. royalty. 43 Ga oline laxe. 59 Nonrenewable resources. 2 Net-of-tax: prices. 52. 12. 57 Income: allocation of. 40-44. 71. intertemporal 69. 69. 68-69.87 35-37. 28. 58. 67 Iowa. 72 Highway trust funds. Plants: processing. 28 Distortions. 1. 72 Fire protection. 7. taxation. 23-24. 1-2. 59. 57.40. problems of. decisions. 1.71. 9. 2. factor of. 83 Inflation indicators. market. capitalized net. 42 68 Net proceeds taxes. 60 Overburden.16-17. 41. changing conditions of. 63. 18. 9. 18 Extraction: cost of. discounted. policies on. 1-12. 57 Payback periods. 39-40. 9 Production schedules and taxes. 58 Loans and loaning principles. 12. 68.63. 38-39. 72 Drilling. 23. factor of. -7. 59. adverse economic. wealth of. 60. projections of. 53-54. 22. 87 Moisture levels. 36 North Dakota. 13 Minnesota. corporate. studies. profits. 70. 72.83 Incentives. 89 16.13-14.90-91. 60 Montana..106 Development: long-range.72-74. highway trust. 12.73 Oregon. issues of. size of. 20. 8. factor of. 22 Environment: and conservation. Charles E. 12. 19. 7. New York. taxes.89 extraction.65. factor of. 1. taxes. 19. iron. 16. 7. 19. 14. need for.. techmques.82 Illinois.44. 12 Nondistortionary profits tax. 24 Overhead. 56. corporate. 31 Earning power: cost. factor of. capitalization of. 55. 16. after-tax. undiscounted. values.52-54. policies. 16. 3-4 Output-related taxes. and maps. 40 Maryland. 52.71. dilution of. 66. 74 Magnetic processes. incremental. depressed.44-46. tax systems.22 Executive compensation. 2 Geochemical properties. 52-54. 21. 23. 16 Employment. 58 Profitability and profits. 69. 6. 35 High-grade ores. 72. 15. 17. allocation. 14. tax. grades of. property. 25. rate of return. 26. 14. 17.17 Mineral: development. failures. 19-21. operations. 45. Processing: plants. 1. 13-16. 70 Engineering studies. 26. 13. 66 Market(s): accessibility to. 70. extraction of. 73. 36. 63. 22. prices. 52. finished. 56. 14. 20-21 Federal: agencies. 23-24. J. 21. 59. Jr. coal in. 17. 16. 23. resource.76. taxes. future. property. 90 Ores: bypassing of. 24 Equity.43. 21. 23 Expenditures. capital. influence of. 13 Investment(s). benefits from. 74 Fixed-payments and taxes. 20-23. 57 Fees. 10. tax. 17 Missouri. 20. See also Decisions Politics and political uncertainties. 71. 56. 24 Pollution. 3-4 Kansas. 20 Integrated: firms. 18 Mineralization. mineral ore. policies on. 44.86 Mississippi. 82 Gross-proceeds methods. 12. 1 Fault structures. 15. 42. 2 Housing.17. 44. 69. condition changes in. 2 Laws. 1. 20-21 Mining and mines: low-profit. housing. 2. 1. 90 . discounted. taxes. 16. 12. corporate. 24. 10. 52-53. 84-85 Maxwell.63. type of. 23 Payments: fixed. 21.. 24. need for. Nevada. 13.72 Ownership: of capital. distortion of. quantity ratio of. 83 Iron ore. net-of-tax. 68-69. 16. 52. competition in. transactions. corporate.84 Labor requirements. 76. 20. 2.90.35-39. 30-31. 41 Geophysical anomalies. 64. 60. 17. 24. 71.. 91 piggyback federal taxes.72-73 Nebraska. 5 Oklahoma. 54 Interstate profit allocation rules. 6. 76.90 On-site inspections. problems of. 73. 38. 69. 56 Pennsylvania. 70. 16 Intrafirm transactions. rate of. 39-40. profitability. Natural resources. effects of. 36-37. diamond and shallow. 24-26. margin formulas for. 69. rights. 15. shale. 73 Indiana. 21 Funds. extraction. 72 Maps and mapping. ad valorem. 64. 74 McClure. system of. 20.13-14.72 Discount: prices. 57. 19. 3-11. mineral. 16 Expansion. 17. 23. 73 Prices: consumer. 2. 84 Management policies and fees. 6. importance of. 22 Index 107 Local: services. 71 54-55. 70. 12. 70 Price indexes.59 Exportation.84 Kentucky. 19. 72 Land reclamation. mines. 19-20 Marginal: extraction costs. 38. structure of. 55 Geography. 14.69. 12 Enforcement policies. 13. 17. 2. interstate New Mexico. 73. value of reserves. 72. sites. 16-17.

