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Mining Industry Receives Special Tax Treatment
March, 2008
(pdf version of this fact sheet)
Special Tax Treatment for Mining Industry
Like other businesses hardrock mining companies are allowed a variety of income tax deductions such as for depreciation, amortization, healthcare and retirement costs, etc. But mining companies also layer on additional special tax treatments that add up to millions in taxpayer giveaways annually. Meanwhile, mining companies continue to rake in record profits,1 UK based Rio Tinto, for example, took in $7.7 billion in profits in 2007.2 The hardrock mining industry can easily afford to pay a royalty on the minerals they extract for free from public lands.
Tax Preferences
Three tax preferences in particular give added benefit to the extractive mining industries: the percentage depletion allowance; the ability to expense rather than capitalize certain exploration and development (E&D) costs; and the ability to deduct the costs of mine closure and reclamation.3
Depletion allowance: Mining companies and other extractive industries are allowed to deduct a percentage of their revenues from gross income.4 This deduction typically exceeds the capital cost of extraction. The deduction ranges from 5% for things like gravel and sand, to 15% for minerals such as gold, silver or copper, to as high as 22% for uranium.5 Cost -- $3.02 billion over seven years6
Expensing: In most cases businesses capitalize their business costs, meaning they spread the costs over a number of years. Mining firms can instead expense certain E&D costs immediately, allowing for enormous write-offs in certain years. Cost -- $10 million per year7
Closure and Reclamation: Mining companies may deduct these costs before actual closure of the mine. A practice which is contrary to general tax rules.8 In many cases mines close or are abandoned with insufficient resources for closure and reclamation costs, meaning the mining company potentially gets a deduction for a cost never incurred once they declare bankruptcy.
Preferences Lower Effective Tax Rate
These special tax treatments, along with the other preferences available in general to all businesses, allow mining companies to substantially reduce their tax burden, meaning their effective tax rate is much lower than they would otherwise pay. Companies are also allowed to deduct any royalties they do pay (such as to a state or tribal government, or a private entity) before calculating taxable income. Further, most other countries have rejected the depletion allowance subsidy.9 All of this substantially increases the profitability of hardrock mining companies.
Legislation such as H.R. 2262, the “Hardrock Mining and Reclamation Act of 2007” proposes a simple 8% gross income royalty to compensate taxpayers for the giveaway of minerals taken from public lands. It is estimated that this will cost mining companies an average of about $40 million annually – a pittance compared to the tax breaks they receive. It is clear that hard rock mining companies operating in the U.S. can sustain a royalty rate of 8% without sacrificing much of their bottom line. Taxpayers deserve fair compensation for the profits made from public resources.
3. Congressional Research Service (CRS), Salvatore Lazzari, “The Economics of Royalties in the case of Hard Rock Minerals on Public Domain Lands,” testimony before the Subcommittee on Energy and Mineral Resources, House Committee on Natural Resources, U.S. House of Representatives. October 2, 2007.
4. The depletion allowance is similar to the depreciation deduction. It allows mining companies to essentially write-off an arbitrary percentage of the value of the extracted mineral as a deduction against income. The justification is that minerals are a finite resource, and a mine’s value declines as minerals are extracted. For more information, see paragraphs 6 and 7 of the Environmental Protection Agency’s description of percentage depletion at this site: http://yosemite.epa.gov/ee/epalib/incent2.nsf/821321c2b2c0d5bd8525677500697227/950fc1c1421943df85256ab200704237!OpenDocument. Last accessed 3/11/08.
6. For nonfuel minerals only. Executive Office of the President, “Analytical Perspectives: Budget of the United States Government, Fiscal Year 2009,” Table 19-2, Estimates of Total Income Tax Expenditures, p 293, line 34 at http://www.whitehouse.gov/omb/budget/fy2009/apers.html.
9. James M. Otto, Independent Consultant on Mining Law, Policy and Economics, answers to questions from the Subcommittee on Energy and Mineral Resources, House Committee on Natural Resources, October 2007.
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