Taxation of Mineral Resources bt Robert F. C. and R. Btyce H.pdf

Taxation ofMineral Resources

Books fromThe Lincoln Institute of Land Policy

The Lincoln Institute of Land Policy is a school that offers intensivecourses of instruction in the field of land economics and propertytaxation. The Institute provides a stimulating learning environmentfor students, policymakers, and administrators with challengingopportunities for research and publication. The goal of the Institute isto improve theory and practice in those fundamental areas of landpolicy that have significant impact on the lives and livelihood of allpeople.

Constitutions, Taxation, and Land PolicyMichael M. Bernard

onstltutlons, Taxation, and Land Policy-Volume IIMichael M. Bernard

.'ederal Tax Aspects of Open-Space PreservationKingsbury Browne

Taxation of Nonrenewable ResourcesAlbert M. Church

Taxation of Mineral ResourcesRobert I. Conrad and R. Bryce Hool

Incentive ZoningJerald S. Kayden

Building for WomenEdited by Suzanne Keller

State Land-Use Planning and RegulationThomas G. Pelham

The Art of ValuationEdited by Arlo Woolery

Taxation ofMineral Resources

Robert F. ConradDuke University

R. Bryce HoolState University of New Yorkat Stony Brook

LexingtonBooksD.C. Heath and CompanyLexington, MassachusettsToronto

Library of Congress Cataloging in Publication Data

nrad, Robert FTaxation of mineral resources.

Bibliography: p.Includes index.1. Mines and mineral resources-Taxation-United States. 2. Mining

industry and finance-Taxation-United States. I. Hool, R. Bryce, jointauthor. II. Title.HJ4169.C66 336.2'7833385'0973 80-8392ISBN 0-669-04104-1

Copyright © 1980 by D. C. Heath and Company

All rights reserved. No part of this publication may be reproduced ortransmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage or retrieval system,without permission in writing from the publisher.

Published simultaneously in Canada

Printed in the United States of America

International Standard Book Number: 0-669-04104-1

Library of Congress Catalog Card Number: 80-8392

To Helen and Emily

Contents

List of Figure and Tables ix

Introduction and Summary xi

('hupter 1 Mining Taxes 1

Output-Related Taxes 1Profits Taxes 12Property Taxes 13Discussion 18

('hllpter 2 Mining Decisions 19

Description of the Mining Process 19The Effects of Uncertainty 24Effect of Risk: An Example 26Summary 31

('hapter3 Effects of Mineral Taxation 35

Extraction 35Some Numerical Illustrations 44Integration of Taxes 53A Note on Taxation and the Concentrating

Decision 54Effects of Taxation on Investment and

Related Issues 55Summary 59

hapter4 Policy Implications 63

Calculating the Net Impact of an IntegratedTax System 63

Incidence Issues 68Recommendations 69Concluding Remarks 77

Appendix State Tax Collections 79

vii

Contents

List of Figure and Tables ix

Introduction and Summary Xl

~hapter1 Mining Taxes 1

Output-Related Taxes 1Profits Taxes 12Property Taxes 13Discussion 18

'hapter 2 Mining Decisions 19

Description of the Mining Process 19The Effects of Uncertainty 24Effect of Risk: An Example 26Summary 31

hapter 3 Effects of Mineral Taxation 35

Extraction 35Some Numerical Illustrations 44Integration of Taxes 53A Note on Taxation and the Concentrating

Decision 54Effects of Taxation on Investment and

Related Issues 55Summary 59

Chapter 4 Policy Implications 63

Calculating the Net Impact of an IntegratedTax System 63

Incidence Issues 68Recommendations 69Concluding Remarks 77

Appendix State Tax Collections 79

vii

viii Taxation of Mineral Resources

Bibliography

Index

About the Authors

95

103

111 Figure

2-1

Tables

1-1

1-2

1-3

-1

2-2

-3

-4

. -I

J-2

l

.1-4

.1-5

-I

-1

List of Figureand Tables

Cycle of Mining Operations

Output-Related Mining Taxes

Profits Taxes

Property Taxes

Annual Price of Tin (1960-1972): HypotheticalTin Deposit

Optimal Extraction Profile for Tin Deposit

Extraction Profile Using Average-Grade Rule

Optimal Extraction Profile with Lower Capacity

Hypothetical Mines and Price Profiles

Optimal Extraction Profiles for Mine I

Optimal Extraction Profiles for Mine II

Effects of Output Taxes on Mine I

Effects of Output Taxes on Mine II

Taxes on New Mexico Uranium Mines

State Tax Collections

ix

20

3

14

16

27

28

29

30

45

46

47

49

50

65

80

Introductionand Summary

There has been a substantial increase in recent years in the level oftaxation imposed on mining firms by state· and. local governments.This increase can be attributed to three factors. First, there has beena heightened awareness that resources are limited in quantity and,consequently, there is a need to conserve the resource base. Second,the environmental damage resulting from mining operations, notably the deterioration of water quality and land abuse, has broughtdemands for just compensation. Third, significant price increases forsome minerals have often been viewed by states as an opportunity tocollect additional tax revenue.

It is important to understand the implications of this taxationand, in particular, the effects associated with each of the variousforms of taxes that are being applied. Accordingly, the broad aim ofthis book is to provide a comprehensive economic analysis of theffects of mining taxation on the extraction of mineral resources.

Although we shall deal specifically with the taxes imposed by statend local governments in the United States, the conclusions will have

more general applicability, since the essential forms of the taxationare applied universally.

On the basis of this analysis, we offer a set of recommendationsfor fax policy. The primary objective of this design is to minimize thedistortionary incentives created by the taxation. From a practicalstandpoint, however, one must also recognize the degrees of diffi-ulty in the administration of the various taxes.

The analysis and recommendations will reflect the premise that,f r tax purposes, a mining operation should be treated in a neutralmanner, that is: like any other form of economic activity. We regardI his premise as appropriate for two reasons. First, in the absence ofproved market failures, a nonneutral tax treatment of the miningIi ctor creates an inefficient allocation of resources. Too many or toofew resources devoted to mining will be costly to states in terms of. bs and output, either in mining or some other activity. Second, ifI he tax system is nonneutral, it may be difficult to detect whethermarket failure is due to the nature of the activity or to relative distorIi ns induced by the tax system. If, for instance, it is determined that

xi

a state's resource base is being depleted too fast, an output tax maybe justified. However, if the resources are being depleted too fastbecause of an excessive property tax, for example, an additional taxmay succeed only in deterring further development. It is thereforeappropriate for states to move toward a neutral tax policy and thento evaluate any alternatives from that position.

The analysis is also based on the assumption that mining firmsrespond, in the short run, to changes in prices and costs and, in thelong run, to changes in the net-of-tax rate of return on investment. Achange in tax policy will always have an impact on mineral development. An increase in the mining industry's tax burden will result inslower growth of mineral development in the state and, consequently, lower output and job creation. To expect otherwise is toexaggerate the realizable benefits of taxation.

The study is presented in four chapters. The first two chaptersestablish the context for the economic analysis. In chapter 1 we setout the major categories of mining taxation and discuss salient features of the several forms within each category. References to themethods adopted by particular states are supplemented by a detailedtabular survey of the taxes applied in twenty-two states with significant mining sectors.

In chapter 2 we describe the main elements of the mining processitself. Recognition of the structure of mining decisions is essential tot?e rel~vance of economic analysis and policy prescription. Of partIcular Importance here is the interaction of economic and geologicalfactors.. The core analysis of the impact of taxes on a mining firm'sInvestment, development, and extraction behavior is presented inchapter 3. We focus initially on the individual effects of the taxes andthen consider the net effects of different taxes applied in combination. To illustrate the major influences, we construct numericalexamples that display the variations in a firm's response to differenttaxes, in otherwise identical economic and geological conditions, aswell as the variations in response to a given tax as economic and geological conditions vary.

Chapter 4 begins with an illustrative computation of the netquantitative effect of a state's tax system and then discusses tax shifting. It concludes with a presentation of recommendations for taxpolicy.

We now summarize briefly the main conclusions from the analysis and our policy recommendations. The particular taxes consideredcan be grouped in three distinct categories: severance (outputrelated) taxes, property taxes, and profits (or income) taxes.

Severance taxes may be specified as a fixed nominal payment perton of final output (that is, payment of a specified number of dollarsper ton, whatever the price level); as a fixed nominal payment per tonof ore extracted, before processing; or as a proportion of sales revenue. Each variant is distinct in its effects. A per-unit tax on outputcreates a tendency to reallocate extraction from present to future andmay also alter the time profile of the quality of ore selected forextraction. A per-unit tax on ore is also an inducement to deferextraction, but such a tax will not influence the quality profile. An advalorem tax will not alter the quality profile but will induce a shift inextraction from present to future, or vice versa, according to whetherprices are rising at a rate less than or greater than the rate of interest.All variants lead to an increase in the cutoff grade of ore, reducingthe size of economically recoverable reserves-the phenomenon oftax-induced high-grading.

All severance taxes, and indeed all taxes, reduce the rate ofreturn on capital and thereby serve to discourage investment anddevelopment expenditures. This is the major long-run distortion ofmining taxation in general, whose incidence across states is in relation to the total tax burden imposed by each state.

Property taxes, in practice, are also levied in various forms, fewof which show any evident connection to the economic definition ofproperty value. As administered, property taxes have the advantageof stable revenue. Their disadvantage is the practical difficulty ofproperty assessment. A true property tax, based on the estimatedvalue of reserves remaining in a deposit, will effectively subsidize andthereby accelerate extraction. At the same time, it will tend to lowerthe cutoff grade and so increase total extraction.

Profits taxes may be proportional (levied at a uniform rate) orprogressive (levied' at an increasing rate) and are typically contaminated by special deductions, such as depletion allowances. In theabsence of deductions, a proportional profits tax is nondistortionarywith respect to extraction, whereas a progressive tax will induce themining firm to modify its profits profile in a manner that will depend

n the time paths of prices and costs. This redistribution may be

xii Taxation of Mineral ResourcesIntroduction and Summary xiii

brought about by changes in the rates of extraction or in the qualitiesof ore extracted, or some combination of the two.

Depletion allowances serve to subsidize extraction. Cost depletion, a fixed nominal allowance per ton of ore extracted, acts as anegative per-unit severance tax. Extraction tends to be reallocatedfrom future to present; cutoff grades will be lower and recoveryhigher than otherwise. Percentage depletion, a fixed proportion ofcurrent revenue, acts as a negative ad valorem severance tax.Accordingly, it encourages a shift in extraction from future to present, or vice versa, as prices are rising at less or more than the rate ofinterest. It also lowers the cutoff grade and increases total recovery.

The preceding array of potential distortions, together with therelative difficulties of administering the options, lead to the following prescription for the general design of mineral tax policy.

1. A proportional profits tax should be the cornerstone. Its primary advantages are recognition of cost as well as revenue; avoidance of a high-grading incentive; and ability, in conjunction with theindividual income tax, to collect the resource rents. The income-taxpackage should include these provisions: (a) percentage depletionshould not be allowed; (b) capitalization of exploration expendituresshould be required; (c) development expenses should be subject tousual depreciation rules; (d) all other state and local taxes should bedeductible; and (e) taxable income should include only incomederived within the state.

2. A property tax is recommended for states that rely on theirmining sector for a stable source of revenue. Administration of theproposed tax is likely to be proportionately less costly for such states.The property-tax base should be an estimate of present value, thefuture income stream being obtained by applying a historical averageprofit margin to estimates of reserves and production. The use of amoving historical average profit margin will reduce the incentive forhigh-grading and accelerated extraction.

3. Given the relative ease of administration, many states willprobably impose a severance tax of some sort. If so, we recommendthat it be an ad valorem royalty, since this does not bias the qualityprofile or induce any consistent quantity-profile bias. All severancetaxes have the undesirable consequence of high-grading, but per-unitseverance taxes also induce extraction-profile distortions. We recommend further that (a) the tax should be imposed on ore, prior to pro-

xvxiv Taxation of Mineral Resources

Introduction and Summary

cessing; (b) ore prices should be quality-adjusted, with a stan.dardprice derived, if necessary, from the price of concentrate wIth ~deduction for processing costs; and (c) the t~x ~a~e s~ould be UnI

form, that is, independent of the price. The J.uStlficatlOns. for. theseproposals and for the rejection of the alternatIves are detaIled m thefinal chapter.

Acknowledgments

Financial support for the research for this book was generously provided by the Lincoln Institute of Land Policy. We wish to thank ArloWoolery, director of the Lincoln Institute, for his encouragement ofthis research. .

We are also grateful to all the state tax administrators for theIrhelpful cooperation.

1 Mining Taxes

I here is considerable variation across states in the types of miningI Ixation currently employed and even in the names they go by. To, mplify the description and discussion of these taxes we divide themIllto three broad categories: output-related (or severance) taxes,pr fits (or income) taxes, and property taxes. This classification islIso used in the subsequent analysis.

Output-Related Taxes

)utput-related taxes are defined here as taxes imposed on a per unitII Isis on mineral output, either at the mouth of the mine or after conI' ·ntration. They are most commonly known as severance taxes butII also referred to as production or mining privilege taxes. This type,I tax takes two general forms: a fixed nominal amount per unit of

0111 put, and a fixed proportion of the value of output (an ad valoremI IX).

These taxes are popular means of raising revenue for several rea-( n . First, the administrative costs are relatively small when com

pared to other forms of taxation, on account of clearly defined unitsof taxation. No costs, depletion, or depreciation need be calculatedIlld valuation problems are relatively minor. However, as Stinson(1977) notes, there are difficulties in assigning values for purposes ofIII output tax based on gross value. The problem arises because\I m's-length market transactions may not occur. This is especially api oblem in vertically integrated operations that purchase mineralolltput as an input into the production process (not necessarily in the

line state).econd, the output tax is perceived as collecting part of the value

( f extracted resources. Unlike other economic operations, mineralI r ction permanently reduces the natural wealth of the state. Thus

Olltput taxes are seen as providing a tangible link between the extrac-

1

...,I

3

'"'"o....bO

....o

'"::>"@>

.....0_

'"~~o u::0o 8~§'" ."'..........bOo",Of.<::vE-o-.o

§0;::u::>."o....p..

I::o"B::>."o....p..

Mining TaxesTaxation of Mineral Resources2

tion process and the perceived resource rents. We question this argument in chapter 3.

Third, the revenue from such taxes, whose source is readily identifiable, is fairly easy to earmark for specific purposes. Like gasolinetaxes used for highway trust funds, output taxes are sometimesplaced in special funds for land reclamation and other projects identified with the mining process. The tax is thus viewed as a means offorcing the mines to "pay their own way" for public services andenvironmental damage. There is no inherent reason that other typesof taxes cannot be similarly earmarked. However, the advantage ofoutput taxes is that a legislature can link a tax to a specific purposewithout allocating a fixed nominal amount of expenditure for theservices in the budget.

Finally, it has been suggested that these taxes are passed throughin the form of higher prices to consumers of finished products, andthus the tax is "exported" out of the state. This claim is examined indetail in chapter 4.

Output-related taxes are not without their difficulties. Chapter 3shows that severance taxes favor large operations of high-gradedeposits whose profits can easily absorb the tax. Second, theyincrease the cost of extraction regardless of the size of the operationand quality of the deposit, causing high-grading, that is, the bypassing of ores that could be profitably extracted in the absence of thetax. Third, they may alter the intertemporal extraction profile.

Table 1-1 compiles the types of output-related taxes in the statessurveyed. It is evident that the taxes and rates vary widely acrossstates for the same mineral. For instance, coal in Ohio is taxed at arate of only 4¢ per ton, while coal in South Dakota is taxed at 50¢ perton, plus a I-percent increase for every 3-percent increase in thewholesale price index (WPI). The taxes also vary across minerals inthe same state. This reflects in part the legislature's perception ofcost differentials and the relative importance of a particular mineralin the state's economic base. (Other economic factors also playarole. For example, the recent decrease in the copper royalty in Arizona reflects a decline in copper prices.)

It is apparent that states are aware of the adverse incentives created by this output tax. Some states lower tax rates for small producers (Wyoming, Alaska, and Montana) as well as allowing rates tovary with quality differentials (Wyoming and Alaska). The need for

Tab

le1

-1co

ntin

ued

Stat

e/M

iner

alN

ame

Bas

ean

dR

ale

Rem

arks

~

Ari

zona

All

min

eral

s

Ark

ansa

s

Oil

Gas

Oil

and

gas

Iron

are

Bar

ite,

baux

ite,

tita

nium

are,

man

gane

sean

dm

anga

nife

rous

ores

,zi

ncor

e,ci

nnab

ar,

and

lead

are

Occ

upat

iona

lgro

ssin

com

e

Seve

ranc

e

Spec

ial

fund

Seve

ranc

e

Con

vers

ion

Seve

ranc

e

Seve

ranc

e

2.50

70o

fgr

oss

valu

e

5070

of

gros

sva

lue

ifw

ell

prod

uces

mor

eth

an10

barr

els/

day.

4070

of

gros

sva

lue

ifw

ell

prod

uces

less

than

10ba

rrel

s/da

y5

mill

spe

rba

rrel

0.30

70/1

,000

cubi

cfe

et

10m

ills

/bar

rel

orI

mill

/I,O

OO

cubi

cfe

et

2¢/t

on

l5¢/

ton

Pri

cede

term

ined

byre

fere

nce

tom

ar

ket

publ

icat

ions

less

out-

of-s

tate

pro

cess

ing

char

ges

and

tran

spor

tco

sts.

1070

of

the

2.50

70is

allo

cate

dby

set

for

mul

a.F

rom

6/1/

78to

6/30

/80

rate

onco

pper

min

ing

and

smel

ting

is20

70.

Use

dto

esta

blis

hth

eA

rkan

sas

Oil

Mus

eum

.

All

seve

ranc

eta

xes

are

allo

cate

dbe

tw

een

stat

ean

dlo

cal

gove

rnm

ents

byse

tfo

rmul

a.

-i

til

X til .- o ::J o - :i!:

::J CD i» ::D CD C/) o c d CD C/)

Se'\-

eran

ceI.

x,t

on

:i!:

::J ::J

<0

Seve

ranc

eI~/ton

-i

til

X

Seve

ranc

e50

70gr

oss

valu

eCD C

/)

Gyp

sum

(sol

dfo

out-

of-s

tate

use)

,ch

emic

al-g

rade

lim

esto

ne, s

.ilic

asa

nd,a

nddi

men

sion

ston

e

Cru

shed

ston

e(m

ost

vari

etie

s)

Oth

ers

(inc

ludi

ngdi

amon

ds,

salt

,an

dso

on)

Cal

ifor

nia

Oil

and

gas

Col

orad

o

Met

allic

min

eral

s

Mol

ybde

num

Oil

and

gas

Coa

l

Oil

shal

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

eSe

vera

nce

Seve

ranc

e

Seve

ranc

e

Rat

eva

ries

year

ly,

0.02

070/

barr

elin

1977

2.25

070

ofgr

oss

reve

nue

inex

cess

of

$11

mill

ion

15~/ton

2070

ifgr

oss

reve

nue

less

than

$25,

000

3070

$25,

000

to99

,999

4070

$100

,000

to29

9,00

050

70ov

er$3

00,0

00

6O~

inop

enpi

t;30~

unde

rgro

und

plus

1070

incr

ease

for

ever

y30

70in

crea

seo

fw

hole

sale

pric

ein

dex

max

imum

4070

gros

sva

lue

ofth

e4t

hye

aro

fop

erat

ion

Con

side

red

are

gula

tory

tax.

Pro

pert

yta

xes

are

allo

wed

asa

cred

itup

to50

070

ofth

ese

vera

nce

tax

due.

Fun

dsgo

into

stat

etr

ust.

87.5

070

of

prop

erty

taxe

sm

aybe

used

asa

cred

it.

Fir

st8,

000

tons

per

quar

ter

exem

pted

.L

igni

tege

tsad

diti

onal

5007

0cr

edit

.

2507

0cr

edit

for

on-s

ite

met

hods

.

01

Tab

le1

-1co

ntin

ued

Stat

e/M

iner

alN

am

eB

ase

and

Rat

eR

emar

ks

0)

Pho

spha

tes

Seve

ranc

e10

%gr

oss

valu

e

Idah

oN

one

All

are

inco

me-

base

d

Ken

tuck

y

Coa

lSe

vera

nce

4.5%

gros

sva

lue

Oil

Seve

ranc

e0.

5%gr

oss

valu

e

Lou

isia

na

Sul

fur

Seve

ranc

e$1

.03/

10ng

ton

Flo

rida

Oil

Gas

Solid

min

eral

s

Salt

Sand

and

grav

el

Mar

ble

Coa

l

Oil

Gas

Mic

higa

n

Oil

and

gas

Min

neso

ta

Sem

itaco

mite

conc

entr

ate

Cop

per-

nick

el

Tac

omit

e,ir

onsu

ifid

eco

ncen

trat

es

Mis

siss

ippi

Oil

and

gas

Oth

erm

iner

als

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Pro

duct

ion

Seve

ranc

e

Seve

ranc

e

Occ

upat

ion

Seve

ranc

e

Occ

upat

ion

8%gr

oss

valu

e(i

fav

erag

epr

oduc

tion

isgr

eate

rth

anI(

)()ba

rrel

sIda

y)

5070

gros

sva

lue

5%gr

oss

valu

e

6¢

/to

n

3¢

/to

n

20¢/

ton

10¢/

ton

12.5

%gr

oss

valu

e

7¢/I,

OO

Ocu

bic

feet

2%gr

oss

valu

e

10¢/

ton

plus

1/10

of

1%of

grad

egr

eate

rth

an55

%I%

of

valu

epl

us2Y

2¢/t

onpl

us10

%o

fba

ses

for

each

0.1

%in

crea

seof

valu

ab

leco

nten

tab

ove

62%

$1.2

5Ito

npl

us1.

6%fo

rea

chI%

valu

ab

leco

nten

tab

ove

62%

6%/b

arre

lor

6%va

lue

3m

ills

/cub

icfo

otor

6%va

lue

5%gr

oss

valu

e

7/8

tost

ate

gene

ral

fund

;11

8to

coun

tyw

here

prod

uced

.

80%

tost

ate

gene

ral

fund

;20

%to

coun

tyw

here

prod

uced

.

75%

toge

nera

lfu

nd;

25%

tola

ndre

clam

atio

ntr

ust;

cred

itfo

rpr

oper

tyta

xes

upto

20%

of

taxe

sdu

e.F

urth

ercr

edit

sif

firm

has

own

recl

amat

ion

prog

ram

.

50%

toge

nera

lfu

nd;

50%

tola

ndre

clam

atio

ntr

ust.

Min

imum

50¢/

ton.

Up

toI%

addi

tion

alm

aybe

colle

cted

byco

unti

es.

All

seve

ranc

eta

xes

dist

ribu

ted

byse

tfo

rmul

abe

twee

nst

ates

and

loca

litie

s.

Rat

eca

nbe

redu

ced

for'

smal

lw

ells

and

spec

ial

circ

umst

ance

s.

Pai

din

lieu

of

prop

erty

taxe

s.

5¢

/to

nba

seif

proc

esse

din

stat

e.

Rat

ein

crea

ses

with

stee

l-m

illpr

oduc

tsin

dex.

Pai

din

lieu

ofpr

oper

tyta

xes.

Rev

enue

dist

ribu

ted

tost

ate

and

loca

lgo

vern

m

ents

byse

tfo

rmul

a.Sl

ight

tax

for

adm

inis

trat

ion

of

cons

erva

tion

law

s.

-; ~ X ~ - o ~ o - ~ ~ CD.

OJ :::D CD en o c n CD en ~ ~ ~ CO -i~ X CD en -..

..l

CD

Tabl

e1

-1co

ntin

ued

Stat

e/M

iner

alN

ame

Bas

ean

dR

ate

Rem

arks

--

Mon

tana

Cem

ent

and

gyps

umL

icen

se22

c/to

no

fce

men

t5~/ton

of

gyps

um

Coa

lSe

vera

nce

Btu

/lb

Surf

ace

Und

ergr

ound

G.V

.=

gros

sva

lue.

Fir

st20

,000

tons

>7,

000

12~/ton

or5~lton

or

exem

pt.

Dis

trib

uted

tova

riou

sco

unti

es20

070

G.V

.3%

G.V

.an

dst

ate

agen

cies

byse

tfo

rmul

a.

7,00

1to

22¢/

ton

or8¢

/ton

or8,

000

30%

G.V

.4%

G.V

.

8,00

1to

34¢/

ton

orlO

¢/to

nor

-i

llJ9,

000

30%

G.V

.4%

G.V

.X llJ

90,0

1740

¢lto

nor

12¢/

ton

or.....

30%

G.V

.4%

G.V

.0 ::J

Met

alli

fero

usL

icen

seG

ross

Val

ueR

ate

0 .-or

es0-

100,

000

0.15

%~

100,

001-

250,

000

0.57

5%::J (1

)

250,

001-

400,

000

0.86

%.... llJ

400,

001-

500,

000

1.15

%:D

500,

000

and

over

1.43

8%(1

) enM

icac

eous

ores

Lic

ense

5¢/t

on0 C

Oil

Seve

ranc

e2.

1%

firs

t$6

,000

of

gros

sva

lue

2.65

%.... ()

exce

ssov

er$6

,000

of

gros

sva

lue

(1) en

All

min

eral

sR

esou

rce

trus

t$2

5pl

us0.