23. 72. 24.44. income'. 55 Taxes and taxation: absence of. 21. 71. corporate. taxes. 52. progressive profits. 16. 59. Reserves: nature of. 19. and marginal.60. probable. 12. 21-22.72 65. 59. and assessors. 44. 39.63.36-39. local. Risk(s): assumption of. value of. 93 Waste. offset of. effect of.42. factor of. 22-23 Subsidies. 13. 16 Studies.92 Value(s): assigning of. 56. tax. 1-2.. 63-68.52. series data. mine. problem of.71. 69. owners. 74 Tennessee. 2 Index Underground mines and mining. piggyback. ownership of. II. of cash flow.59-60. 44. 36. variable. 40-41. 12. 2. 73 Recovery: factor of.74-77 Proportional profits taxes. 2.~------ 108 Taxation of Mineral Resources 76. speci fie.43-44. 60. natural-resources. 1. income.66 Stinson. 76. 13. 18. 22. 16. 25.38-39. special. 40 Virginia. publi . 5 South Dakota. tax base in. 74. taxing of. exportation. 1-12. percentages. rents. sharing of. 16.35. in Wyoming. 55.67. city. 26-27 Sensitivity studies. 71. 1-2. 58 I. 55-56. incentives. of. recovery of. 64 Shale oil. income. 6 Surface rights. 17. 42. 57-59 benefits of. 17 Wholesale Price Index (WPI). 66. I Storage facilities. state. source of. 59. Research and development.74 Time: assessment.22. of 48. 44 "Qu ick" assessments. 12. 71.74 TruSI funds.64. 2. laws on.73. 2. 60. Rents: collection of. 68. 25 Separation processes. 41. 56. progressive taxes on. 57-60.91. 23 Services: budget. 58-59. production. 73 Uranium. Rights: mineral. 15. 58-59 Technology. 58-59. 44 Working days. 25 Wyoming.43. corporate. 44. geochemical. I. 74. 68 Texas. 43. 42-44 Public: policies. 57 12. 19 Tests. payments of.59. 73 Wisconsin. mining. I. 13-16. natural. I.53. 71 Sulfur. and rents. 69. to-II. 16. I. 53-54. 22. 18. 57.58-59. II. net-proceeds tax in. rate of. 76. fixed-free. 26-31.53. 57-59. 69 76 Tin. 63. 60. severance.40-41. 15. 55. Refining proces es. on capital. 40-41. and quality mix. 2.64.41.43-44 Property: assessments. negative. 55. downside. Il. 31. paths. implicit. 20 "Save free" contract clauses. factor of. 57 Surveys. 12. nondistortionary.67. 2. i3-i6. II. 18. feasibility. 2 State: income. taxes. 21-22 Trade-off. ad valorem. of market reserves. mining. 13. 36. 74 Quality. 22 Water. owners. 2.54. 29. Royalties: copper in Arizona. 74. of extracted resources. trends in. 64. 31. 70. 76. record of. 56-57. 23 Straight-line depreciation factors. 22 Severance taxes. 63 Transportation facilities. 16 West Virginia. 23.58. nonrenewable. 41. revenues. 23 Tonnage of material.52.36-39. nondistortionary. 2. 41 . geographical. output. 12. sales. coal in. 25. 10. 12. 2. 56. alternative. 72. taxes. 92 Schools and education. 92 109 Washington. paterns of. net proceeds. 24-25. 72 45.56. 59. 13.70. gasoline. 41 payment of. 1. 52. local. deposits. 56 Resources: depletion of. 17. 63 Quantity: of extracted ores. 19 Ral of return.43. administrative. recoverable. I Revenue: raising of.37-39. 52 72-74. 42. 24. 69. 22.93. 12. 91 Satellites. Thomas F. integrated system. J 8. 21. 73 Windfalls. services.93. 63-65 Utah.70. 18 Sales. 17. Security Exchange Commission (SEC). I.73.66. surface. 42.2.

D. His other published research is in the areas of general equilibrium theory. Bryce Hool received the Ph. Ireland. He is currently an associate professor of economics at the State University of New York at Stony Brook and was an assistant professor at the University of Wisconsin at Madison. He received the Ph. Conrad is currently assistant professor of economics at Duke University. in mathematics and M. Madison in 1978. and Indonesia. taxation of multinational firms. Professor Conrad has served as a consultant on mineral taxation policy for the governments of Canada. Professor Conrad was a visiting lecturer in economics at Northwestern University and worked in the office of international tax affairs at the U. His other research interests include capital taxation. monetary theory.Sc. and macroeconomic theory and policy. Prior to his current position. Comm. in economics from the University of California at Berkeley. and health economics. in economics from the University of Canterbury. . in economics at the University of Wisconsin. after receiving the B.D.About the Authors Robert F.S. Treasury Department.