5%gr

oss

valu

ein

exce

ssU

sed

tore

ctif

yen

viro

nmen

tald

amag

e.of

$5,0

00

20"0

of

gros

sva

lue

4m

ills

/dol

lar

5m

ills

/bar

rel

of

oil

or/5

0,00

0cu

bic

feet

of

gas

Si

Oil

and

gas

Nev

ada

Oil

and

gas

New

Mex

ico

Ura

nium

Sev

eran

ceC

onse

rvat

ion

Con

serv

atio

n

Seve

ranc

eV

alue

/lb

0-5.

00

5-7.

507.

50-1

0.00

10.0

0-15

.00

15.0

0-20

.00

20.0

0-25

.00

25.0

0-30

.00

30.0

0-40

.00

40.0

0-50

.00

750.

00

Tax

(mar

gina

lra

te)

1%

1.6

%

2.0

%

3.0

%

4.0

%

5.0

0/0

7.0

%

9.0

%

12.5

%

$3.2

4

Ifco

ntra

cts

info

rce

prio

rto

1977

,ta

xis

1.25

%.

Fun

dsfr

omse

vera

nce

taxe

sgo

tost

ate.

~ ::J ::J CO -i

llJ X (1) en

Oil

and

gas

Coa

l

Pot

ash

Cop

per

Oth

ers

Har

dm

iner

als

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Res

ourc

eE

xcis

e

.45¢

/bar

rel

or5~/1

,000

cubi

cfe

etpl

usin

crea

sefo

rch

ange

inC

Pl

38¢/

ton

plus

incr

ease

for

chan

gein

CP

I(l

8¢lt

onst

eam

coal

)

2.5%

gros

sva

lue

•1/

3

0.5%

gros

ssa

les

•11

20.

125%

gros

ssa

les

•1/

20.

75%

gros

sva

lue

~

......

o

Tab

le1

-1co

ntin

ued

Stat

e/M

iner

alN

ame

Bas

ean

dR

ate

Rem

arks

Nor

thD

akot

a

Oil

and

gas

Coa

l

Ohi

o

Coa

l

Salt

Lim

esto

nean

ddo

lom

ite

Oil

Gas

Okl

ahom

a

Oil

and

natu

ral

gas

Ura

nium

Oth

erm

iner

als

Sout

hD

akot

a

Oil

and

gas

Pro

duct

ion

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Pro

duct

ion

Pro

duct

ion

Pro

duct

ion

Seve

ranc

e

5%gr

oss

valu

e

65¢/

ton

plus

1I1Jo

for

ever

y3%

chan

gein

WP

I

4¢/t

on

4¢/t

on

I¢/t

on

3¢/b

arre

l

I¢/I,

OO

Ocu

bic

feet

7%o

fgr

oss

valu

e

5%o

fgr

oss

valu

e

0.75

%of

gros

sva

lue

3%o

fgr

oss

valu

e

Pai

din

lieu

of

prop

erty

taxe

s.R

eve

nues

divi

ded

betw

een

stat

ean

dlo

cali

ties

byse

tfo

rmul

a.

Not

inlie

uo

fpr

oper

tyta

xes.

Rev

enue

sdi

vide

dbe

twee

nst

ate

and

loca

litie

sby

set

form

ula.

Seve

ranc

eta

xre

venu

ego

esin

tost

ate

gene

ral

fund

.

Pai

din

lieu

of

all

othe

rta

xes.

Pai

din

lieu

of

licen

seta

x.

-i

Ql

X Ql ..... o ~ o -- ~ ~ (I) ~ :Il

(I) en o c n (I) en

Ten

ness

ee

Oil

Gas

Sul

fur

Uta

h

Met

als

Seve

ranc

e

Seve

ranc

e

Seve

ranc

e

Occ

upat

ion

5¢/b

arre

l5%

gros

sva

lue

$1.0

3/lo

ngto

n

1I1Jo

gros

sva

lue

Rev

enue

allo

cate

dto

vari

ous

agen

cies

byse

tfo

rmul

a.

Fir

st$5

0,00

0is

exem

pt.

Por

tion

of

tax

mus

tbe

prep

aid.

~ ~ ~ <0 -i

Ql

X (I) en

Oil

and

gas

Occ

upat

ion

2%gr

oss

valu

e

Wes

tV

irgi

nia

Coa

lL

imes

tone

orsa

ndst

one

Oil

Gas

Occ

upat

ion

Occ

upat

ion

Occ

upat

ion

Occ

upat

ion

3:85

%gr

oss

valu

e

2.2%

gros

sva

lue

4.34

%gr

oss

valu

e

8.63

%in

exce

ssof

valu

e

$5,0

00of

gros

s

......

......

Rev

enue

toca

pita

lfa

cilit

ies

acco

unt.

Rev

enue

sto

vari

ous

fund

s.

Rev

enue

tost

ate

gene

ral

fund

.R

even

ueto

min

eral

trus

tfu

nd.

1.5%

gros

sva

lue

5%gr

oss

valu

e

2%gr

oss

valu

e

2%gr

oss

valu

e

Seve

ranc

e

Min

ing

exci

se

Seve

ranc

e

Sour

ces:

Wri

tten

corr

espo

nden

cefr

omst

ate

tax

adm

inis

trat

ors;

Sti

nson

(197

8);

Gill

is(1

979)

;S

tate

tax

stat

utes

;C

omm

erce

Cle

arin

gH

ouse

:S

tate

Tax

Gui

de;

Yas

now

sky

and

Gra

ham

(197

6);

and

Ste

erin

gC

omm

itte

eon

the

Impa

cto

fT

axat

ion

onE

nerg

yM

arke

ts,

Nat

iona

lA

cade

my

of

Scie

nces

(197

9).

Not

e:T

his

tax

tabl

ew

asco

mpi

led

usin

gin

form

atio

nfr

oma

vari

ety

of

sour

ces.

The

info

rmat

ion

was

cros

s-ch

ecke

das

far

aspo

ssib

leto

ensu

re

cons

iste

ncy

and

toin

clud

eth

em

ost

rece

ntta

xla

ws.

Wyo

min

g

All

min

eral

s

Coa

l,ur

aniu

moi

l,ga

sC

oal,

uran

ium

Coa

l

Profits Taxes

a secure revenue base is also reflected in the linking of tax rates toinflation indicators (South Dakota) and in the calculation of taxesusing both a fixed dollar per ton rate and an ad valorem rate withcollection of the larger amount (Montana and Alaska). Finally, taxrevenues are used for a variety of purposes. In Alabama, outputtaxes go directly to the general fund and are paid in lieu of propertytaxes, while in North Dakota these taxes are earmarked for variouscategories of expenditure at both the state and local levels.

Profits taxes, if imposed in a state, are paid by every corporateentity. So in the absence of special tax privileges granted to anyindustry, mining enterprises are treated equitably under this tax. Theprofits tax has an advantage over other types of taxes in that it considers both the costs of operation and the depletion of the resourcebase. Taxes are paid only when revenues exceed costs, which againimplies that taxes are levied on a more equitable basis. Also becausecosts are considered, the tax recognizes the ability to pay. Thus thereis no inherent bias against low-profit, small marginal mines.

From the state's perspective there are several difficulties withemploying the profits tax. One is the cost of administration. In orderfor the tax to be applied equitably, accurate books and proceduresmust be maintained. States have partly attacked this problem bymerely adjusting the tax base used for federal tax purposes (table1-2). In effect, some states piggyback the federal taxes, substantiallyreducing administration at the state level. However, this advantage ispartly offset by revenue fluctuations induced by changes in the federal tax laws.

Second, there is the problem of allocating the income of a corporation that operates in more than one state. The major allocationrule for income is known as the"ABC" rule, which allocates incometo the state on the basis of three ratios: the ratio of total sales in thestate to total corporate sales; the ratio of total assets in the state tototal corporate assets; and the ratio of total employment in the stateto total corporate employment. This is an arbitrary procedure thatwill typically not reflect the profitability of a mine in a given state.

Third, there is the intrafirm pricing problem for integrated firms.

13

"roperty Taxes

d valorem property taxes are the oldest form of taxation imposednn the mining sector. Ideally the tax shoul? b~ a tax o~ the "wealth~'( f the mine. However, the wealth of a mme IS very ?lfficult to eS~IInate. Neither future prices and costs nor the geologIcal charactensti s of the deposits are known with certainty. Furthennore, local t~Issessors are not usually trained in the techniques necessary to. estlI~ate these parameters. To compound these difficulties, as will beshown, property taxes induce the firm to extract the ore at a fasterrate than would be the case in the absence of the t~. .

As shown in table 1-3, several states have reahzed these dIfficul-ties and in effect use other forms of taxes in lieu of property taxes.

nly Arizona attempts to estimate the present value of the operation. Other states employ gross-proceeds methods, output ~a~es, ororne form of net-proceeds tax. Net-proceeds taxes ar~ SImIlar to

profits taxes in that they aim to measure the net profIts from anoperation. The major distinctions between net-proceeds and corpo-

Mining Taxes

Illt I state transactions may be of an intrafirm nature, wi~h no m~rI t price established for output. This is a severe ~roblem m the ~n

II , tor where quality variations are reflected m t~e market pnceI III n Ybe difficult to detect on an intrafirm transactIOn.

Finally, there is the issue of allocating corporate overhe~~ andIlllllp nsation of corporate officers. ~hile these are legltl.mateI I 'n es at the corporate level, they are dIfficult to prorate to differ-• III 'tate operations. .

able 1-2 presents a summary of profits taxes m .the states ~ur-

t ycd. As noted, most states use the federal tax base WIth onl! ~norIt I 1I. tments. Those that do not (Arizona, Minnesota, and MIChlg~n)II I different methods in computing loss carry-forwards, depreclaI Oil and expensing. The rates differ from a low of 2.35 percent( i'higan) to a high of 12 percent (Minnesota). Also some states,1Iow a deduction for federal taxes (Alabama) while other~ do not( izona). Finally, some states add back other state taxes paId to theI ral government while others do not. Those that do (Colorado,lur example) increase the net effective rate of th~se taxes on. thelIline's operation and so increase the burden of taxatIOn on the mme.

Taxation of Mineral Resources12

Tab

le1-

2P

rofi

tsT

axes

Stat

eR

ate

Fed

eral

Inco

me

Tax

Ded

ucti

ble

Fed

eral

Inco

me

All

owF

eder

alU

sed

asB

ase

Dep

letio

nR

emar

ks

-'~

Ala

bam

a

Ala

ska

Ari

zona

Ark

ansa

s

Cal

ifor

nia

Col

orad

o

Flo

rida

Idah

o

Illin

ois

Kan

sas

Ken

tuck

y

Lou

isia

na

Mic

higa

n

Min

neso

ta

5'-0

9.40

/0

10.5

070

inco

me

>6,

000

6% inco

me

>25

,000

9% 5% 5% 6.5%

4.0%

6.75

%in

com

e>

25,0

00

5.8%

inco

me

>25

,000

8% inco

me

>20

0,00

0

2.35

%

12%

Yes

No

Yes

No

No

No

No

No

No

No

No

Yes

No

No

No

Yes

No

No

No

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

No

No

Yes

No

No

No

Yes

(exc

ept

shal

e)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Cur

rent

expe

nses

of

unsu

cces

sful

ex

plor

atio

n.

Som

eex

pens

esfo

rex

plor

atio

n.

Min

imum

tax

=$2

00(r

educ

edto

$25

for

gold

).C

urre

ntex

pens

ing

of

expl

orat

ion

and

deve

lopm

ent.

Per

cen

tage

depl

etio

nal

low

ed.

Acc

eler

ated

dedu

ctio

nfo

roi

lco

st.

Dep

leti

on:

oil

=38

%;

coal

=15

%;

and

sulf

ur=

23%

.

Min

imum

tax

=$1

00;

fede

ral

depl

eti

onal

low

edfo

rco

pper

and

nick

el.

-i

Q)

X Q) ... o ::J o - ~ ::J CD tu ::D CD CIl o c: .... (') CD CIl

Mon

tana

6.75

%N

oY

esY

es

New

Mex

ico

5%N

oY

esY

esA

BC

rule

atfr

rm's

opti

on.

Nor

thD

akot

a6%

Yes

Yes

Yes

~

inco

me>

15,0

00::

J

Okl

ahom

a4%

No

Yes

Yes

Oil

depl

etio

n.::J CO

Pen

nsyl

vani

a9.

5%N

oY

esY

es-i

Q)

Sou

thD

akot

a5.

5%X

No

Min

imum

=$2

5.CD

Uta

h4%

No

No

CIl

Wes

tV

irgi

nia

6%N

oY

esY

es

Sou

rces

:W

ritt

enco

rres

pond

ence

from

stat

eta

xad

min

istr

ator

s;S

tins

on(1

978)

;G

illis

(197

9);

Sta

teta

xst

atut

es;

Com

mer

ceC

lear

ing

Hou

se:

Sta

teT

axG

uide

;Y

asno

wsk

yan

dG

raha

m(1

976)

;an

dS

teer

ing

Com

mit

tee

onth

eIm

pact

of

Tax

atio

non

Ene

rgy

Mar

kets

,

Nat

iona

lA

cade

my

ofSc

ienc

es(1

979)

.N

ote:

Thi

sta

xta

ble

was

com

pile

dus

ing

info

rmat

ion

from

ava

riet

yo

fso

urce

s.T

hein

form

atio

nw

ascr

oss-

chec

ked

asfa

ras

poss

ible

to

ensu

reco

nsis

tenc

yan

dto

incl

ude

the

mos

tre

cent

tax

law

s.

......

c.n

10 Taxation of Mineral Resources Mining Taxes 17

rate-profits taxes are the use of cost depletion and straight-linedepreciation; the disallowance of corporate overhead, research anddevelopment, and executive compensation; and differences in interstate profit allocation rules. In effect, net proceeds are closer to theeconomic definition of profit from the mine than is the measure forcorporate-income taxes.

The use of other types of taxes in lieu of ad valorem propertytaxes offers other advantages. First, the tax is usually a statewide tax,thus ensuring equity among the state's mineral producers. Second,administration is transferred from the local level to the state. Thestate's larger and more highly trained bureaucracy provides scaleeconomies in administration and more effective assessment, collection, and enforcement. Finally, the funds are allocated to the localities in a fashion that attempts to measure the costs of local servicesattributable to the mine. Mines in one county may use public servicesfrom another county: in particular, schools, electricity, and water.Under the old system, the counties providing the services could notobtain reimbursement when the mines were technically in a differentjurisdiction.

In summary, states have generally moved away from the oldtypes of property-tax administration. The alternatives also presentboth administrative difficulties and adverse economic incentives, butthese drawbacks have been judged lesser than those of property-taxadministration.

Sources: Written correspondence from state tax administrators; Stinson (1978); Gillis (1979);State tax statutes; Commerce Clearing House: State Tax Guide; Yasnowsky and Gr~ham(1976); and Steering Committee on the Impact of Taxation on Energy Markets, NatIOnalAcademy of Sciences (1979).Note: This tax table was compiled using information from II; variety of so~rces. Theinformation was cross-checked as far as possible to ensure consIstency and to mclude themost recent tax laws.

Progressive rates.

Remarks

New mines must prepay taxesto offset increased demandson local public services.

Severance taxes paid in lieu ofproperty taxes.

Severance taxes paid in lieu ofproperty taxes.

300070 of value of profitstimes 1/3 which is statewideassessment ratio.

Other taxes replace propertytax.

State rate; local rates vary.

None

Assessed value

None

Base

25070 gross value less royalties

9070 gross value

Profits

Gross value

Net proceeds

Local assessment

Local assessment

Gross value

Local assessment

10¢ per $100 ofassessed value

None2070 of five-year averagenet-production value

None

Local assessment

Local assessment

2 times average of netproceeds for 3 years non-metalliferous 30070 capitalizednet income for 5 years plus$5/acre

West Virginia Local 'assessment

Wisconsin Net proceeds

Wyoming 100070 gross proceeds

Oregon

Pennsylvania

Utah

Nonproductive properties

North Dakota

Montana

Nevada

New Mexico

Uranium

Oil and gas

Coal and otherminerals (productive)

Oklahoma

Louisiana

Michigan

Mississippi

Arkansas

alifornia

olorado

l7forida

Ken lucky

Siale/Mineral

Table 1-3 continued

Remarks

Present value of planned extraction using five-year average profit margin.

Production tax paid in lieu ofproperty tax.

Other taxes paid in lieu ofproperty tax.

Base

None

None

Gross value of production

60070 of full coal value

Table 1-3Property Taxes

State/Mineral

Arizona

Oil and gas

Other mines

Alabama

Alaska

The preceding discussion shows the wide variety of tax methods usedby states. There are numerous reasons for this variance. First thesize of the state's economic base (and thus the tax base) derived fromthe min~n~ sector is an important factor. States that have relativelylarge mmmg sectors must rely more heavily on mineral taxation tosupport state and local services. Presumably, this leads to a morediverse and sophisticated set of tax policies, since these states need tocollect r~latively more revenue from the mining sector while ensuringthe contmued economic viability of their resource base. States thatdepend on the mining sector for a substantial part of their revenuesal~o. employ and ~rain tax administrators to deal exclusively with themmmg sector. ArIzona is a prime example: the state assesses all mineral property, has its own mineral tax division, trains assessors, andexpends considerable effort keeping up to date on cost market andtechnological trends. ' ,

Second, state legislatures differ in their perceptions of the role ofmineral taxation. Some regard these taxes as a means of collectingresource rents and a method of tax exportation while others view. 'mmes as corporate enterprises and attempt to treat them as such.

A third reason is the attitude of some states that state taxes aresmall relative to federal taxes, and that, since state taxes are deductible from federal taxes, the impact of state taxes on the economicbehavior of a mine is small. This may have been true in the past butchapter 4 shows that it is no longer the case. The appendix providesdata on the size of the revenues generated by these taxes.

Description of the Mining Process

Exploration

The objective of the mining firm is to profitably extract and processthe valuable contents of a mineral deposit. This objective is achieved,if at all, only after a long and costly process. This chapter describesthe process and models it from an economic perspective. Proper recognition of the actual structure of mining decisions, and of the influence of geological factors, is essential for prediction of responses tochanges in economic conditions.

Mining Decisions2

Figure 2-1 presents schematically the major phases of a typical mining cycle, with estimates of the time and cost necessary to completeeach phase. In practice, the time and cost requirements can vary sub-tantially across minerals and across mines of the same mineral, on

account of geological differences, location, and other factors. Thenumbers on figure 2-1 should therefore be considered as only repreentative. Each phase is now described in some detail. 1


Discussion

A typical exploration program usually involves a three-step procedure: preliminary exploration and sampling; detailed exploration;and estimation of reserves and recovery factors. 2 The first step aimsto determine areas of possible mineralization or anomalies over largeregions. If there has been previous mining activity in a region, oldmappings, surveys, and other historical documents are studied. Geological maps and other material compiled by state or federal agenciesare also used. Specially equipped airplanes (or even satellites) arethen used to photograph the region and to conduct magnetic andother geographical surveys. 3

19

20 Taxation of Mineral ResourcesMining Decisions 21

Activity

Exploration

Investment

Development

Exploitation

Time to CompleteActivity

2-4 years

2-4 years

2-4 years

10-20 years

Cost

$10 million

$50 million

$100 million

include (1) length, width, and depth of mineralized area; (2) faulttructure and other discontinuities; (3) specific gravities; (4) moisture

levels; (5) grade of ore; and (6) nature of overburden.This information from the samples is used to place the reserves

into three broad categories.

I. Proved reserves: ores that have been both delineated and measured; tonnage and grades are known within 5-percent error.

2. Probable reserves: tonnage and grades are computed fromwidely spaced samples and from geological projections; errors inestimates are usually less than 20 percent.

3. Possible ore: no samples available; estimates based on inferencessolely on geological structure and geophysical anomalies. 6

Profit

Source: Adapted from Thomas (1973), p. 60.

Figure 2-1. Cycle of Mining Operations

The results of this work identify promising anomalies which arestudied in more detail in a series of preliminary on-site inspections.These inspections consist of general geophysical or geochemical testso~ chip s~mples from outcroppings or streambeds. Tliese tests, alongwIth detailed mappings, enable a determination of the areas whichhold the greatest prospects for mineralization and thus merit moreintensive exploration. 4

The methods employed in the detailed exploration phase dependon the type of mineralization and the geological characteristics of theparticular deposit. Costeaning and shallow drilling are used fordeposits with only a thin layer of overburden. In cases where themineralized area is farther below the surface, diamond drilling isusually employed. Regardless of the technique, the objective of thedrilling is to determine as accurately as possible the size of thedeposit, the metallic content, the fault structure, and other geological, ?eophysical,. and geochemical features·of the deposit. This pro~ess mvolves takmg samples of the area at various points and depthsm order to map the extent of the deposit. ~ The samples are also usedto determine what processes will be necessary to recover the valuablematerial from the waste rock. The types of information obtained

The estimates of reserves and other factors are then used to compute an estimate of the total tonnage of ore contained in the deposit,that is, theoretical reserves. This estimate is adjusted for the faulttructure and other geological factors to obtain an estimate of how

much ore can be extracted, that is, minable reserves. 7

Once the sample information has been analyzed, a determinationis made of alternative methods which might be used to extract andprocess the reserves. This involves choosing a set of mining methods(open pit, underground) and a concentrating process (flotation, sep-

ration) which are appropriate given the available geological information. For each mining method, the mineral reserve estimates aremodified in two ways. The mining process itself may cause some oreto be left behind. This results from the necessity of roof and floorsupports in underground methods, or overburden removal in openpit methods. To allow for this, minable reserves are adjusted by an

timate of the extraction ratio (the proportion of ore left unmined)to derive net recoverable reserves. 8

Dilution of ore also occurs in the mining process. It is inevitablethat some waste rock will get mixed with ore. This reduces the value

f ore mined and increases the tonnage of ore which must be handled(run-of-mine ore) to recover the same amount of valuable product.Therefore, an adjustment called the "dilution factor" must be madeto account for the increased tonnage which must be processed.

The final adjustment is made for losses incurred in the separationr concentrating process. In most cases, raw ore is processed at or

Investment

near the mine site to separate the valuable material from the waste.In ~he case of metal mining the ore is crushed and a chemical or magnetIc process used to separate the metal from the other elements. Themethod used in the process is determined, in part, by the characteristics of the ore. Some valuable material will be lost as a result of theseparation process and so a further adjustment must be made inorder to estimate the tonnage of material which will be sold. Thisadjustment in known as the "recovery rate."

To summarize, the exploration process is a method where various areas are selected for intensive examination to determine thenature of reserves. In addition to estimating the reserves in thedeposits, various adjustments are made to account for losses in themi?ing and recovery process itself. The results of this stage includeestImates of recoverable ore and material available for sale in addi-. ,tlOn to reserve estimates. 9

If exploration has been successful, a determination of the mine'sprofitability must be made. This determination is usually a two-stepprocedure.

10A "quick" assessment of the mine's profitability is

made to decide if the expense and time necessary to complete detailedfeasibility studies are warranted. This assessment is based on currentprice projections, the average grade of ore, and crude cost estimates.

If the chances for profitable operation are promising, detailedstud~es are.initiated. <:>ne part of this process is a series of engineeringstudI~S WhICh determme the best technology, scale, and processingtechmques, under alternative methods of operation. 11 The engineering detail is quite specific in order to determine capital and laborr~quirements.and costs, as well as ordering the reserves for productIon. MarketIng studies are made to determine price projections and~c.c~ss to markets. Preliminary negotiations w!th potential buyers areInItIated to determine quality and quantity characteristics whichform the basis for long-term contracts. Finally, alternative methodsof financing are evaluated and banks are contacted to obtain loans. 12

The information from the engineering and marketing studies isthen combined to select the most profitable method of operation.The procedure commonly used is to determine the profits from an

23

After all this time and expense involved in exploring and constructing the mine, extraction of ore can proceed and a positive cash flowgenerated. At this stage the firm is constrained by all its previousdecisions. Capacity and technology are in place, limiting the amountof ore that can be currently extracted and determining both overhead

Mining Decisions

annual extraction and development profile for a given scale of operations and a specific technology. The size of the operation is changed(in increments of about 50 percent) to generate new estimates ofprofitability. Finally, sensitivity studies are made to determine theeffect of changing conditions on profitability under alternative mining methods. The fimll decision on the type and scale of the mine tobe constructed is based on a number of criteria. First, the presentvalue is calculated using discount factors that reflect attitudes towardrisk. The internal rate of return is calculated for comparison withother investments. Minimum returns may range from 12 to 25 percent. Finally, the undiscounted payback period is calculated to estimate the time necessary to recapture the initial investment. Based onthese and other criteria, the technology and plant size are chosenwhich yield the greatest estimated present value of profits.

Once financial arrangements are made the construction anddevelopment stage is begun. Before any ore is extracted and processed, the mine, processing plant, and storage and transportationfacilities must be constructed. Not all of the mine is constructed atonce, however. Rather, development expenditures of different partsof the mine are sequenced in a manner consistent with the longrange development profile. Even if it were technically feasible todevelop the entire mine at once, economic considerations would dictate a sequence of incremental expenditures. If too many areas aredeveloped relative to capacity, additional investment costs would beincurred early in the operation which have no immediate payback. Inaddition, overall costs would be increased as a result of keepingdeveloped areas not currently in operation in safe and productivecondition. Thus it is better to sequence mine development so thatsome areas are developed as others are exhausted, to lower overheadand defer incremental expansion costs until conditions warrant them.

Extraction


24

tracted and processed this month?14 Such a procedure does not'liminate risks, but it allows incorporation of new information and

I • valuation of options based on previous results.Since not all decisions are made and reevaluated at once, simpIi

nations or rules of thumb have to be used. These simplificationsvary from one decision to another. They relate to (1) length of theI lanning horizon; (2) areas of the mine under consideration; and (3)lIverages (of various magnitudes) of such variables as costs, daysw rked, and tonnages of ore processed. IS For instance, explorationdoes not provide complete information about the nature of reserves.I rojections must be made, based on samples and past experience.

• he investment decision is made on the basis of these estimates andannual averages of prices and costs. At the current extraction stage,urrently developed areas are the only consideration and the

planning period may be less than a year.This segmentation of the process results in a hierarchical decision

structure which allows for revisions as time proceeds. This procedurealso enables variables which must be determined at one level to betreated as exogenous at another. For example, exploration providesreserve estimates which are used in the investment decision. Theinvestment determines the technology and capacity, which in turn aretreated as given when extraction plans are made. Further, information acquired at one level can be used in the reevaluation of plans atother levels. For example, information gained from current extraction, such as profits and revised ore estimates, is used in evaluatingpossible changes in capacity and modifications to development andfuture exploration activity.

One consequence of this decision structure is that uncertainty isreduced at lower levels. At the current extraction level, the managercares only about short-term variations in prices and costs. Prices tenyears from now are of no concern. The areas of possible extractionhave been developed and the properties of the ore are known.Finally, capacity is in place and there is a history of operations to aidin reevaluation. The initial investment decision, in contrast, must bemade without the benefit of this information. Prices and costs mustbe projected far into the future so that annual averages must be usedto make any projections at all. The structure of the ore body is anestimate and the technological implications of alternative investmentstrategies are unknown. 16

A further consideration of practical importance is that modifica-

Taxation of Mineral Resources

and variable costs. The only variables which can be controlled at thislevel are the quantity of ore processed, and its quality. The cash flowgener~ted fro~ current operations is used to repay debt, pay returnsto eqUIty, begm operations and exploration activities in other minesor reinvest in the current operation. •

Although the firm is constrained by all its previous decisions theextraction process is still dynamic in nature. Production schedulesmust be established for a six-to-twelve-month period and must ber:e.valuated in light of new developments and changing market condItIons.

The Effects of Uncertainty

Uncertainty in mining operations arises from three sources. First, thetonnage and quality of a deposit are not known with certainty. Untilhafts are developed (or overburden removed) the exact delineationf ~.articular areas is uncertain. In addition, the tonnage and qualityf fmal output may not be known until the ore is extracted and pro-

ce ed. Second, the future economic conditions (in particular, pricesand costs) a~e unknown and cannot be perfectly predicted. Third,there are socIal and political uncertainties which may be beyond thecontrol of the operator. Governments can change tax and environmental policies at some future date, thereby affecting the profitability of the operation. 13

These risks are compounded by the time lag between explorationand .extracti~n, and by the costs of obtaining and processing informa~lOn. An m:estment decision made today will not generate salesuntIl three to fIve years hence. This means that funds must be committed for a substantial period of time before any profits are forthcom~ng. Further~ore, if an attempt were made to account for everypossIble eventualIty, the firm would spend too much money and timeto warrant an investment. Therefore, trade-offs must be madebetween accuracy of prediction and the risks assumed by the operators.

The mining process follows a logical sequence from explorationto exploitation and thus it is natural to segment the decisions according to each phase. This segmentation allows each decision to be considered separately; for example, should there be more exploration'how much development is warranted; and how much ore should b;

Mining Decisions 25

Effect of Risk: An Example

tions to long-run decisions take time and incur adjustment costs. Forinstance, if prices are higher than expected, a larger capacity andmore development may be needed to exploit this trend. But aninstantaneous adjustment is not possible and there is always the riskthat, by the time any change has been effected, the interim evolutionof events will have rendered it unprofitable.

For an illustration of how uncertainty can affect the decisions madein mining operations, consider the hypothetical tin deposit describedin table 2-1. The price of tin for 1960-1972 is also reported in thetable. If the operator knows all geological and economic factors withcertainty, the only problem is to choose an investment which willyield the greatest present value to the firm. Such an investment andthe corresponding optimal extraction profile are reported in table2-2. The calculations are based on an investment cost of $200 million, extraction cost of $10 per ton of ore, a capacity of 2 milliontons of ore per year, and a lO-percent discount rate.

Two properties of this plan should be noted. First, the orderingof the grade selection profile corresponds to the ranking of discounted prices (see column 3 of table 2-1). The best two grades ofore are extracted in 1965 when the price discounted at 10 percent isthe highest. The reason for this behavior is that more metal per ton isobtained from high-grade ore than from low-grade ore and thus current revenues are always maximized by extracting the best ores.However, the best grades of ore are in limited supply and so shouldbe extracted when their contribution to profitability is the greatest;that is, in the periods with the highest discounted prices. 17

Second, the mine closes in 1971 even though there are 16 milliontons of reserves left in the deposit, because the remaining reservescannot be profitably extracted; that is, they are below the cutoffgrade. For instance, if the 25-percent ore were extracted in 1972, a$2.25 million loss would result. Therefore, even in the absence ofuncertainty, it may be optimal from the operator's perspective toleave some ore behind. 18

When uncertainty is incorporated into the decision structure theplanned operation may change substantially. For simplicity, it will beassumed that the characteristics of the reserves are known, so that

27

uncertainty arises only because of lack of information about futureprices and costs. One procedure commonly used to project prices andcosts is extrapolation along a linear trend. 19 Suppose that an economic analysis of historical data reveals that pri~~s and costs r~se at a5-percent annual rate. This means that the deCISion maker will take$101.40 per ton and $10 per ton of ore as base-period prices andincrease each by 5 percent a year through the planning period.

Mining Decisions

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

Annual Price of Tin

Price Ranking of

Year Price (qflb) Discounted @ /0% Discounted Prices

1960 101.40 92.18 4

1961 113.27 93.61 3

1962 114.61 86.11 5

1963 116.64 79.67 7

1964 157.72 97.93 2

.1965 178.17 100.57 I

1966 164.02 84.17 6

1967 153.40 71.56 8

1968 148.11 62.81 10

1969 164.43 63.39 9

1970 174.13 61.03 II

1971 174.36 55.56 12

1972 177.47 51.41 13

Hypothetical Tin Deposit

Grade Tons Grade Tons

(%) (millions) (%) (millions)

2.80 I 0.70 2

2.60 I 0.65 2

2.40 I 0.60 2

2.20 I 0.50 2

2.00 I 0.40 4

1.60 I 0.30 4

1.20 I 0.25 8

0.80 I 0.20 8

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


Table 2-2Optimal Extraction Profile for Tin Deposit

28 Taxation of Mineral ResourcesMining Decisions

Table 2-3Extraction Profile Using Average-Grade Rule

29

Undiscounted payback period: 5.35 years. Present value using Hoskold meth~d: 36.15(calculated using average annual earn,ings, an 8-percent safe rate, and a 15-percent risk rate).

A verage Grade UndiscountedYear Extracted Profit

1959 -200.00

1960 1.28 33.50

1961 1.28 35.17

1962 1.28 36.93

1963 1.28 38.77

1964 1.28 40.71

1965 1.28 42.75

1966 1.28 44.89

1967 1.28 47.13

A verage Grade Undiscounted DiscountedYear Extracted (%) Profit (million $) Profit (million $)1959

-200.00 -200.001960 1.00 20.56 18.691961 1.80 61.55 50.871962 0.70 12.09 9.081963 0.60 7.99 5.461964 2.30 125.10 77.681965 2.70 172.42 97.331966 0.65 22.65 11.621967 0.50 10.68 4.981968 0.40 3.70 1.571969 0.40 6.31 2.431970 0.30 0.90 0.311971 0.30 0.92 0.29

Total244.87 80.31

Totals 119.85

DiscountedProfit

200.00

29.13

26.59

24.28

22.17

20.24

18.48

16.87

15.41

- 26.83

ource: Conrad (I978b)Marginal cost: $lOlton.

apacity: 2 million tons/year.Discount rate: 10010.Investment cost: $200 million.

Another method used to account for uncertainty is to increasethe discount rate. 20 In the present example a IS-percent discount ratewill be used, representing a 50-percent premium over the rate in theabsence of uncertainty. Finally, operators often assume that theaverage grade of ore will be extracted in each year. Since prices arenot known, an optimal grade-selection profile cannot be determined.The average-grade rule is used to simplify the calculations and tolower the range of possible extraction profiles, in order to keep downcomputational costs. When a detailed plan is made, the firm mayalter this assumption.

The net effect of these three adjustments is to lower the presentvalue of the investment. This is clear from an examination of table2-3, where the present value is negative. Note also that the plannedmine life has been reduced to eight years. This is a consequence ofthe method used to project and discount prices and costs. In effect,the cutoff grade is the one which would be calculated using the base-

year price and cost estimates, thereby forcing more ore into the submarginal category.

The higher discount rate further reduces the present. value offuture earnings from the planned extraction. Although undisc.ountedannual profits consistently rise (because of the m~thod of. pnce andcost extrapolation), their present value constantly f~lls. Fmally, theaverage-grade extraction rule further reduces the .estlIDate ~f presentvalue because it does not allow the matching of hIgher quahty of orewith higher discounted price. (In the present example, the best oreshould be extracted in 1965.)

The fact that this scale of operation produces a loss does notnecessarily mean that the mine will not open. There may be anotherplant size which can generate a positive. present .value. Such a pla?tsize and corresponding optimal extractIOn profile. are presented mtable 2-4. Note that a lower capacity generates a hIgher cost per ~on

of ore extracted. This means that less ore is planned for .extr.actIOnbut its average grade is higher (that is, the cutoff grade ~s hIgher).Note also that the planned life of the mine is longer than WIth a .largeinvestment, because capacity is smaller relative to econo~llcaIlY

recoverable reserves. The mine manager may furtht:r restnct thedecision by arbitrarily imposing a fixed planning horizon. 21

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

These examples highlight several basic points about the effects ofuncertainty on the operations of the mine. First, investment andextraction are not all-or-nothing decisions. The optimality of plantsize is relative to given economic and geological conditions. In general, uncertainty reduces the amount the firm will be willing to investat the beginning of the operation. This results in higher extractioncosts, lower total recovery and, in most cases, a shorter planned life.

Second, the acquisition of information over time may suggest asubsequent reevaluation of the plan. The examples cited are limitedto what the firm initially plans to extract. Even with a given investment it is possible that the actual behavior of the firm will be significantly different once new information is available. If prices rise (fall)relative to costs, more (less) ore may be recovered and the life of themine may be longer (shorter) than anticipated. However, the firmmust bear the costs of its past decisions in making these adjustments.This by no means implies that the operator's behavior is not systematic. Rather, uncertainty complicates the interpretation of economicbehavior.

Table 2-4Optimal Extraction Profile with Lower Capacity

31Mining Decisions

Summary

The preceding description of the mining-decision process wasintended to highlight the economic artd geological variables whichinfluence the behavior of a mine operator. An understanding of thisdecision structure is important in determining the effects of publicpolicy, particularly taxation, on the overall development of the mining sector in a particular state. At different stages of the mining cyclethe firm is operating on different cost curves and using differentassumptions to make decisions. Therefore, a tax imposed on a minethat is fully developed may have different effects than the same taxon a mine which has yet to be completed. Also a tax may have noeffect on the extraction profile once the investment is made, yetmight change the future development of the mine.

A second important aspect of this decision structure is the jointinfluence of geology and economics. Each mine is unique and, evenif economic conditions are the same for all, decisions will typicallyvary across mines. Accordingly, a public-policy initiative, such as atax, may produce different responses. Geological factors cannot beoverlooked.

Finally, it should be emphasized that the decision structure usedin mining is not peculiar to this industry. All economic agents mustconfront uncertainty and limited computational capacity, and this isreflected in planning structures. 22 Individuals plan for retirement andplan next month's budget. The decisions are clearly interrelated butthey are not made simultaneously. There are also analogs to theexploration and the long lead times necessary to obtain a positivereturn that characterize mining. For instance, the drug industryspends large sums on research (exploration) for new drugs, much ofwhich is spent on abandoned projects (dry holes). This research isconducted with the knowledge that a competitor may make the discovery first and control the market (if a cure is not found in theinterim which makes the drug obsolete). Finally, the time from initialdiscovery to positive cash flow is on average quite similar to leadtimes in mining. So while risks exist at all levels of the mining problem, they must be taken in context and evaluated relative to risksinherent in other economic activity before appropriate policy can beformulated.

-25.00

3.96

3.62

3.30

3.02

2.75

2.51

2.30

2.10

I.91

1.75

2.22

DiscountedProfit

-25.00

4.56

4.78

5.02

5.28

5.54

5.82

6.11

6.41

6.73

7.07

32.32

UndiscountedProfit


2.4

2.4

2.4

2.4

2.4

2.4

2.4

2.4

2.4

2.4

A verage GradeExtracted (%)

30

Year

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

Totals

32 Taxation of Mineral Resources Mining Decisions 33

Notes

1. This section is only an introduction to the complexities of themining process. For a more complete description see McKinstry(1948), Truscott (1962), Pfluder (1968), Just (1976), and Thomas(1973).

2. See Thomas (1973) and Allais (1957) for details.3. Byrne and Sparvero (1969) and Maximov et al. (1973)

describe such processes.4. See Preston (1960) and Patterson (1959) for a complete

description.5. The determination of where to drill may be based on mathe

matical methods, such as those described by Agterberg and Kelly(1971). For a description of diamond drilling see Koch and Link(1971).

6. Thomas (1973).7. See Patterson (1959) for a description of this.8. Hazen (1967), Koch (1971), and Link et al. (1971) describe

such factors.9. See Cooper, Davidson, and Reim (1973) for a discussion of

the trade-offs between accuracy and cost.10. Details of this process are found in Lewis and Bhappu

(1975), Beasley, Tatum, and Laurence (1974), Bennett et al. (1970),Gentry (1971), Gentry and O'Neill (1974), and Halls, Bellum, andLewis (1969). The industry traditionally employed the Hoskoldformula, Hoskold (1877), or a variant of it at this level.

11. Ibid.12. For an analysis of the financial considerations see Lindley et

al. (1976), Frohling and McGeorge (1975), and Frohling (1970).13. Brown (1970) describes the nature of such risks.14. The economics underlying this model are developed in Con

rad (1978a) and Conrad and Hool (1979a).15. ee Roff and Franklin (1964) and MacKenzie et al. (1974)

f r alt rnative descriptions.16. c Harris (1970) and Bennett et al. (1970) for a detailed

d s 'ripl i n of the use of this type of data.17. . onrad and Hool (19790) for a proof. For a mining

en in r's p r pective on the grade-selection problem, see Walduck(1976) lind Thomas (1976).

18. Cutoff grades are generally more complicated, but thismodel is a standard rule of thumb; see Lane (1964).

19. See Conrad (1978b) and references cited therein.20. See Thomas (1973) for a discussion.21. U. Peterson has noted this to the authors.22. See Cigno and Hool (1980) for a discussion of this.

Extraction

The following notation will be used to facilitate the analysis. In theabsence of taxes, discounted profit in any period is given by

Effects of MineralTaxation3

35

III = discounted profit in period t

PI = price of output in period t

XI = ore extracted in period t

C/ (XI) = total cost of extraction and processing in period t (afunction of ore and not of output)

Tn this chapter we investigate the effects of the various types of taxescommonly employed in the United States.1 The analysis begins with aconsideration of the effects of each individual tax on the firm'sbehavior. Numerical examples are then developed to demonstratehow the impact of a given tax may differ across mines. Finally, thetaxes are considered in combination to exhibit the possibility of reinforcing or offsetting effects. This integration is essential in view ofthe fact that most states do impose a variety of taxes on the miningindustry.

As described in the previous chapter, the overall planning problem for a mining operation is segmented in a hierarchical fashion.However, the objective of each segment is the same: to maximize thepresent value of extracting and processing ore. Since the majorconcern of tax policy has been the induced extraction distortions, it isappropriate to begin by analyzing the extraction decision.

where

36 Taxation of Mineral Resources Effects of Mineral Taxation 37

(l + r)'

at = average gr~de of ore extracted in period t, measured relatIve to the standard quality of metaloutput (concentrate)

r = discount rate

Total output sold is defined as at X;. This formulation allows forthe effect of grade variation on total production. Note also that totalcost is a fun;tion of the total tonnage of ore processed, independentof the grade. The cutoff grade is calculated as

* Mela =--Pt

where a * = cutoff grade

MCI = marginal cost of extraction

Ores whose average quality is below the cutoff grade will not beextracted since this would result in a reduction in profit; that is,

ifa<a*

We now consider in turn the effects of the various mining taxes.

Severance Taxes

Seve~ance taxes are generally of three types: a fixed payment, innommal terms, per ton of final output; a fixed payment, in nominalterms, per ton of ore extracted; and a proportion of the sales price ortotal revenue. Twenty-nine states currently employ some form ofseverance tax..As noted in chapter 1, this popularity has resultedfro~ the relatIve ease of administration and collection,3 and thebehef t.hat such taxes can be used to collect rents that accrue fromextractmg a nonrenewable resource.4

. After-tax discounted profit for a firm which pays a severance taxImposed per ton of output is

~ (PI - T) [XIXI - C I (Xl)III

(l + r) I

where T = severance tax in dollars per ton of output. If a fixedpayment per ton of ore extracted (that is, at the mouth of the mine) isimposed, after-tax discounted profit is

PI a t XI - C I (XI) - 'YXIIl = ----'-----'------'---=---..:....--=----=-------'-

I (l + rrwhere 'Y = severance tax in dollars per ton of ore. Finally, an advalorem tax on total revenue results in discounted after-tax profit

where (3 « 1) = proportion of revenue collected as tax.The fixed fee per ton of output is seen to decrease the expected

price in each period by the same dollar amount, T. Since the tax isfixed in nominal terms, the present value of the tax decreasesthrough time; that is,

T T T---> >----(1 + r)I+1 (l + rr+ 2' ... ,

This means that the operator has an incentive to reallocate extractionfrom the present to the future. (Some states, such as North Dakota,have attempted to offset this effect by allowing the rate of tax toincrease with inflation. This type of tax is discussed below.) Forinstance, a firm which produces the same tonnage of output over thelife of the mine before and after the imposition of the tax will have topay the same amount of tax in nominal terms regardless of when it isextracted. However, the longer the firm can defer extraction, thelower the tax payments will be in real (present value) terms, andconsequently the higher the after-tax discounted profit. S

This type of tax may also affect the ordering of grade selection ifdiscounted prices are expected to rise. Recall that chapter 2 showedthat the firm will extract the best grade of ore when the expecteddiscounted price is greatest. A severance tax on output effectivelyreduces the price received by the firm by the same nominal amount ineach period. Therefore, if the price is expected to rise, such a tax mayalter the period with the highest effective (net-of-tax) discountedprice; that is, it may well be the case that

This will occur if (and only if)

(1 + r)Pt - Pt+17>----'------'---------..:....:-...:...

r

A fixed fee per ton of ore extracted will similarly induce a reallocation of ore extraction from the present to the future, but will haveno potential effect on the grade-selection profile. Such a tax increases the cost of extraction and processing by a constant amountinstead of lowering the price received per ton; that is, it is a tax o~both valuable content and waste. If the raw ore were not processed,the effects of a $10 per ton tax on output would be identical to a $10per ton tax imposed at the mouth of the mine. However, mostminerals, even coal, when extracted are used as inputs into a processing plant at or near the mine site where the valuable material is separated from waste products. Therefore, the lower the proportion ofraw ore sold after processing, the greater the impact of a tax imposedat the mouth of the mine. Suppose, for example, that it takes twotons of raw ore to produce one ton of concentrate. Suppose also thata state is considering a tax of $10 per ton to be imposed either at themouth of the mine or on output of concentrate. If the tax is imposedon concentrate, then for every ton of raw ore extracted the firm mustpay $5. If the tax is imposed on ore, the firm must pay $10.

The effect of an ad valorem output tax is different again fromthose of the other two output taxes. This tax reduces the discountedprice received in each period by the same proportion. It will, there~

fore, have no effect on the grade-selection decision since the rankingof discounted prices is unaffected. However, this tax may alter theextraction profile. A proportional tax on revenue will collect a highertax per unit the higher the price. This means that the firm can lower

39

for the ad valorem output tax

for the fixed-fee tax on ore

for the fixed-fee tax on concentrate

MCt + 'Ya* = --'---

PI

MC ta* = ---'--(1 - (3)~

a* = MCt

P t - T

Effects of Mineral Taxation

Variable per unit severance taxes have been introduced in somestates, examples being North Dakota and Minnesota. The usualjustification for such taxes is that, because of inflation, revenuesfrom fixed-rate output taxes do not keep up with the real costs ofgovernment services. The tax is therefore linked to some price indexin order to compensate for such losses. There are two problems with

An increase in the cutoff grade means that marginal ores will now beleft in the ground. The total tonnage of economically recoverablereserves is therefore reduced. This phenomenon is known as "taxinduced high-grading" and has been noted extensively in the naturalresources literature.6

Since each of these taxes is collected regardless of a mine's profit-ability, the downside risk associated with mining is increased. Giventhe risk-averse behavior of most mining operations, an increase inrisk will generally shorten the life of the mine because of lowerinvestments and high-grading.

A Note on Variable Severance Taxes

its tax payments on the same tonnage of output by extracting less orein periods of higher discounted prices and more ore in periods oflower prices. If discounted prices are expected to fall through time,the firm would reallocate extraction from the present to the future asin the per unit case. If discounted prices are expected to be the same,no distortion occurs, while if discounted prices are expected to rise,the firm will extract more ore early and less in later periods.

Each of these three output taxes creates the further distortion ofincreasing the cutoff grade; that is,


~ - 7 > Pt+l- 7

(1 + r)1 (1 + r)t+1

P t P t + 1--->----(1 + r)t (1 + rr+ 1

38

but, with the tax,

(1 + rr

Property Taxes

41Effects of Mineral Taxation

ever, such a value is impossible to estimate, and state and localpractices vary. We therefore leave this as a general function.)

Note that the assessed value is directly negatively related toprevious extraction. This means that once the ore is extracted andsold the tax base, and therefore tax payments, are permanentlyreduced. This gives the firm an incentive to increase extraction inearly periods and decrease extraction in later periods. In effect, thetax serves as a subsidy to rapid extraction because each ton of oreextracted increases after-tax present value by the tax rate times thepresent value of the taxes that would have to be paid if the extractionwere delayed.

This type of tax may also increase mine recovery by lowering thecutoff grade. If a tax must be paid on ores remaining in the ground,it may be cheaper for the firm to extract and process low-grade orethan to pay the tax indefinitely.s In the long run, when capacity isvariable, lower investment as a result of taxation may lead to anincrease in the cutoff grade.

The effects of the tax are complicated by the inability to accurately assess the property. An ideal property-tax base would be thenet present value of the deposit. But such a base is impossible todetermine since it depends on future prices and costs as well as thegeological structure, none of which is known with certainty. To dealwith this problem, states have resorted to arbitrary and sometimescomplicated methods to calculate the tax. For instance, the Wyoming tax base is 100 percent of gross proceeds at the mine. This tax is,in effect, an ad valorem output tax and has no relationship to thetraditional concept of property taxation. Utah bases assessments on30 percent of capitalized net income for the previous five years. Thistax has the opposite effect to the property tax, because the higher thehistorical profits, the larger the tax. In addition to the obviousproblem of using historical values to project future profitability,there is no clear relationship (and, if anything, a negative one)between historical extraction and the current mineral content of thedeposit. This problem is particularly acute in the later years ofoperation when marginal ores are being extracted. A tax based onhistorical profits will always overestimate the value of the mine inthis case. Finally, some states have replaced property taxes withseverance and net-proceeds taxes because of the difficulty of fairassessment.

40 Taxation of Mineral Resources

this p!ocedure. First, there is the choice of the price index with which~o adjust the tax rate. If the index is a function of the price, the taxI~creases regardless of costs. Consequently, firms may have to payhIghe: taxes e:en though profits are falling. If the index is not relatedto pnce (as m North Dakota and New Mexico), the problem isfurther compounded because a change in the index is only remotelyr~lated. to the cost an~ price structure of anyone mine. Such indexatIOn ~Ill therefore remforce the distortionary effects noted above'that IS, cu~off grades will rise, extraction will be reallocated andrecovery wIll be reduced. '

Ad valorem pr~p.erty taxation is the oldest form of taxation used bytatc and localItIes for collecting revenue 7 The tax b' 11dr' ase IS usua yC In d a th.e market value of reserves. This market value dependsn the quantl.ty of reserves remaining in the deposit and the averagerade at the tIme ?f assessment. The tax paid is a proportion of thIs

value. After-tax dIscounted profit is then

where u = millage rate

at X t = output equivalent of ore remaining in thedeposit in period t

liR = output equivalent of total ore reserves beforeextraction began

~t-I

~j=o aj~ = cumulative output of extraction to date

FO = assessment function

(Theoretically, F(·) is the present value of remaining reserves. How-

Proportional Profits Taxes and DepletionAllowances

where k = profits tax rate

d = cost depletion allowance (in dollars per ton of output)

Il = P t CitXt - Ct(Xt) - k{PICi I XI - Ct(X) - dCitXt }

I (1 + rr

43

- Ct(X)]kh(1 - k)[(l + 1 _ k'Pt Cit

=---_-----::=-----:.:....-:------(l + r) t


where h = deduction allowance as a proportion (0 :;; h :;; 1) ofrevenue.

When profits are positive, this allowance increases the after-~ax

price of output by a fraction kh/(l - k) and is, in effect, a negatIvead valorem output tax; that is, a subsidy for extraction. (The totaldeduction is usually limited to some proportion of profits. If thatlimit is reached consistently, no distortion will occur.) Therefore, theeffects of the allowance are the opposite of those discussed withrespect to ad valorem output taxes. In addition. to the~e .effects, itshould be noted that in most cases this allowance IS not lImIted to thetotal costs of the mine. This means that it is entirely possible for thesum of the deductions taken through time to exceed the costs ofacquisition and development. Most of the debate over percentagedepletion has been in the context of oil and gas. However, the sameanalysis applies for nonfuels.10

Progressive Profits Taxes

Renewed interest in progressive profits taxes has occurred for at leastthree reasons. First, governments have sought a means to increasetheir share of profits in good years (perceived windfalls) withoutimposing ex~essive taxation in lean years. Second, governments havebeen concerned about equity issues, particularly with respect to smallmarginal operations. In effect, the ability-to-pay principle has been

from the future to the present, cutoff grades will be lower andrecovery higher than would be the case without the allowance.

Percentage depletion allows a fixed proportion of currentrevenue to be deducted to compensate for exhaustion. After-tax discounted profit in this case is

Pt Cit X t - Ct(X1

) -k[Pt CitXt ~ Ct(X) - hPt CitXt]

Il t = (1 + rr


kd(1 - k)([~ +1----=7() Cit X t - c: (X; )]

=(l + r)t

It has been well established that a pure proportional profits tax doesnot affect the behavior of the mine once an investment is made. Inaddition, it does not affect the downside risks because taxes are paidonly when profits are positive. However, the profits taxes employedby the federal government and the various states are not pure profitstaxes, because of the various deductions which are available to thecorporate sector in general and the mining sector in particular.

The most common deduction available to the mining industry isthe depletion allowance. There are two types of allowance currentlyused by various states: cost and percentage depletion.9 Cost depletion is a fixed nominal allowance per ton of ore extracted. Theamount of the deduction is based on estimates of the costs (orpresent value) of the mineral property and estimates of the recoverable tonnage of ore. In effect, the allowance attempts to allow adeduction for the reduction in reserves on a unit of production basis.After-tax discounted profit with cost depletion is

As shown, the effect of the depletion allowance is to raise the net-oftax price received per ton by kd/(l - k), when profits are positive. Ittherefore acts as a negative severance tax (an implicit subsidy) perton of extraction and its effects are accordingly the exact opposite ofthose of the per unit output taxes. (It should be noted that any formof expensing that is deducted on a unit-of-production basis will havethis effect. For example, for federal taxes development expendituresmay be deducted in this manner.) Extraction tends to be reallocated

Some Numerical D1ustrations

To illustrate how geological and economic factors combine to determine the tax response of a particular mine, two hypothetical mineral

45

Minimum of average cost curve: $90@ 450 tons oreMarginal cost: .2X,

Minimum of average cost curve:$51.38.@·256.90 tons ore

Marginal cost: .2X,


Grade tonnage4070 450 tons ore (18 tons output)2070 550 tons ore (II tons output)1070 1,000 tons ore (10 tons output)

Total cost = $20,250 + .IX,2

B. Alternative price profiles to be used in calculations1. P, = $5,OOO!ton output every year2. P z = P 3. = $5,250!ton output

P, = $5,OOO/ton output all other years

Mine II

A. Description of mines to be used in calculationsMine I

Grade: 2070Tonnage: 1,000 tons ore (20 tons output)

Total cost = $6,600 + .IX, Z

Table 3-1Hypothetical Mines and Price Profiles

deposits are considered. 14 The essential characteristics of eachdeposit are detailed in table 3-1. Mine I is composed of a homogeneous ore body, while mine II has three distinct grades with tonnages varying by grade. The marginal costs per ton of ore extractedare the same for each mine, but the fixed costs (and thus the averagecosts) of extraction and processing are different. Such differencesmay be due to different techniques or different geological structures.Two alternative price profiles are also noted in table 3-1. Calculations will be made for the two different price profiles to show howalternative economic conditions can affect the outcome qualitativelyas well as quantitatively.

The optimal extraction profiles for mines I and II under bothprice profiles (and in the absence of any taxes) .are reported i~ tabl~s3-2 and 3-3, respectively. As shown, the optimal hfe of mme I IS

three years with either profile. Extraction steadily declines whenprices are coustant in nominal terms, while extraction is highest. inthe second year when nominal prices increase in the second and thudyears. The optimal life of mine II is only two years with either pricesequence and none of the 1 percent ore is ever extracted or processe.d(that is, it is below the cutoff grade). The best grade of ore ~s

extracted and exhausted in the first year!S The 2-percent ore IS

extracted in both years and exhausted. Note that, when the nominalprice is increased, extraction of the 2-percent ore is reduced in the


PI (XI XI - CI(XI) - T(P, (XIX, - C,(X»

(1 + ry

used to argue that large, more efficient firms should be made to beara larger proportion of the tax burden: 1 Third, there has been asearch for alternative taxes which do not have the distortionaryeffects or large administrative costs of other types of tax which havebeen in use (particularly ad valorem property taxes). The recent Wisconsin net-proceeds tax is a case in point.

After-tax discounted profit in any period with a progressiveprofits tax is defined as

where T(·) = profits taxes paid in period t, a function of the level ofprofits, with r > 0, T8 > O. This form of the profits-tax functionshows that taxes paid by the firm increase with profits at an increasing rate. In effect, the firm chooses its own marginal tax rate in eachperiod.

The effects of this type of tax depend on the firm's expectationsregarding the time paths of discounted prices and costs. In general,the tax will induce the firm to shift output (and therefore profits)from periods with higher tax rates to those with lower rates. Thereare several ways of accomplishing such a transfer. Extraction can belowered in periods with high expected profits and increased in otherperiods; the average grade of ore extracted can be increased ordecreased; or the firm can change both extraction and grade toreduce taxable profits in some periods. 12

Regardless of the method employed, it is important to emphasizethe distortionary incentives that are present in such a system. It isunlike a proportional profits tax in that the firm, by choosing thequantity-quality mix, can change its marginal tax rate in each periodand thus the total taxes that it will pay. The exact magnitude of thedistortion will vary according to the specific design of the tax, butthis incentive will always exist! 3

~ (j)

Tab

le3

-2

Opt

imal

Ext

ract

ion

Pro

file

sfo

rM

ine

Iun

der

Var

ious

Pri

ceP

rofi

les

Opt

imal

extr

acti

onpr

ofil

ew

hen

curr

entp

rice

is$5

,000

Iton

each

year

Out

put(

met

al)

Und

isco

unte

dP

rofi

tD

isco

unte

dP

rofi

t

Out

put(

met

al)

Und

isco

unte

dP

rofi

tD

isco

unte

dP

rofi

t

~ X s:u - o :::J o - ::D (1) en o c d (1) en3: :::J

(1) W

15,6

39.0

9

16,0

19.6

8

13,9

83.4

6

45,6

42.2

3

15,6

39.0

9

17,6

21.6

5

16,9

19.9

9

50,1

80.9

3

6.98

16,1

18.0

96.

6815

,639

.09

6.34

15,0

59.1

5

20.0

046

,816

.93

6.68

6.84

6.48

20.0

0

16,1

18.0

9

14,2

17.3

5

12,4

45.5

8

42,7

81.0

2

Opt

imal

extr

acti

onpr

ofil

ew

hen

curr

entp

rice

sar

e:PI

=5,

000,

P2

=P

3=

$5,2

50

Year

Ext

ract

ion

(ore

)

I34

8.94

233

3.84

331

7.22

Tot

als

1,00

0.00

---

Year

Ext

ract

ion

(ore

)

I33

3.84

234

2.22

332

3.94

Tot

als

1,00

0.00

Tab

le3

-3O

ptim

alE

xtra

ctio

nP

rofi

les

for

Min

eII

unde

rV

ario

usP

rice

Pro

file

s

Opt

imal

extr

acti

onpr

ofil

ew

hen

curr

entp

rice

is$5

,000

Iton

inea

chpe

riod

Year

Ext

ract

ion

(ore

)A

vera

geG

rade

Out

put(

met

al)

Und

isco

unte

dP

rofi

tD

isco

unte

dP

rofi

t

150

0.00

.038

19.0

049

,750

.00

49,7

50.0

0

250

0.00

.020

10.0

04,

750.

004,

318.

18

Tot

als

1,00

0.00

29.0

054

,500

.00

54,0

68.1

8

in - -(1) (') -en o - 3: :::J

(1) W -I s:u X s:u - o :::J

Opt

imal

extr

acti

onpr

ofil

ew

hen

curr

entp

rice

sar

e:P

I=

$5,0

00,

P2

=P

3=

$5,2

50

Year

Ext

ract

ion

(ore

)A

vera

geG

rade

Out

put(

met

al)

Un

disc

ount

edP

rofi

tD

isco

unte

dP

rofi

t

148

8.10

.038

418

.762

49,7

35.8

449

,735

.84

251

1.90

.020

10.2

387,

295.

346,

632.

13

Tot

als

1,00

0.00

29.0

0057

,031

.18

56,3

67.9

7

~ -...J

48 tl f Min ral Resources Effects of Mineral Taxation 49x n

first year and increased in the second. This increases the average~ ~ ~grade of ore extracted in the first year but decreases total output in

E-..;; '" E-..;;",8 8 ~ N s:: E-..;; '" 8 a- - :28 00 r-- V) 0

~'" ~'" o 0~'" - 00 IC r-: '" ;:sIC 0

'" ;:s g 0\ 0\that year.

'" ;:s v\ 00 .0 \Ci V) - s:: .n .n 0 0 ;:;:: _ s::00- s:: s:: '" o V) V) s:: '" o - -s:: '" r-1000\1l('') a-

~ 0 ;:s .. N - r-- -;:s .. t"('r'IO'\\O r--. ;:s .. <"l N 00 .....The taxes considered are three forms of output taxes: a 10-0'" ~C""'\N 0\ ... 0'" MMM 0\0'" N N ~_'" 00 <.>Cl:: .!:j Cl::

<.>Cl::.!:/ IIpercent ad valorem tax on output; a tax of $500 per ton of concen- .!:/

~ ~

~~trate produced; and a tax of $10 per ton of ore extracted. These

s::numbers are used for illustration only. However, the distortions ·9t:;will occur regardless of the size of the tax. The effects of each tax i§ ~~ i§~ <"l r-- 00 00on the extraction profile of mine I are reported in table 3-4. When Q:; -("f'10\r- 0 Q:; o a- r-- IC Q:; V) a- _

~Il(")r-~\O "<l: 00 "'" <"l ~ ~0\ § .,;to 0\ ~

~a-~ ~ ~ ~ g V)

~00 s::

00 N -nominal prices are $5,000 in each year the taxes have identical 0 N N r-- N '" - "'" V)~-...~t"l ~ s:: N r-- N N s:: s::~.. ~ :i ...0

s::N N-" ...0

~;:s;:s

~O\r-\O <"l ;:s<"l

effects, as shown in part A of the table. There are two reasons for8 <"l

~0 - - - <"l 8<.>

8 .~.~ .~this. One is that, when prices are $5,000 per ton, a lO-percent ad~ Ii: ~ ~ ~

~valorem tax collects $500 per ton from sales. Therefore, when -9 II

'" ~price do not change through time a per unit tax is equivalent to an ..

i§~ i§ :s i§'"

ad val rem lax.~ Q:; B- Q:;Q:; N ;:s <"l r-- r-- r--

Th econd reason for equivalence in this case is the uniform- ;;=; ~ ~ ~ "'" 0~ ~ ~ ~ ~

0 ~V) "'" "'" "<l:~ ~

..... ... ~ gi ~ ;:!i00 ~ 0\ 'Ci ... ~ v\ N 0 a- a-~ 00~ s:: 0

rad di lribution. Since the ore is 2 percent throughout the deposit, r- V) 0\ 00 ~ s::~ 8 ~ '" ;:s _ .. .-1.. ~ N

s::IC 0 N <"l "'". ;:s 00 0

~;:s c 0 ti :f ~ 0\ 0

~ :! ~if lak s fifty tons of ore to produce one ton of concentrate. Thus a ~ 8 ~:i~oO 00 ...., <.> ...., <.>

~ <"l "l .!:/ <"l "l .~.~

::i ~ ::i ~$10 tax per ton of ore is equivalent to a $500 tax per ton of output in <.>~

:§ :§~ :§ II IIthis a e. This remains true when prices vary through time. Thus part - . ~

.;s:: Q., Q., ...of table 3-4 shows again that the $500 per ton output tax and the .. .ll:!II II 0'" .......~ .;: .... .... e$10 per ton extraction tax are equivalent. However, a comparison = ;:s Q., Q.,

::::l- S::::l-~

~ ::::l-~ ~

~~ :2~

~ s::of the two per unit taxes with the ad valorem tax (part B of table 3-4) s::'" '" '" 8 fA

.....~ '" .§. N r-- 8 .§. 00 "'"

00Q .§. V) N <"l 8 § G 00 V) § V) 00 ""! ~shows that the output and ad valorem taxes are no longer equivalent. V) 00 "'" -0 -0 -0 0 :s -0 -0 IC 0 e-'" ... :s V) V) -<i -<i 0 :s N "t:l~ ~ N ::i N ::i B-When prices increase the ad valorem tax collects more revenue per t: B- B- elO:: ;:s ;:s'"Q ~

;:sII C) II C)ton than either of the per unit taxes, and the response of the firm is ... ~

C)Q.,- -==- 8 Q.,

~correspondingly different, as shown.

= s:: ~:§ '" 0.S -s:: -s:: .......Finally, each tax induces the firm to reduce extraction in the$ e- $ $

..... S~ ..... .....early periods and increase it in the later periods. Note that the life of e '" '" '" ~ 8~ .5- .5 ~ .5

Ii: V)the mine is increased by one year in the constant-price case, while ~ Ii: Ii: ~ 8 ~ V) r-- 00 8 fAriIil ~ N a- N r-- 8 IC <"l ::: ... - 0 r-: ~

...'" <"l "<l: V) ... s:: IC "!

~s::

~~= ~ s:: g 0

~~ .9 0 00

~.9 0\ N 00

more ore is extracted in year three when prices vary. This conserva-Q .9 r-- 0:: <"l ~ N

~ t:; N "'" N oJ~r-- N .ll:! t:; <"l <"l <"l <"l <"l <"l'" t:; N N N N

'§ ~ ~ ~ :::ltion effect is the best-known property of such taxes. However, it is~ ~ ~ - <ll

~...

~ >~ ...

~ ~ ~only valid when grades do not vary. CIS ~

s:: <f-~ s:: § .9 :2The effects of the three output taxes are quite different again - .9"11 t:;= t:;

~Q"~ ~

~~

when the grade varies within the deposit. The results for mine II are - ..= ~ ~ ...0 '"reported in table 3-5. Part A of the table shows the optimal extrac-

<; <; <;l(j~ ....

.§ .§ .§~

tion profile with the 10 percent ad valorem tax and the $500 per ton I Q

~l"l '" ~ ~ '"E-<output tax in the constant-price case, while part B reports the profile ~t; '" '" <ll ~<ll ... <ll ...,Q ~ ...

'" 0 '" 0 0which results from imposing the $10 per ton tax under the same price CIS;:: '" 0 I:ci ~ cj ~ E-< Z~~ ~ ~ ....... N f'f') v E-< - N <"l E-< - N <"l

(]l o

Tab

le3

-5E

ffec

tso

fO

utpu

tTax

eson

Ext

ract

ion

Pro

file

sof

Min

en

A.

10%

outp

utta

x:an

d$5

001t

onou

tput

tax

Yea

rE

xtra

ctio

n(o

re)

Ave

rage

Gra

deO

utpu

t(m

etal

)U

ndis

coun

ted

Pro

fit

Dis

coun

ted

Pro

fit

Dis

coun

ted

Tax

I45

0.0

418

.00

40,5

0040

,500

9,00

0.00

245

0.0

29.

000

04,

090.

91-i Q.

>T

otal

s90

027

.00

40,5

0040

,500

13,0

90.9

1X Q.

> ...B.

$10l

ton

ore:

cons

tant

pric

es0 ::J

Year

Ext

ract

ion

(ore

)A

vera

geG

rade

Out

put(

met

al)

Un

disc

ount

edP

rofi

tD

isco

unte

dP

rofi

tD

isco

unte

dT

ax0 -

145

0.0

418

.00

45,0

00.0

045

,000

.00

4,50

0.00

~2

450

.02

9.00

00

4,09

0.91

::J 0 .....T

otal

s90

027

.00

45,0

00.0

045

,000

.00

8,59

0.91

~

C.

10%

ou

tpu

ttax

:P

I=

$5,0

00an

dP

2=

P3=

$5,2

50::I

JCD (J

)Y

ear

Ext

ract

ion

(ore

)A

vera

geG

rade

Out

put(

met

al)

Und

isco

unte

dP

rofi

tD

isco

unte

dP

rofi

tD

isco

unte

dT

ax0 C .....

I45

0.00

.04

18.0

040

,500

.00

40,5

00.0

09,

000.

00() CD

247

2.50

.02

9.45

2,07

5.62

1,88

6.93

4,51

0.23

(J)

Tot

als

922.

5027

.45

42,5

75.6

242

,386

.93

13,5

10.2

3

D.

$500

lton

outp

ut:P

I=

$5,O

OO

andP

2=

P3=

$5,2

50

Yea

rE

xtra

ctio

n(o

re)

Ave

rage

Gra

deO

utpu

t(m

etal

)U

ndis

coun

ted

Pro

fit

Dis

coun

ted

Pro

fit

Dis

coun

ted

Tax

m - -I

450.

00.0

418

.00

40,5

00.0

040

,500

.00

9,00

0.00

CD ()

247

5.00

.02

9.50

2,31

2.50

2,10

2.27

4,31

8.18

... Ul

Tot

als

925.

0027

.50

42,8

12.5

042

,602

.27

13,3

18.1

80 -

E.$1

0lto

nor

e:P

I=

$5,0

00a

nd

P2

=P

3=

$5,2

50~ ::J

Year

Ext

ract

ion

(ore

)A

vera

geG

rade

Out

put(

met

al)

Und

isco

unte

dP

rofi

tD

isco

unte

dP

rofi

tD

isco

unte

dT

axCD ..... Q.>

I45

0.00

.04

18.0

045

,000

.00

45,0

00,()

()50

0.00

--t2

475.

00.0

29.

502,

312.

502,

102.

274,

318.

18Q.

> X Q.>

Tot

als

925.

0027

.50

47,2

32.5

047

,102

.27

4,81

8.18

... 0 ::J (]l .....

.

assumption. Note that the extraction profiles are identical in parts Aand B. Note also that extraction is reduced in both periods. The bestgrade of ore is extracted and exhausted in the first year while only450 tons of 2-percent are are extracted in the second year. Thisoccurs because the net-of-tax price received per ton of 2-percent oreis exactly equal to the cost of extraction and processing at theminimum of the average cost curve; that is, 2 percent is now thecutoff grade. This is confirmed by the fact that after-tax profit isequal to zero in the second year when only the 2-percent ore is beingextracted. The mine operator will be indifferent between extracting450 tons and extracting nothing at all. Any other tonnage wouldproduce a loss. If the tax had been higher, none of the 2-percent orewould have been extracted.

Although the extraction profiles are identical under either tax,the tax revenues to the government are lower when there is a $10 perton tax on extraction. This is because of the grade variation. Notethat $9,000 in tax revenue is generated in the first year when the tax isimposed on output, while only $4,500 is taken when the tax isimposed on extraction. When are is 4 percent, only twenty-five tonsof ore are necessary to produce one ton of concentrate. Therefore,an equivalent output tax on 4-percent ore would be $250. However,the tax revenues are equivalent when the 2-percent are is extracted.Again it takes fifty tons of 2-percent are to produce one ton of concentrate, so that a $10 per ton tax on ore is equivalent to a $500 perton tax on output. This demonstrates that a per unit tax on extraction imposes a smaller burden on high-grade than on low-grade ores.The lower the grade, the smaller the valuable content and thereforethe larger the tax in terms of its value.

Parts C, D, and E of table 3-5 show how the effects of the taxesvary when nominal prices are not constant through time. As shown,the ad valorem tax has a greater effect on the extraction profile thando the two per unit taxes. Again, when prices change, the dollarvalue of the tax paid changes, altering the effect on extraction. Theextraction profiles for the two types of output taxes are identical (thedistortionary effects of the taxes are the same), but the tax revenuesdiffer for the reasons cited above.

These examples, while hypothetical, highlight the important factthat economic and geological factors in conjunction determine theconsequences of any tax or set of taxes. In actual situations, theeffects of a tax across mines could range from little or no effect to a

complete closing of an operation, depending on the geological structure unique to each deposit and the general economic conditions.

kd X(1 - k)[(Pt +~) a,X, - C,(X,)] - Tat I

TI, = (1 + ry


(1 - k)[(Pt + ~d_-kT)at X, - C,(X,)]

(1 + ry

The depletion allowance increases the net-of-tax price while the p~runit tax decreases the net-of-tax price. This means that, used mcombination the allowance and the output tax tend to offset oneanother. If kd = T, then they exactly offset each other and no distortionary effect occurs, since the profits tax is neutr~l in the s~ort r~m.If a per unit tax were used with percentage depletlOn, the dlstortlOneffects would again be offsetting.

If the severance tax is allowed as a deduction for profits-tax purposes, then for a complete offset the unit tax would have to be equalto the allowance. For example, if the profits-tax rate were 50 percentand cost depletion $10 per ton, a $5 per ton output tax which is notdeductible and a $10 per ton output tax which is deductible wouldeach result in no distortionary effect in the short run. The analogousoffsetting would result with percentage depletion and an ad valoremseverance tax with the rates suitably chosen.

A combination of taxes often employed is an output tax and an

Integration of Taxes

Several states and localities impose more than one tax on the miningindustry. These taxes are used for a variety of purposes, and each taxhas its own set of distortionary effects. It is thus of interest to determine how these taxes in combination affect the firm's behavior.Consider first the effects of a profits tax with cost depletion combined with a per unit output tax. If the output tax is not deduc~ib~efrom income for profits-tax purposes, discounted after-tax profIt many period is

Taxation of Minerai Resources52

A Note on Taxation and the Concentrating Decision

ad valorem property tax. When the output tax is ad valorem, aftertax discounted profit is

The previous analysis has implicitly assumed that the quality of finaloutput is exogenously determined.'16 In practice, the level of processing is part of the decision structure and can be affected by taxation. The concentration (or processing) stage of a mining operationinvolves the separation of valuable material from waste. In general, a


trade-off must be made between increasing the quality of concentrateproduced and the total recovery of metal from the raw ore. Efficientoperations can usually increase the quality of concentrate only bydecreasing the amount of metal recovered.

Along with the geological and geochemical pr~perties o~ !hedeposit, economic variables play an important role In deterffilm~g

the trade-off between quantity and quality of output. The pncereceived is a function of the quality, while costs change with intensityof processing.I' A per unit output tax reduces the quality of concentrate while increasing quantity, whereas an ad valorem output taxhas the opposite effect. Finally, neither pure profits taxes nor perunit extraction taxes distort the concentrating decision.

These results are important because one of the goals of naturalresource policy has been to ensure maximum rec~very from thedeposit. Maximum recovery means not only extractIng the. gr~atestpossible tonnage of ore from the ground. If valua~le matenal IS u~

necessarily discarded at the processing level, maxl~um r~co.very ISnot being achieved. Care must therefore be taken In deslgmng taxpolicy so that losses are minimized at both the extraction and concen-trating h~vels.

Effects of Taxation on Investment andRelated Issues

whereNPV = net present value

I = size of initial investment

T II g- T

~ I ,

NPV= -1+ 1.J I1=0 (l + r)

A firm considering an investment in a mining opera~ion tr:at~ a~yform of taxation as a cost of doing business in a particular JUnsdlCtion. The taxes paid reduce the present value of cash flow and thusmake the investment less attractive. This means that, in addition tothe possible effects of a tax (or combination of taxes) on the extrac-tion profile, the tax will tend to decrease investmen~. .

To understand this process, consider the follOWIng expreSSIOn forthe net present value of a mineral investment

Taxation t Minerai Resources

(1 + r)t

PI exlXI - C,(XI ) - uF(aR - 1;1-1 ex.X.) - {3Pl ex I X,J~O J J

54

II,

If prices are not expected to rise at a rate greater than the rate ofinterest (as is usually assumed), the output tax tends to reduce extraction in early periods, which will tend to offset the tendency of theproperty tax to increase early extraction. There is no simple formulafor a combination which will produce no distortionary effects,because the base of the property tax is constantly changing. Acomplete offset in each period would require changing rates. Notethat if a per unit output tax were employed in combination with aproperty tax, there would be an offsetting tendency regardless of theexpected rate of increase in prices.

Another combination of taxes used is a profits tax with a form ofdepletion allowance and the ad valorem property tax. In this case,both the depletion allowance and the property tax tend to increaseextraction in early periods. They complement each other and thusinduce faster exhaustion than either tax individually.

In summary, the effects on extraction of taxes used in combination can be offsetting or reinforcing, depending on the nature oftheir respective distortions. This does not imply, however, thata government can select a set of taxes with offsetting effects and raisean arbitrary amount of revenue. In order for there to be no distortion in the long run, after-tax profits to the firm must remain sufficiently large to justify future extraction. If a sufficiently high levelof taxation is imposed the firm may prefer to cease operationsentirely.

56 Taxation of Min ral Resources Effects of Mineral Taxation 57

rr~ = gross-of-tax cash flow in period t

T( = tax revenue collected in period t

Fr~m this si.mple formulation of the net present value it is clear that~n Increase In tax payments reduces the present value and makes theInvest~entless attractive. This is true of profits taxes as well as othertaxes dIscussed earlier. It is true that a pure profits tax will not affectthe extraction profile, but that is not the only issue when investmentsare b~ing determined. For example, there is little doubt that for thesame In.vestment the firm would prefer an output tax which collects$1,000 ill present value terms to a nondistortionary profits tax thatcollects $2,000 in present value terms.

. ~ny ta.x .,,:ill therefore tend to decrease the size of investment inrrnmng activIties. This reduction increases the unit cost of extraction,decreases the tonnage of economically recoverable reserves, andgenerally shorte~s t~e ex~ected life of the mine. The tendency to discourage extractlOn IS reInforced by uncertainty. Taxes reduce theexpected. profitability and thus reduce the investment for a givenlevel of nsk. Also the same level of taxation will have a greater deterrent effect the more risky the investment, other things equal. This~eans that deposits which have low returns but are relatively safeillvest~ents may be preferred to deposits which have very hIgh .potential returns but have correspondingly high risks.

Expensing Provisions

~ining firms. are able to take advantage of special provisions regardIng expl~ratI~n and development, in addition to depletion and~epreCIatlOn, In calculating profits taxes. In general, these deductions do not change the total taxes paid over the life of the mine.Rather, they change the timing of tax payments from early to lateryears, thereb'y d~~rea~ing the present value of the tax payments.~ome of the JUStI.fIcatlOns for these privileges are (1) mining is morensky than other Investments; (2) development is mine-specific withno s~lvage value; and (3) firms need to finance development withde~t ~n early y.ears and therefore need a sufficient cash flow to repaypnncipal and Interest.

There is no doubt that the benefits from exploration are uncer-

tain. However, from an economic perspective, exploration is aninvestment made by a firm to obtain a stream of future benefits. Likeall economic agents, mining firms choose a strategy that will offsetthese risks. Firms can reduce risks by (1) forming exploration companies that legally separate the risks from other sources of income;(2) pooling risks, by buying interests in property owned by anotherfirm and selling partial interests in their own; and (3) exploring anumber of deposits in a variety of areas at one time, to spread therisk within the company. Given this ability to adjust for uncertainty,excessive governmental tax inducements will either transfer resourcesfrom other sectors of the economy to mining, or extend explorationto submarginal prospects.

Development, like exploration, is a capital expenditure made tocapture a future stream of benefits. As such, good accounting andeconomic practice dictate that such expenditures be amortized ordepreciated to offset these costs as benefits are received.18

One of the objectives of granting liberal allowances for exploration and development is to attract mining investments into aparticular area. However, in a market economy the benefits may notaffect the operations at all, but transfer income to other parties. Forinstance, a mine may sell the product at a lower price in order toensure a market. In this case, the firm will not change its behavior,and the tax benefits will be exported with price reductions to otherstates.19 The firm may also increase the price it is willing to pay forthe right to extract the resource. Again a tax incentive may notincrease investment at all but instead be shifted to somewhere orsomething else. In sum, the effect of these incentives is diluted oncethe interactions in a market economy are taken into account.

Taxing Rents

In most countries legal title to subsurface rights has been vested inthe state. The United States is exceptional in this respect, since title tosubsurface minerals is usually recognized as part of the ownership ofsurface rights. This aspect of the system has a number of implications for tax policy.

First, the original owner of the property collects a payment fromthe extractive firm for the right to explore and develop his property.

That is, the resource owner collects a "rent" because of his ownership. Competition would ensure that this payment would vary acrossmineral properties according to quality, quantity, and ease of extraction. Because of uncertainty, most of these payments are not lumpsum. Instead, a complicated system of lease bonuses and percentageroyalties have developed, to enable some risk sharing between theowner and producer. However, the essential point is that naturalresource rents accrue at teast in part to the initial owner of themineral rights.

Some analysts have argued that states and localities should collect the rents from resource extraction.20 Based on the above discussion, taxing rents implies that the incidence of the tax should beborne by the original owner and not by the extractive firm. Forinstance, if the property were sold outright, the state could tax theowner's capital gain from the sale. The firm's behavior would beunaffected, the supply of the resource would be unaffected, and thetate would be collecting the rent.

From the analyses of those who would supposedly tax resourcerents, this type of taxation is hardly what they had in mind. A truefax on natural-resource rent would be borne by the state's residents(if they own the land) and not by large firms. The tax could not (andshould not) be exported or shifted to purchasers in other states.Therefore, .a tax on pure natural-resource rent would involve only atransfer of Income from the owners of the property (usually residentsof the state or the state itself) to the government.

Part of the confusion over taxing rent is the tendency to correlatelarge profits with rent. It should be emphasized that large profitsmay. be~r little relationship to the rate of return on invested capital.CapItal IS allocated in a competitive economy until the rate of returnf~om inves,ting. in va:ious activities is the same. Modern mining is ahlghl~ capltal-In~e~SIVe process. This fact, combined with the longlead time for pOSItive returns, suggests the need for sizeable profits insome years. Thus industry spokesmen have some justification forclaiming that a comparison of annual profits, without calculating thenet-of-tax rate of return, is misleading and unfair.21 Given also thepaYments to the owners for the right to extract ore, any associationof profitability (even of so-called bonanzas) with some notion of rentis tenuous at best.

Another consequence of the emphasis on profitability when discussing the taxation of mining firms has been the neglect of the fact

Summary

The preceding analysis examined in detail the response of the miningfirm to the major forms of taxation, at each stage of the miningcycle. If price-taking, profit-maximizing behavior is assumed, only apure profits tax is nondistortionary in the short run. Further, any taxwill, ceteris paribus, discourage exploration, development, andinvestment by reducing the rate of return to capital. A subsidywill have the reverse effect. It was also shown that taxes applied inconjunction may have offsetting effects; for example, an ad valorem


that taxes paid by the firm are only part of the tax revenue generatedby mining activity. Most states impose income taxes 01) individualsand firms or collect paYments from state-owned lands. Capital gainsfrom the sale of mineral properties and royalties paYments whichaccrue to resource owners are part of the income-tax base. Therefore, states are already imposing a form of taxation on the owners ofthe resource. Little analysis has been done on the effects of thisaspect of taxation on the trade of mineral rights or the behavior ofowners. Also no estimates are available for the amount of tax collected in this manner. It is clear, however, that the sum of the directtaxes paid by mining firms will underestimate the tax benefits to thestate.

In summary, rent is a paYment above the minimum amountnecessary to bring forth a given supply of a resource. Since the property rights for minerals are usually vested in private hands, it is theowner who collects this paYment without contributing to product. Atax designed to collect natural-resource rent must then, by definition,be borne entirely by the property owner, and would have no effect onthe profits of the mining firm.

While simple in concept, the ability of the government to collectrents by taxation is complicated in practice. Because of uncertainty,mining firms will typically collect some of the economic rent thatwould otherwise go to landowners. However, policymakers must beaware of the implications of and distinctions between a tax on rentand a tax on the return to capital. A rent tax will have no effect onthe firm's behavior (because the owners of the firm do not bear theburden of the tax), while a tax on the income to capital will reduceinvestment.

Tax tlon f Min ral Resources58

property tax and an ad valorem output tax can offset each other.This does not imply, however, that the firm's long-range strategy willbe unaffected. Increases in the level of taxation increase the cost ofdoing business, regardless of the effect on extraction. Thus as notedabove, some decrease in investment will result.

Some writers have claimed that price-taking behavior is inappropriate for the analysis of tax policy at the state level. 22 They arguethat a state with large reserves can increase the level of taxationwithout affecting the industry in that state, since the tax can beexported to consumers in other states. They offer such mechanismsas hold-free clauses in long-term contracts as supporting evidence.This claim may well be justified, but only as a short-term phenomenon. A national firm will always try to shift the tax burden to someone else. Its ability to do so will depend on the relevant elasticities ofdemand for final goods and inputs. But as long as a state does nothold a complete monopoly of the resource, some response by thefirm is inevitable. Contracts do expire and buyers will always seekthe least expensive source. 23 States must therefore weigh short-runrevenue gains against long-term losses from excessive taxation. In theshort run behavior may not change, but in the longer run development and investment will fall.

Another implication of this analysis is the importance of separat- .ing the issues of taxing rent and taxing the return to capital. It is truethat large, rich deposits collect more rent, but in a market economy itis the owner of the land who collects at least part of the expectedvalue of the rent. So a tax on rent should be borne accordingly bylandowners and not capital. Such a tax would have no effect on thefirm's level of profitability unless it obtained the mineral rights forfree. While rents are easy to define, they are impossible to measure.Invariably, some rent is collected by firms as well as consumers ofthe product. However, an understanding of how rents are generatedand their relationship to profitability, if any, is essential fordesigning tax policy.

6160 Tax tl n I Min r I Resources Effects of Mineral Taxation

2. See Conrad and Hool (19790).3. Lockner (1965) and Stinson (1978) noted that the.d~vel~p

ment of severance taxes resulted from the cost of fairly admmlstenngthe ad valorem property tax.

4. See Boyle (1977). .5. This effect has been established by Hotelhng (1931) and

Lockner (1965).6. References to this effect are found in Gillis et al. (1978) and

Conrad and Hool (1979b).7. See Warren (1944) for discussion.8. See Conrad (1978b) for a proof. This is contrary to the

short-run high-grading effect claimed by McGeorge (1970).9. See Peterson (1976) for a discussion. .

10. The writings of Harberger (1974), Steiner (1959), DaVldso~(1970), and McDonald (1967) all pertain to some aspect of thls

debate.11. The validity of this point is discussed below.12. See Conrad and Hool (1979b) for details.13. Ibid.14. These examples are found in detail in Conrad (19790).15. This is consistent with the discussion in chapter 2.16. For a formal analysis of this problem see Conrad (1979b).17 See Conrad (1979b) for discussion.18: See Convery and Conrad (1979) for further discussions.19. The long-run implication ofthis is discussed in chapter 4.20. See Boyle (1977).21. See Hansen (1977).22. See Long (1976) and Sorenson and Greenfield (1977). .23. The same shifting can occur with subsidies as well. Davldson

(1970) argued that depletion allowances mai~IY ~ncrease .the rent payments to landowners, with no effect on the fum s behaviOr.

Notes

1. The model used to evaluate these taxes is developed inConrad (19780) and in Conrad and Hool (19790; 1979b). The formalproofs are found in these texts; only the results are reported here.

4 Policy Implications

In the previous chapter we examined the potential effects of varioustaxes on the decisions of mining operations. It was shown that taxeswill typically alter the pattern of quality and quantity of extractionbut, unless excessive, will not force an operation to close completely.Rather, investment and total mineral yield will tend to be smaller andthe life of the mine shorter as a result of taxation. In addition tothese losses, the citizens of the taxing jurisdiction must bear the costsof administration and enforcement. The choice of tax policy is oftencomplicated by a trade-off between the ease of administration andenforcement and the magnitude of the distortionary effects.

This chapter analyzes some of these trade-offs and offers somepolicy recommendations for consideration. For illustrative reference, we begin with calculations of the impact of the tax system of agiven state. A discussion of the incidence (who bears the burden ofthe tax) follows. In this context, administrative issues are discussedalong with the use of particular taxes to meet specific goals.

Calculating the Net Impact of an Integrated TaxSystem

The first step in the analysis of tax policy is to obtain a measure ofthe taxes paid by a single firm. Since states generally use more thanone tax, this measure must account for the combined effects of theentire state taxation system. It is also important not to overlook thefact that all state and local taxes are deductible for federal tax purposes.

The best way to illustrate the interactive effects of an integratedtax system is with a numerical calculation for a particular state. Therepresentative calculation presented below is for a uranium mine inthe state of New Mexico. New Mexico was chosen because of its variety of taxes imposed on mining.

63

64 T x tlon f MIn r I Resources

The t:u'es imposed on uranium operations in New Mexico arereported. III table 4-1. To simplify the calculation, the followingassumptIOns are made.

Policy Implications

Table 4-1Taxes Imposed on New Mexico Uranium Mines

65

Tax Rate Remarks

1. The fi:m is incorporated in New Mexico and has no multistateoperatIOns.

2. The firm owns the deposit.3. The price of uranium concentrate (yellow cake) is $29.04 per

pound. 1

4. The property-tax assessment is $0.2025 per pound of yellowcake. 2

The first assumption removes the problem of allocating income to~ew. Mexico, which uses the three-factor formula. The secondImphes that no royalty payments are made. Royalties are deductiblefrom several other taxes.

Total.taxes paid to New Mexico by the mining operation areexpressed III general terms as

Income 5OJo

Severance Value0- 5.00$ 5.00- 7.50$ 7.50-10.00$10.00-15.00$15.00-20.00$20.00-25.00$25.00-30.00$30.00-35.00$40.00-50.00$50.00 and over

Resource excise 0.75% of value

Conservation 0.0475% of value

Marginal Rate1.0%1.6%2.0%3.0%4.0%5.0%7.0%9.0%

12.5%$3.24

Uses federal tax base;a thereforegrants depletion allowance of22%.

Contracts prior to 1977 with nopass- through clause taxed at1.25% until 1985. Base is totalvalue.

Allows deduction for state andfederal royalty payments.

Allows deductions for state, federal, and Indian royalties. Rate is19/100 times 25% value.

T = te(PQ - C(Q) - hPQ - aPQ - rPQ - dPQ - eQ - fQ - 7:1)

+ aPQ + rPQ + dPQ +eQ +fQ

Continuedcare fund

Propertyb

1O¢/lb

Varies with location

Payments made until each minepays $1 miUion.

For producing undergroundmines, rate is total sales less state,federal, and Indian royalties timesone-fourth times one-third.

where P = price of yellow cake

Q = output of yellow cake

C( Q) = total cost of operations

h = federal depletion-allowance rate

a = severance-tax rate

r = resource excise-tax rate

d = conservation-tax rate

e = continued-care tax rate

f = property-tax rate

T_ 1 = New Mexico income taxes paid for the previous year

te = corporate-tax rate

Sources: Written correspondence from state tax administrators; Stinson (1978); Gillis (1979);State tax statutes; Commerce Clearing House: State Tax Guide; Yasnowsky and Graham(1976); and Steering Committee on the Impact of Taxation on Energy Markets, NationalAcademy of Sciences (1979).Note: This tax table was compiled using information from a variety of sources. The information was cross-checked as far as possible to ensure consistency and to include the most recenttax laws.aCertain adjustments for nonbusiness income.bCapital equipment valued at book value.

Because New Mexico uses federal taxable income as its corporatetax base, it explicitly allows a deduction for all its output-relatedtaxes, the property tax, and income tax from the last period, incomputing its income tax. Thus when profit is positive, the effectivepayment to the state from each tax (excluding the income tax) is 95¢per $1.00 actually paid (for example, the firm pays a dollar in property taxes but recoups 5¢ by the deduction). Also because of thefederal depletion allowance, 1.1 percent [(.05)(.22) = .011] of totalrevenue is excluded from the tax base.

Substituting the numerical values for tax rates and prices into theexpression for T yields the following formula for the tax paid peradditional ton of output.

6766 Taxation of Mineral Resources

Policy Implications

When all the state and local taxes are incorporated, the cutoff gradebecomes

However, when New Mexico taxes are introduced, the rate of returnis

r = 27040 - 1374 _ 1 = 25666 _ 1 = .0694, or 6.940702 24000 24000

MC + e + f _ 2 + .3025 = 8.33070a = d t] 29.04[.9412]

P[I - a - r - + 1 _ th

The introduction of taxation has reduced the internal rate of returnby over 45 percent. Other investment criteria may be used, but thequalitative effect of the taxation will be t~e sa~~. . .

While the above example is highly slmphfled, It serves to illustrate the fact that a tax which is small in relationship to the price (orto operating profit) can have a sUb~tantial impact on the rate ofreturn. Several authors made calculations of the lffipact of such mea-

= 27040 _ 1 = .1267, or 12.6707024000

PQ- Cr l = I -

This amounts to an increase of over 20 percent in the cutoff grade.The last equation shows clearly how the net-of-tax price and costs areaffected by the output-:related taxes. The ad valorem taxes reduce thenet-of-tax price, while the per unit taxes increase the cost per poundprocessed. Note that the depletion allowance tends to offset t~e

decline in the net-of-tax price. Other things equal, the taxes III

combination will reduce current extraction and lower total yield.The discussion to this point has concentrated on the short-run

effects of the tax system. But there will also be long-run effects oninvestment. When incremental investments are contemplated, the .taxwill serve to reduce the rate of return. To illustrate, suppo.se th.e fIrmis considering opening a new shaft at the mine. The ore III thIS newarea will produce 1,000 pounds of yellow cake at a cost ~f $2,000. Itwill cost the firm $24,000 this year to sink the shaft III order toextract all the ore next year. Assuming a price of $29.04 for y~llo~

cake next year, the internal rate of return in the absence of taxatIOn IS

MC 2a * = - = -- - 6 89 t,!op 29.04 - .

whcre MT = marginal tax and MC = marginal cost of extractionand processing. This shows that New Mexico will collect $2.73 less 5percent of marginal cost of extraction and processing, for eachpou nd of concentrate sold.

These taxes are partly offset by their deductibility from thefederal tax base, which effectively reduces the taxes paid by the firmt thc tate by an additional 46 percent. Therefore, the impact of thetax y tern, net of federal tax deductions, on this firm in New Mexicoi $1.47 - .027 (MG). The net effect amounts to a tax of 5.06percent of the value less 2.7 percent of marginal cost, per pound ofyellow cake.

This calculation highlights several important issues. First, thereis the effect of federal deductibility on the impact of state taxes paidby the firm. By allowing the deductions, the federal government is ineffect paying 46 percent of the taxes for the firm through lost taxrevenue. The total tax burden of both federal and state taxes is,however, higher than it would have been in the absence of statetaxes.

Second, there is the reduction in the state's own tax revenue dueto the use of the federal base. Since the state taxes are deductible forfederal taxes, they are deductible for state income taxes as well. Thisrevenue loss thus reduces the long-run distortionary effects of thetaxes.

Third, the tax system increases the cutoff grade. Suppose that thecost per pound of extracting and processing is $2. In the absence ofthe tax the cutoff grade would be

MT = .05(29.04 - MC - .22(29.04) - .035(29.04) - .0075(29.04)

- .000475(29.04) - .10 - .2025) + .035(29.04)

+ .0075(29.04) + .000475(29.04) + .10 + .2025

= $2.73 - .05(MC)

68 Taxatlonf Min r J Resources Polley Implications 69

sures as tax payments per ton of reserves, tax payments per ton ofoutput, or the ratio of taxes to current profit. 3 These figures do allow~ c?mparison of tax impacts across states but they are misleadingIndIcators of how a set of taxes can potentially affect the level ofinvestment activity. In the long run it is the rate of return to invested~apital. whi~h will determine the willingness of capital owners toInvest In mIne:al projects. The appropriate measure for evaluatingthe long-term Impact of a tax system is therefore the net-of-tax rateof return to capital.

Incidence Issues

It has been claimed by several authors that increases in the level ofstate and local taxation will have little or no effect on the behavior ofthe mining firm. This argument is based on the presumed ability ofthe firm to shift the burden of the tax to out-of-state purchasers ofthe resource, in the form of higher prices. 4 To substantiate this theseauthors cited "pass-through" or "save free" clauses in con~ractsand increased investment in some states despite increased levels oftaxation. 5 The ability of a mining firm or the entire industry withinany state to export or shift the incidence of a tax depends on a number ~f factors. 6 First, the state (or group of states) must have somedomInance over the resource; that is, the reserves located in the statemust be a substantial proportion of total reserves. However a domi-nant position is not sufficient for shifting to occur. '

A second factor is the elasticity of demand for the resource. Ifthe demand is inelastic, a substantial portion of the tax can beexp~rt~d. Minerals are used as inputs into other productive processesa~d It IS ~ener~lly agreed that in the short run the elasticity for mostmmerals IS qUIte small. However, the long-run elasticity is substanti~lly larger. 7 This is due to the ability of buyers to sign new contractsWIth lower-cost producers or to change production methods in orderto substitute less expensive alternatives for the taxed resource. This~eans that. through time the ability to export taxes through price'mcreases wIll become much more difficult.

A third .factor which must be considered is the mobility of factor~of productIOn. When factors are immobile the part of the taxin.cr~ase which is not exported may be borne by capital and laborWIthin the state. In the long run both capital and labor can move.

Mines close and the capital and jobs will be exported instead of thetax. Therefore, at least part of the burden will be borne by resourceowners and the state through lack of future development. 8

In summary, states can expect little or no effect from taxincreases in the short run. However, in the long run, investment andexploration activity will be lower and jobs will be lost as a result of atax increase. While this conclusion is simple in concept and inevitablein a market economy, it is difficult to convey to citizens and legislatures because it is largely unobservable. What are observed are profitlevels and mineral development when prices increase. The conclusionis then drawn that state taxation has little or no effect on the firm'sbehavior. As prices rise, mineral development will increase as long asthe increase in taxation does not capture all the return. The realissues from a policy perspective are (1) how much more mineraldevelopment would occur, (2) how much more would be paid toproperty owners for minerals rights, and (3) how many more jobswould be created, if the rate of taxation were lower?

A recent study by Genetski and Chin offers some empirical support for our prediction. 9 Vsing cross-section time-series data, theyfound that the burden of taxation by state had little effect on stateincome in the same year. However, when they introduced a threeyear time lag to allow for adjustments to tax changes they found thatan increase of 1 percent in a state's relative tax burden decreases astate's relative income by 0.5 percent. In the context of minerals, thisimplies that an increase in taxation in, say, New Mexico relative toother states will encourage capital and labor to move to other statesover time, decreasing investment and income in New Mexico andincreasing it in other states.

Therefore, state and local tax policy should be formulated in fullawareness of the fact that higher taxation will reduce the rate ofgrowth of mineral production, decrease economically recoverablereserves, and cause a relative increase in mineral activity in otherstates.

Recommendations

A rational mineral tax policy must be based on a well-defined set ofcriteria. Some goals of mineral tax policy are (1) revenue stability(particularly for schools and local government); (2) ease of adminis-

The Income Tax

A well-designed income (profits) tax should be the basis for any minerai tax policy. From a corporate perspective, the income tax is alevy on the return to invested capital. Therefore, an income tax oncorporate income can be designed so that it is neutral with respect toincentives within the corporate sector. The income tax has thefurther advantage of not increasing the downside risks as much asother taxes, since costs are considered explicitly and taxes are paidonly when profits accrue. Third, the tax does not induce high-grading in the short run, so will have relatively little effect in terms ofreserve loss. Finally, if there is also an individual income-tax system,

tration and enforcement; (3) control of external effects such as pollution and land reclamation; (4) consistency with a state's developmentgoals and the relative importance of mineral development in theachievement of these goals; and (5) neutrality of the tax system.

From the preceding discussion, it is clear that no single tax canimultaneously achieve all these goals. Recent theoretical literature

al 0 suggests that more than one type of tax may be preferable to asingle tax. 10 For instance, an income tax designed to ensure neutralityb tw en mining and other sectors may be impossible to administerb au of its complexity and may not generate adequate revenues inp ri ds of depressed markets. On the other hand, a severance tax perunit f output is a relatively stable source of revenue and is easier todminister, but it induces excessive high-grading and increases

down ide risks.In addition, different weights will be assigned to each goal,

a cording to the circumstances particular to each state. Finally, econ mic conditions change and tax policy should be flexible enough toodj u t to new conditions without excessive inducements or disincentive .

tates differ with respect to both the type and geological compo-ition of each mineral and their willingness to pay for tax administra

tion. (This is probably one reason why a regional tax policy has neverdeveloped.) However, the same basic criteria will apply to each state.Therefore, our recommendations deal with the general structure ofthe tax system. Particular modifications can then be incorporated byeach state according to its specific circumstances.

71

1. Only cost depletion should be allowed. . d2. Capitalization of exploration expenditures should be requlf~ ..3. Development expenses should be subject to usual depreclatlOn

rules.4. All other state and local taxes should be deductible.5. Taxable income should be defined to include only income accru-

ing within the state (that is, no income allocation rule).

Percentage depletion, as used in the United States, has been ~howneither to act as an income subsidy for mining fir~s or t? md~ceexcessive investment in mining activity. II The preVIOUS dlscusslOnalso showed that the allowance will generally increase early extraction and reduce the life of the mine. Finally, no other industry is permitted to deduct an amount greater than its investments cos.ts. Neutrality therefore dictates the elimination of percentage depletlOn.

The expensing privileges for explorat~on and ~evel.o~ment havebeen claimed to be justified by the risks mherent m mmmg and thelead times necessary to recapture the invested capital. However,these risks should be reflected in market pricing. Therefore, goodaccounting and economic principles imply that such expenses bededucted as income accrues. . ..

The deductibility of other state taxes will allow a partIal mItIga-tion of their distortionary effects. In addition, other taxes are generally privilege taxes or a form of use charge for publicly providedgoods. They are thus part of the cost of doing business in the stateand should be recognized as such. . .

In theory, a state income tax should only recogruze l~come andcosts which accrue in that state. Under the current allocatlOn sys~em

used by several states, it is possible that firms which suffer losses l~ astate must nevertheless pay income taxes there becaus~ of profItsgenerated elsewhere. Likewise, firms with high profits m.one statemay be able to reduce their tax liability there by deductmg lossesfrom operations in other states. In addition, McClure (1977) recently

Policy Implications

the state is assured of collecting part of the natural-resource rents. Ineffect the state should not care how the rents are divided betweenresou;ce owners and extractive firms, because it will collect part ofthe rent from both sources.

The following provisions should be part of the income-tax pack-

age.

x tI 11 f Min r I Resources70

Output-Related Taxes

Any output-related tax will discourage investment and induce highgrading. In addition, such taxes increase the downside risks associated with mining since they do not recognize costs. They are, however, extremely popular tax instruments and their use will apparentlycontinue. Given this, our recommendations are intended to serve asguides for minimizing distortions while generating revenue.

First, the tax should be imposed at the earliest possible point,that is, at the mouth of the mine if possible. This will minimize theeffect of the tax on other stages, such as concentrating and refining,and will thus partly reduce the incidence on capital and labor. 12

Second, the tax should be related to the value of the ore. Whilesome high-grading is inevitable there is no justification for imposinga uniform per unit tax on all ore. Such a tax will always create alarger high-grading effect for the same revenue than a tax which isrelated to value.

Three pieces of information are necessary to administer such atax: the tonnage, the grade, and the price. The first is easy to obtain,

showed that the formula currently employed acts to make the incometax a series of taxes on each of the three factors included in the formula (sales, employment, and assets), whose incidence may beregressive. Therefore, to preserve the neutrality and the intendedincidence of an income tax, only intrastate income should be taxed.

Some of the above recommendations are at variance with currentfederal practice. States that currently use federal taxable income asthe base will consequently incur a greater administrative burden ifthey adopt such measures. This is especially true with regard to thelast recommendation. States will have to determine what proportionof corporate overhead, research and development, and managementfees can be deducted within a state, if any. While some of these decisions will inevitably be arbitrary, the bias with such an allocation willnot be nearly as great as under the current system.

The net-proceeds tax, which has become increasingly popular, issimilar in effect to an income tax with the characteristics we prescribe. This move toward taxes of the net-proceeds type is an indication that states are willing to bear some additional costs to ensure, aswell as increase, their revenues.

73Policy Implications

the second may require independent analysis to ensure properenforcement, and the third may be difficult to obtain. The difficultyin obtaining price information is due to the fact that most metals arenot sold in their natural form. Rather, they are inputs into a concentrating process whose output is then marketed. Therefore, an arm'slength price in general does not exist. One solution is to deter~inefirst the arm's-length price of concentrate, either from an analysIs ofthe contract provisions or from an independ~nt source, an? thenallow a deduction for processing charges to arnve at a net pnce perton. This procedure will yield the value of ore in concentrate .that canserve as the base of the tax. (This is the same method used 10 determining income from mining which serves as the base for percentage

depletion.) . 'Finally, we recommend that the tax be at a umform rate. DIff~r-

ent rates may be imposed for different minerals or for alternatIvemining techniques (that is, one rate for underground mines ~nd onefor open pits) but the rate should be independent o.f the pn.ce. Theusual justification for progressive severance taxes IS that fI:ms donothing to bring about a price increase and thus collect a w1Odfall.This argument has three basic flaws. First, a win?fall should bedefined only with regard to the rate of return on capItal, and not ~heprice. It is entirely possible, given the risks of mining .a~d the pnceuncertainty, that a price increase may only reflect a mI~Imal rate ofreturn. Second, a price increase may be accompamed by c~stincreases such that the price increase is associated with lower profItsrather than a windfall. Finally, this tax is totally discriminatory. If astate legislature feels it has a right to tax windfalls, it ~hould do soconsistently. That is, it should increase the rate of taxatIOn on wheatfarmers when wheat prices are high, independent of costs; tax thesale of homes and property more heavily when housing prices arehigh regardless of maintenance and upkeep expenses; and so on.Unl~ss it can be proved that such a tax is functionally related to amarket failure its use is discriminatory and should be avoided. Asnoted above ~n output tax may be appropriate for environmentalconservatiod, but the cost of environmental damage bears little relationship to the market price.

If in spite of this such a tax scheme is to be used, it should berelated to the price of the specific mineral and should acknowledgeprice decreases as well as increases. A tax related t~ th.e consum~rprice index (as in New Mexico) or the wholesale pnce 10dex (as 10

Tax tlon f Min r I Resources72

74 Taxation of Mineral Resources Policy Implications 75

North Dakota) has a tenuous relationship to the profitability of anymine. Such indexes are composites of national averages and thuscould overestimate or underestimate the effect of the general level ofinflation on a particular region or mine. That the tax rate shoulddecline when prices fall is suggested as the natural counterpart to thetaxation of supposed windfalls. Such flexibility would reduce somewhat the discriminatory bias of the tax.

Property Taxes

One of the more important goals of state and local tax policy is toprovide a stable source of revenue to finance a minimal level of public services such as schools, police, and fire protection. Each of thetaxes outlined above is unsatisfactory in this respect because the taxrevenue is a function of mineral prices (and costs in the case ofincome taxes), which have historically been cyclical. Therefore, theycannot be relied on to provide a stable revenue base for the provisionof public programs.

Property taxes, on the other hand, do offer such stability. This isdue less to the nature of the tax than the way it is administered. Historically, proponents of the property tax have emphasized its revenuestability due to the inelasticity of the base. For example, Maxwell(1965) suggests that local governments resort to the property tax,rather than income or sales taxes, because the immobility of realproperty precludes a shrinkage of the tax base. This view has beenchallenged both theoretically and empirically"3 It has been shownthat the supply of real property is inelastic only in the short run.Over time, factors are mobile and an increase in the rate of taxationwill encourage movement. Individuals and firms have moved to thesuburbs to escape city taxes (while still taking advantage of city services). Local stores followed and shopping centers developed. Inaddition, high property taxes have been a factor contributing to anexodus from certain regions of the country. Therefore, in the longerrun, the tax base is not secure and thus cannot be the explanation forthe stability of the revenue generated by the property tax.

The key to the tax's revenue stability lies in its administration.The tax rate is usually determined after the budget for the next fiscalyear has been projected. That is, the tax rate is set to collect a specificamount of revenue. Since this is the process typically used, the reve-

nue is stable by definition, quite indepcnd nt f lh base. In thissense, any tax can be a stable source of r venue. iven this, realproperty may be a preferable base since it is less subject to periodicfluctuations than are other tax bases. But again it must be emphasized that the stability of the base itself is not to be identified with thestability of revenue.

Theoretically, the value of the property is its market value. Froman economic perspective the market value of a fixed asset is the present value of income generated by holding or using the asset. Therefore, a property tax based on market value is an income tax which. ispaid on the future stream of benefits generated by the asset. The dIfference between the regular income tax and the property tax is thatthe former is a tax on the realized stream of income, while the latteris a tax on the expected future stream of income. If there were nouncertainty, a property tax could be designed in such a way that theimpact and incidence of the tax would be identical to a tax on realized income. 14

Uncertainty, however, is a complicating factor and t~e difficulties it creates are most apparent in the mining sector. Unlike otherforms of real property the extent of mineralization in a mine is neverknown, in most cases, until it is extracted and processed. In addition,mines are not subject to frequent sale and the characteristics uniqueto each mine make comparisons difficult across mines. Finally, mineral-price profiles tend to be more uncertain than those of othertypes of real property. These uncertainties combine to make propertyvaluation more difficult in this sector.

States and localities have realized this problem and have developed numerous ways to cope with it. Among the tax bases currentlyin use are (1) a fraction of total revenue (in effect an ad valorem output tax); (2) net proceeds (in effect a tax on current realized income);(3) estimates of the present value; and (4) traditional local asses~ment. Of these four methods, the estimate of the present value IS

most likely to reflect the true worth of the deposit. However, thmeasure is far from perfect and the estimates must be derived withcare.

The valuation procedure we recommend is based on the Arizonamethod, which we feel is both feasible and more accurate than oth rmethods. In this approach, the present value of the operation is calculated on the basis of estimates of reserves and production. Insteadof projecting prices and costs, a profit-margin formula is used to

76

Notes

Concluding Remarks

local governments to justify such a distortionary in entive whichdeters development and cuts jobs in the mining ector.

77Policy Implications

1. Average price calculated by the New Mexico Taxation andRevenue Department (14 February 1979).

2. Tax calculated by the New Mexico Taxation and RevenueDepartment.

3. For one example, see the New Mexico Taxation and RevenueReport, where the impact of taxes is calculated to be about 6 percent.Income taxes and federal deductions have been ignored in this calculation. For another example see Shelton and Morgan (1977).

4. Griffin and Shelton (1978) adopt this argument, while Long

The recommendations outlined above reflect the view that for taxpurposes, mineral development should be treated in the same manner as any other form of economic activity. In the absence of provedmarket failures, this means that the burden of the taxation borne bymining activities should be the same as that borne by other sectors.While it is true, in a sense, that the minerals found within the boundaries of a state or locality are finite, this alone is not a sufficientcondition for excessive inducements for or taxes on mineral activity.16 In the long run, the effect of depletion will be largely beyondthe control of anyone state. State and local tax laws may distort thecurrent allocation of investment within and between states. However, these relative distortions will not substantially affect the longrun availability, because there are too many alternative sources.

A balanced approach is necessary to ensure that the minerals sector develops along with other sectors, so that the scarce resources canbe put to their most productive use. If market failures are present,the state has the obligation to correct them, and tax policy may be anefficient means by which to modify the system. However, the basisof the tax system should be neutrality. Otherwise, a proper evaluation of the effects of other adjustments cannot be made.


c?nvert the extraction profile into an income stream which is thendIscounted to obtain the present value. The profit-margin formula isbased on the average margins for the preceding five years to even outfluctuations. I'

'!'his method has a number of advantages. First, it is consistentand IS based on the same principles as used in the industry itself. Second, .the ta~ base will not discriminate against marginal mines. Am~rgI?al mme is, by. definition, one with a lower profit margin, andth. ~Ill be reflected m the calculation. Third, it recognizes costs andthu IS ~ better measure of income from property than are sales.

ourth,. It uses a histor~cal average margin which weights the goodyear with the bad, and IS therefore better in this respect than currentnet proceeds. In addition, it alleviates the burden of projectingfuture costs and prices. Finally, it is not as distortionary as other~axes. There still exists an incentive to extract more, and higher qUalIty, ore early to keep down the estimated value of future extractionHo~ever, this effect is offset, at least in part, by the use of historicaiprof~t mar~ins. If the firm were to maximize the current return,profit margms would be higher and would thus serve to increase thefuture value.

~~e m~thod does have one major disadvantage: the cost ~fadrmrustratIOn. In order for the method to be accurate and consisten.t, much information is necessary and several unknowns must beestIma~ed. Comprehensive field reports are written annually on eachoperatIOn to ke:p.a current re~ord of technology and capitalizationr.ates. Also statIstics are compIled from financial and professionalItterature and Securities and Exchange Commission reports, in orderto a sure that assessments are fair. (It is our impression that someproblems exist in the Arizona system and that property values inorne cases may be subject to arbitrary methods.) It is clear that such

a method can only be employed by a state agency with the resources~o devote to such a task. However, any state that has an active minmg s~ctor should be collecting this type of information at the statelevel m a~~ event, and so the method could be employed withoutmuch addItIOnal expense.

. Once the base is estimated, the assessment ratio must be determmed. In the absence of proved market failure, the assessment ratioshould be. the s~me for mining as for other industrial sectors. Somestates, Anzona mcluded, employ higher ratios for mining. This distorts the long-run allocation of investment. The onus is on state and

I X tl , Minerai Resources

(1976) uses it as a justification for a regional tax policy on coal. Seealso Link (1978).

5. Sorenson and Greenfield '(1977) claim that a state can taxmining and capture at least part of the comparative advantage of astate's mine with no effect. However, for this to occur the tax mustbe shifted.

6. For a detailed analysis see McClure (1978).7. See Conrad (19780) and the references therein.8. McClure (1978) argues that in the long run the tax will be

borne almost entirely by resource owners, because reserves are theleast mobile factor.

9. Cited in the Wall Street Journal, 9 September 1979.10. See Atkinson and Stiglitz (1976).11. See Harberger (1974) for the classical statement of the dis-

tortion introduced by percentage depletion.12. See Conrad (1979b) for a discussion of downstream effects.13. See Mieszkowski (1972).14. See Fiekowsky and Kaufman (1976).15. This procedure is outlined in the Arizona statutes.16. Long (1977) supports this view.

AppendixState Tax Collections

Tab

leA

-ISt

ate

Tax

Col

lect

ion

sex

>(t

hous

ands

ofd

olla

rs)

0

Tax

1971

1972

1973

1974

1975

1976

1977

1978

(pre

lim)

Ala

bam

a

Lic

ense

53,3

8066

,834

76,7

6577

,191

81,6

2090

,704

99,7

0410

6,04

6O

ilco

mpa

nies

432

510

559

613

1,03

81,

269

1,70

01,

957

Indi

vidu

alin

com

e(n

et)

92,0

9411

8,99

414

2,23

116

9,80

118

9,96

422

4,59

726

1,89

531

7,95

8

Cor

pora

tion

net

inco

me

33,7

6432

,908

40,9

3947

,255

58,1

5860

,307

75,8

7483

,161

Cor

pora

tion

:ge

nera

l29

,667

29,0

4636

,622

42,2

8352

,643

55,4

2569

,043

74,3

07

Pro

pert

y24

,020

25,3

5527

,498

26,4

4728

,593

31,3

8134

,095

53,8

77G

ener

al23

,735

25,0

5226

,961

25,8

8427

,929

30,6

7033

,212

52,7

84

Sev

eran

ce2,

379

5,08

36,

522

8,62

710

,948

11,5

7013

,757

17,0

56-i

Ql

Pro

duct

ion

priv

ileg

e99

41,

492

2,06

03,

632

5,39

36,

158

7,68

610

,321

X Ql

Oil

and

gas

497

606

824

1,79

42,

697

3,07

63,

843

5,16

1.....

Coa

lto

nnag

e2,

040

2,63

51,

771

1,50

784

367

20

Iron

ore

tonn

age

198

84

1::

J 0 - ~A

lask

a::

JIn

divi

dual

inco

me

(net

)35

,484

39,1

1243

,363

49,2

1986

,975

156,

254

210,

338

145,

828

(1) ....

Ref

unds

NA

-30

,889

-41

,02

9-

35,5

13Q

l

Gro

ssco

llec

tion

sN

A17

7,14

325

1,43

018

1,34

1::c

Cor

pora

tion

neti

ncom

e6,

050

6,45

56,

964

8,24

117

,345

31,1

0335

,772

33,5

04(1

) enP

rope

rty

(spe

cial

)6,

566

306,

429

409,

767

173,

197

0O

ilan

dga

sre

serv

es22

3,14

727

0,62

7c: ....

Oil

and

gas

prop

erti

es6,

566

83,2

8213

9,14

017

2,99

5('

)(1

)

Sev

eran

ce14

,491

14,9

0514,0~9

17,5

1526

,619

27,9

7823

,758

107,

715

enO

ilan

dga

spr

oduc

tion

11,4

6914

,760

26,5

4227

,901

23,7

0510

7,60

0O

ilan

dga

sco

nser

vati

on3

7777

5311

5

Ari

zon

a

Sal

esan

dgr

oss

rece

ipts

316,

435

361,

950

419,

644

466,

695

579,

665

531,

172

710,

534

803,

503

Min

ing

9,58

28,

465

10,1

3912

,585

11,5

6011

,799

14,5

4011

,744

»In

divi

dual

inco

me

(net

)73

,710

94,5

7710

8,63

113

7,69

815

7,53

716

2,86

919

0,59

122

2,80

8"0 "0

Ref

unds

NA

-17

,87

3-2

4,1

81

-31

,427

(1)

Gro

ssco

llec

tion

sN

A18

0,74

221

4,77

225

4,23

5::

J Co

Cor

pora

tion

neti

ncom

e26

,987

28,1

2637

,408

39,3

5649

,553

46,4

9951

,788

63,8

42X

Pro

pert

y65

,547

68,5

3770

,392

47,6

0797

,158

114,

689

129,

834

136,

182

Gen

eral

57,3

6059

,016

59,5

5835

,870

75,3

5493

,642

102,

781

109,

253

Spe

cial

8,18

79,

521

10,8

2311

,737

21,8

0421

,047

27,0

5326

,929

Ark

ansa

s

Indi

vidu

alin

com

e44

,243

70,1

5089

,343

117,

022

126,

192

147,

688

163,

781

202,

939

Ref

unds

NA

-21

,44

0-3

5,3

49

-36

,02

3

Gro

ssco

llec

tion

sN

A16

9,12

819

9,13

023

8,96

2

Cor

pora

tion

net

inco

me

26,3

8431

,568

37,8

2545

,916

54,4

6956

,197

67,2

1083

,528

Pro

pert

y97

61,

078

1,21

31,

416

1,62

51,

779

1,70

32,

080

Gen

eral

103

9111

212

112

617

815

316

0

Sev

eran

ce4,

667

4,97

34,

911

6,52

87,

264

8,87

010

,495

12,3

91

Gen

eral

3,67

93,

871

3,84

05,

396

6,28

77,

798

9,24

810

,632

Cal

ifor

nia

Indi

vidu

alin

com

e(n

et)

1,26

6,55

61,

838,

503

1,88

6,44

21,

803,

080

2,45

6,57

32,

957,

788

3,62

0,93

34,

532,

488

Ref

unds

-45

5,3

67

-58

8,8

43

-63

4,7

66

-86

4,3

36

-81

9,3

90

Gro

ssco

llec

tion

s2,

258,

447

3,04

5,41

63,

592,

554

4,48

5,26

95,

451,

878

Cor

pora

tion

inco

me

533,

121

661,

071

866,

347

1,04

6,03

11,

252,

633

1,28

4,06

81,

641,

595

2,07

6,27

0

Sev

eran

ce1,

830

2,26

22,

079

2,53

72,

331

2,33

41,

530

30,4

52ex

>

Pet

role

uman

dga

s1,

231

1,55

41,

407

1,66

12,

331

2,33

41,

530

1,53

0~

Tab

leA

-lco

ntin

ued

ex>T

ax19

7119

7219

7319

7419

7519

7619

7719

78(p

relim

)I\

,)

eole

rad

o

Indi

vklu

alin

com

e(n

et)

143,

461

174,

269

185,

785

250,

527

280,

498

294,

008

338,

920

375,

341

Ref

unds

-11

1,6

30

-11

6,1

19

-15

5,7

25

Gro

ssco

llec

tion

s40

5,63

845

5,03

953

1,06

6

Cor

pora

tion

net

inco

me

28,8

3736

,463

38,9

9352

,745

58,1

1568

,504

80,5

7586

,202

Ref

unds

-8,8

49

-7,7

52

-9,3

93

Gro

ssco

llec

tion

s77

,353

88,3

2795

,595

Pro

pert

y2,

008

2,32

82,

561

3,18

11,

697

1,66

52,

438

2,60

7

Sev

eran

ce56

756

183

31,

108

2,36

14,

371

2,32

01,

838

Oil

and

gas

prod

ucti

on(g

ross

inco

me)

430

435

6384

61,

932

3,89

61,

762

1,37

0~

Oil

and

&as

cons

erva

tion

9489

182

217

333

417

482

404

III

XC

oalt

onna

ge43

3738

4546

5876

64II

I - 0 :::::l

Geo

rgia

0In

divi

dual

inco

me

(net

)18

3,35

323

9,90

028

4,90

934

0,04

037

3,91

641

3,18

849

5,63

960

4,36

1-

Ref

unds

-73

,43

5-

83,8

89-

91,8

88-1

01

,86

7-1

15

,67

6~

Gro

ssco

llec

tion

s41

3,47

545

7,80

550

5,08

659

7,50

672

0,03

7::::

:l roC

orpo

rati

onne

tin

com

e81

,688

88,9

2811

4,11

413

2,62

911

9,35

313

2,74

117

0,88

520

3,82

3.... III

Pro

pert

y4,

057

4,05

54,

590

5,09

96,

123

6,61

29,

903

7,91

4:0 ro en

Idah

o0 C

Indi

vidu

alin

com

e(n

et)

39,7

5550

,191

57,6

9172

,183

91,2

4498

,824

112,

470

138,

050

.... 0R

efun

ds-1

6,0

74

-22

,74

2-2

7,5

28

-32

,50

6-2

7,9

98

roG

ross

coll

ecti

ons

88,2

5711

3,98

612

6,35

214

4,97

616

6,04

8en

Cor

pora

tion

neti

ncom

e12

,563

12,8

9416

,024

23,0

7628

,162

31,7

5231

,034

33,3

26

Pro

pert

y44

628

928

337

232

525

722

823

5

Gen

eral

380

242

216

295

252

179

148

92

Spe

cial

6647

6777

7378

8014

3»

Sev

eran

ce:

min

ing

priv

ileg

e26

815

273

192

481

394

203

273

" "ro :::::l

Dlin

ois

~ X

Lic

ense

400,

327

412,

505

425,

701

Min

esan

dm

iner

als

583

605

437

Indi

vidu

alin

com

e(n

et)

773,

610

843,

251

894,

697

1,04

6,67

51,

136,

918

1,21

6,55

71,

413,

368

1,59

3,69

5

Ref

unds

-92

,43

2-1

10

,09

5-1

08

,04

5-1

26

,54

6-7

2,2

30

Gro

ssco

llec

tion

s1,

139,

107

1,24

7,01

31,

324,

602

1,53

9,91

41,

665,

926

Cor

pora

tion

neti

ncom

e15

4,98

417

3,91

222

9,08

322

6,94

430

6,82

831

2,13

138

4,41

037

6,09

8

Indi

ana

Indi

vidu

alin

com

e(a

djus

ted

gros

s-in

com

eta

x)21

8,46

728

3,66

928

4,91

632

8,07

140

0,79

340

5,43

247

9,25

953

8,22

5

Ref

unds

NA

-72

,27

6-4

3,9

95

40,0

00-

39,4

75

Gro

ssco

llec

tion

sN

A47

3,06

944

9,38

751

9,25

957

7,70

0

Cor

pora

tion

neti

ncom

e25

,642

77,4

2785

,487

86,1

9819

2,06

8

Sup

plem

enta

lnet

inco

me

15,4

0052

,094

56,3

8766

,037

122,

872

Adj

uste

dgr

oss-

inco

me

tax

9,58

010

,526

10,0

8410

,242

25,3

3329

,100

20,1

6169

,196

Pro

pert

y15

,592

22,2

2624

,688

25,1

1123

,046

24,9

8923

,568

23,6

50

Gen

eral

1,14

81,

740

945

800

1,76

01,

130

2,09

71,

892

Spec

ial

14,4

4420

,486

23,7

4324

,311

21,2

8623

,859

21,4

7121

,758

Sev

eran

ce:

petr

oleu

mpr

oduc

tion

239

221

203

315

475

508

580

649

Iow

aex>

Indi

vidu

alin

com

e(n

et)

115,

344

202,

158

242,

863

320,

594

358,

899

388,

212

447,

409

490,

210

W

Ref

unds

-44

,20

6-5

1,4

62

-61

,73

9-6

1,2

04

-74

,85

5

Tabl

eA

-Ico

ntin

ued

(X)

Tax

1971

1972

1973

1974

1975

1976

1977

1978

(pre

lim

)~

Iow

aco

nti

nu

ed

Gro

ssco

llec

tion

s36

4,80

041

0,36

144

9,95

350

8,61

356

5,06

5

Co

rpo

rati

on

neti

ncom

e28

,359

37,1

0947

,288

59,4

1660

,024

77,8

3191

,894

108,

961

Kan

sas

Indi

vidu

alin

com

e(n

et)

82,1

5695

,345

114,

268

147,

143

170,

044

193,

730

209,

171

241,

224

Ref

unds

-10

,55

1-1

2,5

20

-11

,31

3-2

2,2

87

-31

,416

Gro

ssco

llec

tion

s15

7,69

418

2,56

420

5,04

323

1,45

827

2,64

0

Co

rpo

rati

on

net

inco

me

25,1

1233

,153

53,8

2176

,766

85,8

8792

,848

116,

721

128,

513

Cor

pora

tion

s77

,213

84,6

0510

6,30

111

6,22

5

Pro

pert

y10

,459

11,3

3011

,807

12,5

0313

,294

13,9

729,

976

16,5

61X

Gen

eral

9,09

19,

698

10,0

2810

,445

11,0

0411

,190

444

13,1

04

Sev

eran

ce66

468

771

170

470

078

581

684

1::

JN

atur

alga

s40

543

244

646

445

840

251

654

7O

ilpr

oduc

tion

138

120

118

112

106

237

149

149

-O

ilp

rora

tio

n12

113

514

713

813

614

615

114

53: ::J

Ken

tuck

yCD .... D

)

Lic

ense

51,4

5957

,241

61,3

9867

,592

72,0

4175

,139

83,5

74-

Str

ipm

inin

gpe

rmit

s80

890

31,

295

2,59

41,

830

1,89

22,

862

:0 <DIn

divi

dual

inco

me

(net

)13

2,66

915

6,36

917

9,21

621

2,32

424

9,44

929

2,54

633

8,16

038

9,91

2C/

l0

Ref

unds

-44

,65

2--

52,3

57-

59,3

20-6

6,8

44

-76

,32

0c::

Gro

ssco

llec

tion

s25

6,97

630

1,80

635

1,86

640

5,00

446

6,23

2.... C

')

Co

rpo

rati

on

net

inco

me

40,0

9353

,903

69,3

3883

,364

116,

626

134,

785

131,

254

138,

597

<D C/l

Pro

per

ty26

,746

38,4

7731

,385

33,6

8135

,364

37,2

9943

,413

147,

366

Gen

eral

2,28

52,

430

2,40

52,

688

2,91

23,

216

3,44

875

,514

Sev

eran

ce18

25,

941

37,3

8553

,749

99,0

8991

,496

113,

005

128,

160

Coa

l5,

767

37,2

2653

,495

98,7

4091

,078

112,

597

127,

765

Oil

prod

ucti

on18

217

415

925

334

941

840

839

5> "0 "0 <D

Lou

isia

na

::J ~

Lic

ense

70,7

2779

,422

80,4

9992

,876

97,4

9411

4,15

812

2,63

614

0,72

5X

Dri

llan

dre

new

alpe

rmit

517

416

405

331

390

424

533

544

Indi

vidu

alin

com

e(n

et)

81,8

6710

5,35

410

9,41

799

,956

108,

870

117,

641

133,

614

192,

276

Ref

unds

NA

-34

,957

-24

,31

4

Gro

ssco

llec

tion

sN

A16

8,57

121

6,59

0

Co

rpo

rati

on

neti

ncom

e51

,299

79,5

2378

,781

67,6

0378

,718

87,7

4195

,248

186,

956

Pro

pert

y:ge

nera

l28

,254

29,1

1724

,030

163

2623

414

734

Sev

eran

ce25

6,60

024

4,45

626

7,71

239

0,34

554

8,51

035

8,49

549

5,49

847

6,82

9

Oil

and

dist

illa

te13

2,98

412

2,52

711

2,06

118

6.06

128

2,48

327

5,92

826

9,87

425

9,61

4

Gas

116,

095

113,

958

147,

394

192,

214

250,

940

225,

792

210,

372

202,

031

Sul

fur

2,65

92,

459

2,24

22,

131

2,04

64,

062

2,43

52,

295

Mai

ne

Indi

vidu

alin

com

e(n

et)

23,8

7828

,179

31,3

0839

,033

44,6

0352

,190

75,1

5710

3,17

7

Ref

unds

-8,7

49

-11

,03

0-1

2,3

90

-19

,78

1-1

9,1

14

Gro

ssco

llec

tion

s47

,782

55,6

3364

,580

94,9

3812

2,29

1

Co

rpo

rati

on

net

inco

me

8,55

88,

588

10,0

4413

,202

20,1

8132

,642

35,2

0034

,307

Pro

pert

y3,

967

5,81

95,

993

5,77

610

,250

13,4

9614

,317

18,7

63

Gen

eral

3,43

54,

885

5,25

15,

771

10,2

3813

,480

14,2

9518

,741

Mar

ylan

d(X

)

Indi

vidu

alin

com

e(n

et)

413,

976

456,

854

515,

933

573,

728

665,

997

790,

364

806,

740

884,

392

01

Ref

unds

NA

-18

1,80

3-1

97

,08

1-2

26

,87

2

Gro

ssco

llec

tion

sN

A97

2,16

71,

003,

821

1,11

1,26

4

Tabl

eA

-Ico

ntin

ued

CO 0'>

Tax

1971

1972

1973

1974

1975

1976

1977

1978

(pre

lim

)

Mar

y/an

dco

ntin

ued

Co

rpo

rati

on

net

inco

me

70,2

6077

,441

80,0

3590

,065

94,3

8910

9,25

411

5,29

712

6,80

2G

ener

alco

rpo

rati

on

83,9

6898

,404

101,

514

112,

528

Pro

per

ty33

,541

36,2

7345

,954

50,0

4752

,419

59,7

9272

,446

80,4

37G

ener

al:

loan

taxe

s33

,424

36,1

6245

,647

49,7

3852

,085

59,4

8672

,143

80,0

94S

peci

al:

roll

ing

stoc

k11

811

211

510

910

134

55In

tere

stan

dpe

nalt

ies

192

198

234

272

303

288

Min

neso

ta-i

lndi

vidu

alin

com

e37

0,70

248

3,21

558

6,23

570

1,39

880

7,10

884

9,52

095

6,93

31,

074,

552

tll'

Ref

unds

-15

7,6

41

-16

9,4

85

-21

6,84

5-2

54

,25

7-

311,

465

X tll

Gro

ssco

llec

tion

s85

9,03

097

6,59

31,

066,

369

1,21

1,20

01,

386,

017

... o·C

orp

ora

tio

nne

tin

com

e79

,969

112,

403

170,

655

190,

326

195,

905

196,

436

258,

095

292,

853

:::JR

efun

ds-1

3,4

08

-19

,26

9-2

8,1

00

-27

,03

8-2

7,7

65

0G

ener

al(g

ross

)18

7,21

519

9,00

420

3,25

626

3,73

729

3,64

6.....

.

Pro

per

ty6,

844

2,86

82,

122

2,57

62,

355

2,18

23,

083

3,76

0s::

Gen

eral

139

4855

2214

2218

:::J CDS

ever

ance

18,3

8820

,080

19,9

2429

,394

35,8

9758

,171

59,7

1861

,945

.., tll

Occ

upat

ion

tax

9,31

27,

292

10,0

2215

,842

20,0

5524

,321

25,0

5710

,193

Tac

onit

e6,

358

6,88

510

,235

19,2

1818

,141

6,24

7]J

Iro

nor

e3,

664

8,95

89,

820

5,10

36,

916

3,94

6CD en

Roy

alty

tax

2,90

03,

392

3,89

03,

503

3,79

32,

853

0T

acon

ite

1,64

71,

840

2,47

71,

953

2,35

62,

770

3,03

91,

905

c ..,Ir

on

ore

421

1,43

71,

532

731

752

945

0

Co

pp

er,

nick

el2

22

22

3CD en

Tac

on

ite

ton

nag

ean

dad

diti

onal

tax

7,42

910

,948

7,00

210

,159

11,9

5230

,347

30,8

6848

,889

Mis

sour

i

Indi

vidu

alin

com

e(n

et)

168,

932

256,

801

315,

027

315,

481

311

,334

333,

843

389,

594

438,

604

):-

Ref

unds

-44

,461

-61

,037

-62

,74

1-7

2,4

39

-91

,983

Gro

ssco

llec

tion

s30

9,94

237

2,37

140

1,58

446

2,03

353

0,58

7"0 "0

Co

rpo

rati

on

net

inco

me

27,3

2250

,012

62,6

6454

,683

56,4

0583

,680

105,

772

111,

953

CD :::J

Co

rpo

rati

on

inco

me

56,4

0567

,439

87,1

6091

,224

0.

Ref

unds

-5,8

44

-9,

588

-6,9

30

-7,6

89

X

Gro

ssco

llec

tion

s62

,249

77,0

2794

,090

98,9

13

Pro

per

ty:

gene

ral

3,25

23,

899

3,56

83,

802

3,95

24,

364

4,49

24,

627

Mo

nta

na

Indi

vidu

alin

com

e(n

et)

42,3

8168

,082

77,0

6679

,029

88,5

9997

,520

111,

862

123,

621

Ref

unds

-11

,90

2-

14,2

12-

18,3

17

Gro

ssco

llec

tion

s90

,931

126,

074

141,

938

Co

rpo

rati

on

net

inco

me

9,54

611

,523

12,5

0715

,736

22,0

7923

,020

24,9

5729

,239

Pro

per

ty8,

596

7,49

26,

694

22,5

0710

,604

16,8

1315

,636

16,3

29

Gen

eral

22,4

6610

,546

16,7

3715

,636

16,2

49

Sev

eran

ce5,

131

4,47

45,

229

9,82

214

,685

31,3

4445

,753

44,6

6

Coa

lp

rod

uct

ion

2,93

32,

668

2,69

83,

315

5,39

622

,924

34,4

7033

,624

Oil

pro

du

ctio

n21

248

369

44,

256

6,18

06,

564

6,88

46,

Res

ourc

ein

dem

nity

2,21

02,

2

Met

alm

ines

tax

1,97

71,

314

1,82

82,

240

3,09

91,

845

2,17

81,

979

Nev

ada

Pro

per

ty11

,479

12,6

2114

,617

16,5

8117

,586

19,9

6422

,105

27,0

51

Gen

eral

6,57

67,

103

8,21

08,

287

IO,2

15

Rea

lpr

oper

ty5,

250

6,10

46,

538

7,57

27,

576

9,21

Per

son

alpr

oper

ty68

247

256

563

871

199

8CO

Sev

eran

ce:

min

epr

ocee

ds50

128

104

156

177

148

105

129

.....,

j

00

Tabl

eA

-Ico

ntin

ued

00

Tax

1971

1972

1973

1974

1975

1976

1977

1978

(pre

lim)

New

Jers

ey

Indi

vidu

alin

com

e(n

et)

19,5

7023

,258

25,5

2744

,035

45,9

4210

1,20

070

9,65

377

8,50

5

Co

rpo

rati

on

net

inco

me

112,

312

119,

528

170,

588

197,

591

202,

780

228,

996

332,

7-7,

538

9,22

7C

orp

ora

tio

nin

com

eta

x31

4,32

337

9,78

2

Pro

pert

y:S

peci

al:

busi

ness

pers

onal

prop

erty

50,8

4253

,442

57,7

4564

,235

70,7

4264

,742

80,4

9181

,176

New

Mex

ico

-i

III

Indi

vidu

alin

com

e(n

et)

X35

,815

44,0

8849

,501

57,9

4656

,575

58,1

9126

,639

45,9

92II

IR

efun

ds-1

5,5

64

-17

,21

4-2

3,3

24

-72

,11

6-

55,8

34.... 0

Gro

ssco

llec

tion

s73

,510

73,7

8981

,515

98,7

7510

1,82

6::::

l

Co

rpo

rati

on

neti

ncom

e10

,119

13,2

1115

,063

16,6

1018

,344

23,5

0429

,486

37,6

080 -

Pro

pert

y15

,893

15,0

3013

,230

13,8

3314

,466

13,8

4116

,095

19,8

51~

Gen

eral

13,9

9413

,210

13,4

8919

,023

Spe

cial

:oi

lan

dga

s::::

la>

prod

ucti

on47

263

12,

606

828

~ III

Sev

eran

ce35

,815

35,8

7836

,947

43,9

6371

,154

87,4

8510

2,78

314

5,82

6O

ilan

dga

s,3~

07018

,390

36,0

6446

,211

53,9

7574

,088

:::D a>O

ilan

dga

spr

ivil

ege

18,7

5226

,250

31,4

5736

,715

42,8

31CI

lO

ilan

dga

s0 c:

adva

lore

mpr

oduc

tion

3,24

63,

906

4,05

84,

419

5,03

4~

Oil

and

gas

cons

erva

tion

1,03

01,

456

2,22

52,

787

3,51

5("

) a>N

atur

alga

spr

oces

sors

1,31

91,

695

2,19

92,

719

3,21

0CI

l

Oth

er:

copp

er,

pota

sh,

uran

ium

1,22

61,

513

1,33

52,

168

17,1

48

New

Yor

k

Indi

vidu

alin

com

e(n

et)

2,55

0,20

72,

514,

557

3,21

1,93

03,

431,

993

3,58

8,58

43,

948,

808

4,52

6,97

54,

506,

245

Ref

unds

-71

3,6

31

-75

8,2

40

-96

0,6

11

-57

6,7

83

-1,1

38

,57

3»

Gro

ssco

llec

tion

4,14

5,62

44,

346,

824

4,63

9,41

95,

103,

758

5,64

4,81

8"0

."0

Co

rpo

rati

on

net

inco

me

572,

328

781,

010

874,

267

874,

379

967,

401

1,13

2,75

61,

295,

001

1,34

4,61

0a>

Co

rpo

rati

on

fran

chis

e43

3,82

560

1,36

969

3,94

870

6,17

476

3,26

987

7,19

01,

048,

021

1,08

0,59

6::::

l~ X

Nor

thD

ako

ta

Indi

vidu

alin

com

e(n

et)

16,8

7719

,506

27,3

1845

,435

67,6

4950

,477

55,0

3769

,171

Ref

unds

-3,0

95

-6,

143

-6,9

50

-5,

387

Gro

ssco

llec

tion

s70

,743

56,6

2061

,987

74,5

58

Co

rpo

rati

on

neti

ncom

e7,

723

8,87

210

,089

14,5

2619

,964

19,5

7221

,800

20,9

21

Co

rpo

rati

on

net

inco

me

6,11

98,

559

9,32

812

,566

11,9

65

Bus

ines

spr

ivil

ege

tax

8,40

711

,405

10,2

449,

234

8,95

6

Pro

per

ty1,

410

1,47

61,

353

1,46

31,

468

1,73

02,

605

2,62

5

Gen

eral

847

829

864

882

891

1,09

31,

222

1,24

8

Sev

eran

ce3,

166

3,30

63,

140

4,35

86,

880

12,5

9415

,418

18,6

19

Oil

and

gas

prod

ucti

on3,

166

3,30

63,

140

4,35

86,

880

8,28

39,

288

10,7

30

Coa

lpr

oduc

tion

4,31

16,

130

7,88

9

Ohi

o

Lic

ense

390,

676

326,

457

355,

470

421,

469

370,

748

335,

460

Pub

lic

util

itie

s

6,71

38,

202

Coa

lco

nsum

ptio

n

341

Str

ipm

inin

gad

min

.69

872

959

677

280

474

1

Indi

vidu

alin

com

e11

1,26

937

3,54

341

9,17

448

1,78

551

1,63

661

4,87

977

5,49

4

Ref

unds

-51

,681

-54

,730

-64

,68

3-6

9,5

58

-77

,04

8

Gro

ssco

llec

tion

s47

0,85

553

6,51

557

6,31

968

4,43

785

2,54

20:

>

Co

rpo

rati

on

net

inco

me

134,

698

167,

970

190,

584

267,

315

265,

052

315,

481

461,

393

CD

Pro

pert

y:sp

ecia

l60

,553

65,5

1575

,950

84,2

1991

,335

98,1

6110

8,34

711

9,61

7

Tab

leA

-1co

ntin

ued

<0

0

Tax

1971

1972

1973

1974

1975

1976

1977

1978

(pre

lim)

Ohi

oco

ntin

ued

Sev

eran

ce86

44,

141

4,10

13,

892

3,93

03,

918

3,80

0C

oal

and

salt

555

2,13

62,

012

1,92

82,

070

1,99

71,

937

Oil

4325

023

323

425

626

625

8

Ok

lah

oma

Indi

vidu

alin

com

e(n

et)

63,6

4897

,759

105,

054

120,

773

176,

208

200,

998

216,

833

252,

127

Ref

unds

-24

,83

7-

33,5

14-5

6,2

63

-60

,82

3--

lG

ross

coll

ecti

ons

201,

045

234,

512

273,

096

312,

950

ll> X

Co

rpo

rati

on

neti

ncom

e25

,207

28,0

1435

,434

40,3

6646

,053

53,4

3070

,635

91,3

75ll> -

Sev

eran

ce51

,280

73,3

4271

,456

96,9

8012

8,09

615

1,31

619

1,35

123

0,36

8:::J

Gro

sspr

oduc

tion

50,0

9972

,164

70,3

2695

,898

126,

858

150,

071

189,

180

215,

925

Gas

cons

erva

tion

11,8

07-

Pet

role

umex

cise

1,18

11,

178

1,13

01,

082

1,23

81,

245

2,17

12,

636

~ ~ CD "'"O

rego

nll>

Indi

vidu

alin

com

e(n

et)

226,

245

251,

226

300,

555

352,

396

427,

002

472,

147

561,

895

686,

248

::D CDR

efun

ds-6

4,5

95

-69

,54

7-7

7,5

40

-87

,10

7-9

5,4

05

(J)

Gro

ssco

llec

tion

s41

6,99

14%

,549

549,

687

649,

001

781,

653

0 CC

orp

ora

tio

nne

tin

com

e24

,517

40,6

0651

,131

85,7

3490

,691

66,6

5791

,104

125,

474

.... (')

Sev

eran

ce2,

538

2,38

12,

581

2,82

43,

084

3,45

83,

680

4,11

7CD

Eas

tern

and

wes

tern

(J)

Ore

gon

seve

ranc

e1,

880

2,14

11,

917

2,15

7

Pen

nsyl

vani

a

Lic

ense

593,

323

664,

741

726,

844

Ser

vice

min

ing

cons

erva

tion

387

409

421

»In

divi

dual

inco

me

(net

)13

5,06

773

0,64

11,

010,

825

1,11

5,61

299

5,40

91,

062,

210

1,17

8,07

11,

327,

816

"t:l

"t:l

Ref

unds

-9,0

50

-38

,098

-28

,36

0-2

4,8

37

-18

,78

3CD

Gro

ssco

llec

tion

s1,

124,

662

1,03

3,50

71,

090,

570

1,202,~9

1,34

6,59

9~ 0

-

Co

rpo

rati

on

neti

ncom

e43

1,69

648

1,60

049

7,21

254

0,10

360

1,01

661

6,87

266

5,99

378

6,97

6X

Pro

pert

y:sp

ecia

l33

,765

35,6

7239

,963

46,0

4647

,881

60,0

5462

,524

69,6

22

Uti

lity

prop

erty

30,8

4032

,307

,16,

317

42,4

2643

,731

55,2

9057

,527

64,9

67

Dom

esti

cco

rpor

atio

n3,

415

3,89

34,

495

4,25

04,

401

For

eign

corp

orat

ions

205

257

269

747

253

Sou

thD

akot

a

Sev

eran

ce31

053

687

2

Min

eral

and

min

eral

prod

ucts

310

536

526

Oil

and

gas

346

Ten

ness

ee

Lic

ense

156,

017

164,

284

Str

ipm

inin

gpe

rmit

s19

337

6

Indi

vidu

alin

com

e(d

ivid

ends

and

inte

rest

tax)

(net

)12

,383

13,5

9815

,103

16,4

6418

,436

22,1

3122

,385

24,8

57

Ref

unds

-62

-49

-11

9-1

10

6070

tax

(gro

ss)

14,9

5018

,011

18,6

4521

,181

4070

tax

(gro

ss)

3,50

33,

880

3,71

33,

699

Pen

alti

esan

din

tere

st45

289

147

87<

0

Co

rpo

rati

on

neti

ncom

e59

,455

77,8

0410

2,97

811

2,97

412

6,71

512

8,62

115

6,04

217

0,84

8-'

"

Exc

ise

(inc

ome)

128,

621

150,

935

164,

8

Sev

eran

ce:

coal

tax

810

1,59

51,

818

2,05

22,

128

coTa

ble

A-I

cont

inue

dI\

)

Tax

1971

1972

1973

1974

1975

1976

1977

1978

(pre

lim)

Tex

asP

rope

rty:

gene

ral

63,8

3761

,589

57,1

9150

,811

44,9

0136

,668

42,7

5544

,598

Sev

eran

ce30

7,92

431

1,97

933

9,75

752

3,74

566

6,87

680

0,69

390

7,28

195

9,68

6N

atur

alan

dca

sing

head

gas

108,

809

114,

380

124,

902

171,

068

257,

325

364,

588

474,

318

517,

844

Cru

deoi

l19

2,47

419

0,78

520

7,52

234

4,83

240

2,55

342

9,10

542

6,37

343

5,22

3S

ulfu

r4,

291

4,61

14,

959

5,51

64,

787

4,79

04,

480

4,63

6O

ilan

dga

sre

gula

tion

2,35

02,

203

2,37

42,

329

2,21

12,

210

2,11

01,

983

-i

Ql

X Ql ....

Uta

h0

Indi

vidu

alin

com

e(n

et)

61,8

8474

,096

88,5

4790

,032

104,

919

140,

562

153,

562

188,

894

::J

Ref

unds

-17

,66

8-1

6,3

72

-17

,92

2-2

5,4

06

-31

,03

00 -

Gro

ssco

llec

tion

s10

7,70

012

1,29

115

8,48

418

3,67

421

9,92

43:

Cor

pora

tion

neti

ncom

e(f

ranc

hise

)11

,085

12,6

3629

,575

20,1

7318

,002

24,5

0124

,866

29,4

48::

J CDP

rope

rty:

Gen

eral

13,0

8914

,634

9,49

23,

409

258

204

197

186

$i3S

ever

ance

4,67

13,

938

3,91

35,

292

6,23

811

,723

8,93

18,

926

::DM

ine

occu

pati

on3,

374

2,50

62,

383

2,87

134

24,

731

2,49

02,

283

CDO

ilan

dga

spr

oduc

tion

1,29

71,

432

1,53

02,

421

5,89

66,

992

6,44

16,

643

CIl

0 C ..., (')

Vir

gini

aCD CI

lL

icen

se12

4,74

112

9,85

612

6,60

3S

trip

min

ing

perm

its

309

373

352

Indi

vidu

alin

com

e(n

et)

312,

984

365,

984

441,

900

468,

967

547,

125

614,

575

714,

086

874,

817

Ref

unds

NA

-13

7,1

49

-14

8,1

36

-17

1,5

53

Gro

ssco

llec

tion

sN

A75

1,72

486

2,22

21,

046,

370

>C

orpo

rate

neti

ncom

e64

,705

77,6

4296

,618

106,

406

117,

065

130,

417

159,

152

164,

790

"C "C CD ::J 0-

Was

hing

ton

X

Pro

pert

y11

6,52

513

2,35

013

1,78

591

,245

156,

641

271,

528

303,

165

349,

229

Gen

eral

66,9

5776

,064

72,5

7127

,715

87,5

3018

8,25

420

5,79

523

4,98

8

Wis

cons

in

Indi

vidu

alin

com

e(n

et)

507,

146

594,

697

727,

885

802,

995

873,

723

959,

923

1,14

4,07

31,

324,

679

Ref

unds

-98

,46

1-1

00

,80

6-1

11

,37

7-

122,

548

-15

6,

Gro

ssco

llec

tion

s90

1,45

697

4,53

01,

071,

300

1,26

6,62

11,

480,

898

Cor

pora

tion

neti

ncom

e88

,792

116,

805

136,

107

160,

269

153,

407

190,

419

251,

657

284,

979

Pro

pert

y86

,386

93,0

5491

,295

92,0

8712

6,70

791

,910

100,

874

Sev

eran

ce:

prod

ucti

onta

x(t

imbe

r/ir

onor

e)26

131

347

542

150

465

169

860

2

Wyo

min

g

Pro

pert

y9,

725

9,66

07,

570

9,79

76,

315

7,04

59,

049

17,5

89

Gen

eral

8,53

78,

490

6,11

56,

659

8,79

417

,355

Sev

eran

ce4,

877

5,07

55,

307

5,08

618

,543

40,9

7446

,969

66,0

21

Min

eral

exci

se,

4070

NA

38,7

9143

,732

44,1

16

Min

eral

exci

se,

2070

NA

1,52

51,

925

3,76

6

Coa

l28

399

717

,716

Coa

land

gas

conv

ersi

on30

737

531

542

3

Coa

land

gas

prod

ucti

on4,

877

5,07

55,

307

5,08

6CO W

Bibliography

Agria, S.R. "Special Tax Treatment of Mineral Industries." InA.C. Harberger and M.J. Bailey, eds., The Taxation of Incomefrom Capital. Washington: Brookings, 1969.

Agterberg, F.P., and A.M. Kelly. "Geomathematical Methods foruse in Prospecting." Canadian Mining Journal (May 1971).

Allais, M. "Method of Appraising Economic Prospects of MiningExploration over Large Territories: Algerian Sahara CaseStudy." Management Science 3 (July 1957): 285-347.

Atkinson, A.B., and J. Stiglitz. "The Design of Tax Structure:Direct versus Indirect Taxation." Journal ofPublic Economics 6(1976): 55-76.

Beasley, Charles A., Charles R. Tatum, and Brian W. Laurence. "AProgram for the Determination of the Technical and EconomicFeasibility of Mining Operations." In T.B. Johnson and DonaldW. Gentry, eds., 12th Annual International Symposium on theApplications of Computers in the Mineral Industry. Golden,Colo.: Colorado School of Mines, 1974.

Bennett, Harold J. et al. Financial Evaluation of Mineral DepositsUsing Sensitivity and Probabilistic Methods. Washington: U.S.Department of the Interior, Bureau of Mines, 1970.

Binger, Brian R. "Long-Run Costs in Uranium Production." University of Chicago, April 1977.

Boyle, Gerald J. "Taxation of Uranium and Steam Coal in theWestern States." In A.M. Church, ed., Non-RenewableResource Taxation in the Western States. Cambridge: LincolnInstitute, 1977.

Brown, G.A. "The Evaluation of Risk in Mining Ventures." Canadian Institute of Mining Trans. 72, 1970 (elM Bulletin, October1970).

Burness, H.S. "On Taxation of Nonreplenishable NaturalResources." Journal ofEnvironmental Economics and Management3 (1976): 289-311.

Burt, O.R., and R.G. Cummings. "Production and Investment inNatural Resource Industries." American Economic Review 60(September 1970): 576-590.

Byrne, R.F., and L.J. Sparvero. "A Study and Model of the Exploration Process in the Non-Fuel Mineral Industry." Report to

95

96 Taxation of Mineral Resources Bibliography

U.S. Bureau of Mines, 1969. Available through Clearinghousefor Federal Scientific and Technical Information, Springfield,Virginia, PB 188 526.

Carlisle, D. "The Economics of a Fund Resource with ParticularReference to Mining." American Economic Review 44 (SeptemberI954):595-616.

Cigno, A., and B. Hool. "Bounded Rationality and IntertemporalDecision-Making." Metroeconomica, 1980.

Conrad, Robert F. "Taxation and the Theory of the Mine." Ph.D.thesis, University of Wisconsin, 1978a.

---. "Royalties, Cyclical Prices and the Theory of the Mine."Resources and Energy 1 (l978b): 139-150.

---. "Mining Taxation: A Numerical Introduction." Duke University, 1979a.

---. "Taxation of the Concentration Decision." Duke University, 1979b.

Conrad, Robert F., and Bryce Hool. "A Theory ofthe Mine." DukeUniversity, 1979a.

---. "Resource Taxation with Heterogeneous Quality and Endogenous Reserves." Duke University, 1979b.

Convery, F., and R.F. Conrad. Irish Minerals Policy. GovernmentofIreland, 1979.

Cooper, D.O., L.B. Davidson, and K.M. Reim. "Simplified Financial and Risk Analysis of Minerals Exploration." In Jobo R.Sturguled, ed., 11th International Symposium on ComputerApplications in the Mineral Industry. Tucson: University of Arizona, 1973.

Davidson, P. "The Depletion Allowance Revisited." NaturalResources Journal 1 (1970).

Dougherty, E.L., and R.W. Schewel. "Computer Exploration Techniques." Mining Magazine 123 (August 1970).

Fiekowsky, S., and A. Kaufman. "Mineral Taxation." inW.A. Vogeley and H.E. Risser, eds., Economics of the MineralIndustries, 3d ed. New York: AIME, 1976.

Frohling, Edward S. "What Kind of Financing You Need to GetYour Small Mine into Production." Engineering and MiningJournal (December 1970).

Frohling, Edward S., and Robert M. McGeorge. "How StepwiseFinancing Can Turn Your Prospect into an Operation Mine."Mining Engineering 27 (September 1975): 30-32.

Gaffney, M., ed. Extractive Resources and Taxation. Madison: University of Wisconsin, 1967.

Gentry, D.W. "Two Decision Tools for Mining Investment andHow to Make the Most of Them." Mining Engineering 23(November 1971): 55-58.

Gentry, D.W., and T.S. O'Neill. "A Short Course on FinancialModeling and Evaluation of New Mine Properties." Golden,Colo.: 12th APCOM Symposium, 1974.

Gillis, S. Malcolm. "Severance Taxes on North American EnergyResources: A Tale of Two Minerals." Growth and Change 10(January 1979): 55-71.

Gillis, S.M., and C.E. McClure, Jr. "The Incidence of World Taxeson Natural Resources, with Special Reference to Bauxite."American Economic Review 65 (May 1975).

Gillis, M. et al. Taxation and Mining. Cambridge: Ballinger, 1978.Griffin, K., and R.B. Shelton. "Coal Severance Tax Policies in the

Rocky Mountain States." Policy Studies Journal 7 (1978):29-40.

Halls, J.L., P.P. Bellum, and C.K. Lewis. "The Determination ofOptimum Ore Reserves and Plant Size by Incremental FinancialAnalysis." AIME-Society of Mining Engineers. Preprint,February 1969.

Hansen, C.J. "If Cabbages Were Kings: A Practical Approach tothe Taxation of Mining Properties." In A. Church, ed., NonRenewable Resource Taxation in the Western States. Cambridge:Lincoln Institute, 1977.

Harberger, A.C. "The Taxation of Mineral Industries." InA.C. Harberger, ed., Taxation and Welfare. Boston: Little,Brown and Co., 1974.

Harris, DeVerle D. "Risk Analysis in Mineral Investment Decisions." AIME-Society of Mining Engineers Transactions. 247(September 1970): 193-201.

Hazen, S.W. "Some Statistical Techniques for Analysis of Mine andMineral Deposit Sample and Assay Data." Bureau ofMines Bulletin no. 621, 1967.

Hoskold, H.D. The Engineers' Valuing Assistant. London: Long-mans, Grum and Co., 1877.

Hotelling, H. "The Economics of Exhaustible Resources." JournalofPolitical Economy 39 (April 1931): 137-175.

Just, Evan. "The Production Process." In W.A. Vogely and

98 Tax tJ n f Min ral Resources Bibliography 99

H.E. Risser, eds., Economics of the Mineral Industries, 3d ed.New York: AIME, 1976.

Koch, G.S. "Statistical Analysis of Assay Data from the RoundMountain Silver Prospect, Custer County, Colorado." Washington: Bureau of Mines Report ot Investigations R.I. 74861971. ' ,

Koch, G.S., and R.F. Link. "Sampling Gold are by Diamond Drilling in the Homestead Mine, Load, S. Dakota." U.S. Bureau ofMines, R.I. 7508, 1971.

Lane, K.F. "Choosing the Optimum Cut-off Grade." Quarterly of~he Colo.rado School ofMines 59 (October 1964): 811-830.

LewIs, F. Ml1ton, and Roshan B. Bhappu. "Evaluating Mining Ventures via Feasibility Studies." Mining Engineering 27 (October1975): 48-54.

Lindley, A:H. et al. "Mineral Financing." In W.A. Vogely andH.E. RIsser, eds., Economics of the Mineral Industries, 3d ed.New York: AIME, 1976.

Link, A.A. "Political Constraints and North Dakota's Coal Severo ance Tax." National Tax Journal 31 (September 1978): 263-268.

LInk, R.F. et al. "Statistical Analysis of Gold Assay and OtherTrace Element Data." U.S. Bureau of Mines, R.I. 7495, 1971.

Lockner, A.a. "The Economic Effect of a Progressive Net ProfitTax on Decision-Making by the Mining Firm." Land Economics38 (November 1962): 341-349.

---. "The Economic Effect of the Severance Tax on the Decisions of the Mining Firms." Natural Resources Journal 4 (January 1965): 468-485.

Long, Stephen C.M. "Coal Taxation in the Western States: TheNeed for a Regional Tax Policy." Natural Resources Journal 16(April 1977).

McClure, Charles E., Jf. "State Corporate Income Tax: Lambs inWolves' Clothing?" OTA Paper 25, Office of Tax Analysis,U.S. Treasury, March 1977.

---. "Interstate Exporting of State and Local Taxes: Estimatesfor 1962." National Tax Journal 20 (March 1967): 49-77.

---. "The Interregional Incidence of General Regional Taxes."Public Finance 24 (1969): 457-483.

---. "Economic Constraints on State and Local Taxation ofEnergy Resources." National Tax Journal 31 (1978): 257-262.

McDonald, Stephen L. "The Non-Neutrality of Corporate Income

Taxation: A Reply to Steiner." National Tax Journal 17 (March1964): 101-104.

---. "Incentive Policy and Supplies of Energy Sources." American Journal ofAgricultural Economics 56 (May 1974): 402.

---. "The Effects of Severance vs. Property Taxes on PetroleumConservation. " Proceedings of the National Tax Association(1965): 320-327.

---. "Percentage Depletion, Expensing of Intangibles, andPetroleum Conservation." In M. Gaffney, ed., ExtractiveResources and Taxation. Madison, University of Wisconsin,1967.

---. "Taxation System and Market Distortion." In William A.Vogely and Robert J. Kalter, eds., Energy Supply and Government Policy. Ithaca: Cornell University Press, 1976.

---. Federal Tax Treatment ojOit and Gas. Washington: Brookings, 1963.

---. "Percentage Depletion and Tax Neutrality: A Reply toMessrs. Musgrave and Eldridge." National Tax Journal 15 (September 1962):314-326.

---. "Percentage Depletion and the Allocation of Resources:The Case of Oil and Gas." National Tax Journal 14 (December1961): 323-336.

McGeorge, Robert L. "Approaches to State Taxation of the MiningIndustry." Natural Resources Journal 10 (January 1970):156-170.

MacKenzie, B.W. et al. "The.Effect of Uncertainty on the Optimization of Mine Development." In T.B. Johnson and Donald W.Gentry, eds., 12th Annual International Symposium on theApplications oj Computers and Mathematics in the MineralsIndustry. Golden, Colo.: Colorado School of Mines, 1974.

McKinstry, H.E. Mining Geology. New York: Prentice-Hall, 1948.Maximov, A. et al. Short Course in Geological Prospecting and

Exploration. Moscow: MIR Publishers, 1973 (1st English translation).

Maxwell, J.A. Financing State and Local Governments. Washington: Brookings, 1965.

Mieszkowski, A. "The Property Tax: An Excise Tax or a ProfitsTax?" Journal ojPublic Economics 1 (1972): 73-96.

Patterson, J .A. "Estimating Ore Reserves Following LogicalSteps." Engineering and Mining Journal 160 (September 1959).

100 Taxation of Mineral Resources Bibliography 101

Peterson, F.M. "The Long Run Dynamics of Minerals Taxation."University of Maryland, 1976.

Peterson, F.M., and A.C. Fisher. "The Exploitation of ExtractiveResources: A Survey." Economic Journal 87 (December 1977):681-721.

Pfluder, E.T., ed. Surface Mining. New York: AIME, 1968.Preston, Lee E. Exploration for Non-Ferrous Metals. Baltimore:

Johns Hopkins, 1960.Roff, Arthur W., and James C. Franklin. "A Statistical Mine Model

for Cost Analysis, Planning and Decision Making." Quarterly ofthe Colorado School ofMines 59 (October 1964): 915-924.

Shelton, R.B., and W.E. Morgan. "Resource Taxation, Tax Exportation and Regional Energy Policies." Natural Resources Journal17 (April 1977): 261-282.

Solow, R. "The Economics of Resources and the Resources of Economics." American Economic Review (May 1974).

orenson, J.B., and R. Greenfield. "New Mexican Nationalism andthe Evolution of Energy Policy in New Mexico." NaturalResources Journal 17 (April 1977): 287-292.

teering Committee on the Impact of Taxation on Energy Markets."A Taxonomy of Energy Taxes. " Washington: NationalAcademy of Sciences, 1979.

Steiner, P.O. "Percentage Depletion and Resource Allocation." InTax Revision Compendium. Washington: GPO, 1959.

Stinson, Thomas F. "State Taxation of Mineral Deposits and Production." Office of Research and Development, U.S. Environmental Protection Agency. Washington: GPO, 1977.

---. "State Taxation of Mineral Deposits and Production."Rural Development Report no. 2. Washington: USDA, 1978.

Thomas, L.J. An Introduction to Mining. Sydney: Hicks, Smith andSons, 1973.

Thomas, E.G. "Justification of the Concept of High-GradingMetalliferrous Ore Bodies." Mining Magazine 134 (May 1976):393-396.

Truscott, S.J. Mine Economics, 3d ed., revised by J. Russell. London: Mining Publications, 1962.

Vogely, W.A., and H.E. Risser, eds. Economics of the MineralIndustries, 3d ed. New York: AIME, 1976.

Walduck, G.P. "Justification of the Concept of High-Grading in the

Metalliferrous Ore Bodies: A Dissenting View." Mining Magazine 134 (1976): 65-66.

Warren, R. State Mineral Taxation. Cambridge: Harvard, 1944.Yasnowsky, P.N., and A.P Graham. "State Severance Taxes on

Mineral Production." Proceedings of the Council ofEconomics,105th Annual Meeting. American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc., Las Vegas, 22-26 Feb-ruary 1976.

Index

"ABC" rule for income, 12Accessibility, market, 22Ad valorem: output tax, 38-39, 43, 60;

property tax, 13, 16,40-41,54,59-60; tax rate, I, 12,48, 52

Adjustment costs, 26Administrative: costs, I, 12,63,76;

ease, 36; scale economies in, 16;taxes, 44

After-tax discounted profits, 36-37,40-44,52-54

Agencies, federal, 19Airplanes, factor of, 19Alabama, 3, 12-14, 16,80Alaska, 2-3, 12, 14, 16, 80All-or-nothing decisions, 30Allocation of income and profit, 16,64,Allowances: depletion, 42-43, 54, 64,

67; exploratory, 57Alternative taxes, 44Arizona, 4, 13-14, 16,76,81; copper

royalty in, 2; mineral tax division in,18

Arkansas, 4, 14, 17,81Arkansas Oil Museum, 4Assessment(s): property, 40-41;

"quick," 22; ratio, 16, 76Assessors, local tax, 13Assets, 72; corporate, 12

Behavior, profit-maximizing, 59Benefits: from exploration, 56; tax, 59Bonanzas, 58Bonuses, lease, 58Budgets and budgeting, 2, 74Bureaucracy, problems with, 16

California, 5, 14, 17, 81Capital; expenditures, 57,71; gains,

58-59; intensive process, 58;inve ted, 58, 70-72; and net income,41; owner, 68-69; ral f r IlIrn n,

Index

60, 68, 73; taxes, 68; use of, 22, 76Cash flow, 23-24; positive, 31; value of,

55-56City taxes, 74Coal, production and uses of, 2-3, 5-11Collection, factor of, 16,36Colorado, 5,13-14,17,82Compensation: corporate, 13;

executive, 16Competition, economic, 58Concentration, process of, 21-22,

54-55,72-73Conservation, environmental, 73Constant-price ease, 48Consumer Price Index (CPI), 73Consumers: prices to, 2; of products, 60Contracts: long-term, 22, 60;

"save-free" clauses in, 68Copper, royalties on in Arizona, 2Corporate: assets, 12; compensation,

13; employment, 12; enterprises, 18;income, 12, 16,70; overhead, 13, 16,72; profits, 13, 16; sales, 12; tax base,65

Cost(s): adjustment, 26; administrative,1,12,63,76; depletion, 16,53,71;earnings, 20; expansion, 23;extraction, 2, 30, 38, 52, 56; localservices, 16; marginal, 45; operating,12,64

Cutoff grades, factor of, 36, 39, 41, 43,45,66

Data, time-series, 69Decisions: all-or-nothing, 30; hierarchy

of, 25; investment, 25; long-run, 26;making of, 26-28, 54

Depletion: allowances, 42-43, 54, 64,67; cost, 16,53,71; factor of, 1,77;of resource base, 12

Deposits, quality of, 2Depreciation, I, 13; straight-line, 16

105

106

Development: long-range, 23; mineral,69,77; new, 24; policies, 20, 59; andresearch, 16,72

Discount: prices, 26; profits, 35-37,40-44, 52-54; rates, 28

Distortions, effects of, 44, 66Documentation, historical, 19Downside risks, factor of, 42, 70, 72Drilling, diamond and shallow, 20Drug industry, 31

Earning power: cost, 20; future, 29Economics and the economy: adverse

incentives, 16; competition in, 58;condition changes in, 19,24; factorof, 26, 44, 52; market, 57, 69

Electricity, use of, 16Employment, 72; corporate, 12Enforcement policies, 16,63, 70Engineering studies, need for, 22Environment: and conservation, 73;

damage to, 2; policies on, 24Equity, issues of, 43-44Estimates of mineral reserves, 19,22Executive compensation, 16Expansion, costs of, 23Expenditures, capital, 57, 71Exploitation, problems of, 20, 24Exploration: activity, 69; allowances

for, 57; benefits from, 56;capitalization of, 71; programs of,19-25,59

Exportation, tax, 18Extraction: cost of, 2, 30, 38, 52, 56, 66;

mineral ore, 1, 23-24; process, 1-2,28,35-39,44; quantity ratio of, 21,63; values, 1

Fault structures, importance of, 20-21Federal: agencies, 19; taxes, 12-13, 18,

57Fees, management, 72Fire protection, 74Fixed-payments and taxes, 36, 39Florida, 6, 14, 17Flotation process, 21Funds, highway trust, 2

x tI 11 I Min r I Resources

a, -7, -1 I, 16-17, 43Ga oline laxe.. 2Geochemical properties, 20, 55Geography, factor of, 19Geological factors: characteristics of,

19-21; composition of, 70; influenceof, 26, 30-31,44-46, 52-53, 55; andmaps, 19; structure of, 41

Geophysical anomalies, 20-21Georgia, 82Gross-proceeds methods, 1, 13-16

Hierarchical policies, 25, 35High-grade ores, 72Highway trust funds, 2Housing, factor of, 73

Idaho, 6, 14,82Illinois, 14,83Incentives, 70; adverse economic, 16;

distortion of, 44; tax, 57Income: allocation of, 64; capitalized

net, 41; corporate, 12, 16,70;intrastate, 72; property, 76; state, 69;subsidies, 71; taxes, 1, 16,65,70-74

Indexes, price, 2, 39-40, 73Indiana, 83Inflation indicators, 12, 37Inspection policies, 20Integrated: firms, 12; tax systems,

53-54,63-68; vertical operations, 1Interest, rate of, 54Interstate profit allocation rules, 13, 16Intrafirm transactions, 13Investment(s), 20-23, 59; and capital,58, 70-72; decisions, 25; incremental, 67Iowa, 83Iron ore, 3-4

Kansas, 14,84Kentucky, 6, 14, 17,84

Labor requirements, 2, 68-69, 72Land reclamation, 70; funds for, 2Laws, federal tax, 12Lease bonuses, system of, 58Loans and loaning principles, 22

Index

Local: services, 16, 18; taxes, 63, 67Louisiana, 6, 14, 17, 84Low profit mines and mining, 12

Magnetic processes, 19,22Maine, 84Management policies and fees, 72Maps and mapping, 19-20Marginal: extraction costs, 45, 66;

mines, 12, 76; taxes, 66Market(s): accessibility to, 22; changing

conditions of, 24; depressed, 70;economy, 57, 69; failures, 77; prices,13,71,73; studies, 22; transactions,1; value of reserves, 40

Maryland, 84-85Maxwell, J.A., 74McClure, Charles E., Jr., 71Michigan, 7,13-14,17Mineral: development, 69, 77;

extraction, 1; rights, 60, 69; taxation,

18Mineralization, type of, 20-21Mining and mines: low-profit, 12;

marginal, 12,76; operations, 24-26;profitability, 22; recovery, 41;.risksinherent in, 71; sites, 38; taxatIOn, 1;underground, 73; wealth of, 13

Minnesota, 7,13-14,39,86Mississippi, 7, 17Missouri, 87Moisture levels, factor of, 21Monopoly accusations, 60Montana, 2, 8, 12, 15, 17,87

Natural resources, policies on, 55,58-59, 71

Nebraska, 9Negative severance tax, 42Net proceeds taxes, 13-16,41,44Net-of-tax: prices, 52; rate of return, 58Nevada, 9,17,87New Jersey, 89New Mexico, 9, 15, 17,40,63,65-67,

69,73,89New York, 90

107

Nondistortionary profits tax, 56, 59Nonrenewable resources, 36North Dakota, 10, 15, 17,90,37,39-40,

74

Ohio, 10,90-91; coal in, 2Oil, 3-11,16-17,43; shale, 5Oklahoma, 10, 15, 17,90On-site inspections, need for, 20Open-pit mining methods, 21,73Oregon, 17, 90Ores: bypassing of, 2; dilution of, 21;

extraction of, 23-24; grades of, 21,72; iron, 3-4

Output-related taxes, 1-12,52,72-74;ad valorem, 38-39, 43, 60

Overburden, nature or, 21, 24Overhead, corporate, 13, 16,72Ownership: of capital, 68-69; property,

57-60,69; resource, 71; of surfacerights, 57

Payback periods, undiscounted, 23Payments: fixed, 36; royalty, 64; tax, 56Pennsylvania, 15, 17, 91piggyback federal taxes, 12.Plants: processing, 23, 38; size of, 23, 30Police protection, 74Policy making and makers, 59. See also

DecisionsPolitics and political uncertainties, 24Pollution, problems of, 70Price indexes, 2, 39-40, 73Prices: consumer, 2; discounted, 26;

housing, 73; increases in, 68; market,13,71,73; net-of-tax, 52; projections

of, 22, 27 .Processing: plants, 23, 38; techmques,

54-55,72-73Production schedules and taxes, 1, 24,

68Products: consumers of, 60; finished, 2Profitability and profits, 25; after-tax,

35-37,40-44,52-54; corporate, 13,16; discounted, 36-37; interstateallocation, 16; intertemporalextraction, 2; margin formulas for,

~------

108 Taxation of Mineral Resources Index 109

76; mining, 22; nondistortionary, 56,59; progressive taxes on, 1,43-44

Property: assessments, 40-41; income,76; owners, 57-60, 69; taxes, I,13-16,40-41,54,59-60,64,74-77

Proportional profits taxes, 42-44Public: policies, 31; services, 2, 16, 74

Quality, paterns of, 2, 24, 55, 63Quantity: of extracted ores, 63; and

quality mix, 44"Qu ick" assessments, 22

Ral of return, 23, 58-59; on capital, 60,68, 73

Recovery: factor of, 19,22; mine, 41, 55Refining proces es, 72Rents: collection of, 36; of

natural-resources, 58-59; taxing of,57-59

Research and development, 16,72Reserves: nature of, 22, 25; probable,

21; recoverable, 29, 56Resources: depletion of, 12; natural, 2,

55,58-59,71; nonrenewable, 36; andrents, 2; owners, 71; value of, I

Revenue: raising of, I; source of, 74;tax, 52

Rights: mineral, 60, 69; surface, 57Risk(s): assumption of, 24-25;

downside, 42, 70, 72; effect of,26-31; mining, 71; offset of, 56-57;sharing of, 58

Royalties: copper in Arizona, 2;payment of, 64; percentages, 58-59

Sales, 72, 76; corporate, 12; taxes, 74Satellites, factor of, 19"Save free" contract clauses, 68Schools and education, 16,74Security Exchange Commission (SEC),

76Sensitivity studies, 23Separation processes, 21-22Services: budget, 2; local, J8; publi ,2,

16,74

Severance taxes, 1-2,36-39,53,70;negative, 42; rate of, 64

Shale oil, recovery of, 5South Dakota, 10, 12,91; coal in, 2State: income, 69; taxes, 13, 18,66Stinson, Thomas F., IStorage facilities, 23Straight-line depreciation factors, 16Studies, feasibility, 22-23Subsidies, 59; implicit, 42; income', 71Sulfur, 6Surface rights, ownership of, 57Surveys, geographical, 19

Taxes and taxation: absence of, 12,35,45,67; ad valorem, I, 12,38-39,43,48, 52, 60; administrative, 44; alternative, 44; and assessors, 13;benefits of, 59; city, 74; corporate,65; exportation, 18; fixed-free, 39;gasoline, 2; incentives, 57; income,71; integrated system, 31, 53-54,63-68; laws on, 12; local, 13,63,67;marginal, 66; net proceeds, i3-i6,41,44,52,58; nondistortionary, 56,59; output, 1-12,37-39,43,52,60,72-74; payments of, 56; piggyback,12; production, progressive profits,1,43-44,56,59,73; and rents, 57-59;revenues, 52; sales, 74; severance,1-2,36-39,42,53,64,70,73; special,I, 12; state, 13, 18,66; in Wyoming,41

Technology, 22, 25; record of, 76;speci fie, 23; trends in, 18

Tennessee, II, 91Tests, geochemical, 20Texas, 92Time: assessment, 40-41; paths, 44;

series data, 69Tin, deposits, of, 26-27Tonnage of material, 21-22, 25Trade-off, 24, 55, 63Transportation facilities, 23TruSI funds, variable, 2

Underground mines and mining, 21, 73Uranium, to-II, 63-65Utah, Il, 15, 17,41,92

Value(s): assigning of, I; of cash flow,55-56; of extracted resources; I, ofmarket reserves, 40

Virginia, 92

Washington, 93Waste, problem of, 22Water, factor of, 16West Virginia, II, 15, 17Wholesale Price Index (WPI), 2, 73Windfalls, 43, 73Wisconsin, 17,93; net-proceeds tax in,

44Working days, 25Wyoming, 2, II, 17,93; tax base in, 41

About the Authors

Robert F. Conrad is currently assistant professor of economics atDuke University. He received the Ph.D. in economics at the University of Wisconsin, Madison in 1978. Prior to his current position,Professor Conrad was a visiting lecturer in economics at Northwestern University and worked in the office of international tax affairsat the U.S. Treasury Department.

Professor Conrad has served as a consultant on mineral taxationpolicy for the governments of Canada, Ireland, and Indonesia. Hisother research interests include capital taxation, taxation of multinational firms, and health economics.

Bryce Hool received the Ph.D. in economics from the University ofCalifornia at Berkeley, after receiving the B.Sc. in mathematics andM. Comm. in economics from the University of Canterbury. He iscurrently an associate professor of economics at the State Universityof New York at Stony Brook and was an assistant professor at theUniversity of Wisconsin at Madison. His other published research isin the areas of general equilibrium theory, monetary theory, andmacroeconomic theory and policy.

Taxation of Mineral Resources bt Robert F. C. and R. Btyce H.pdf

Documents

effects of taxation

property taxes

profits taxes

integration of taxes

mineral resourcestaxation

hapter1 mining taxes

outputrelated taxes

mining decisions