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July 1, 2015

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STATE REVENUE:

Over decades, mining forged close ties with regulators

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Steve Marcus / FILE

A cable shovel dumps gold ore into a truck in Crescent Valley in September 2001. In Nevada, mining companies get a slew of tax deductions, including for equipment depreciation.

Mining

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Veteran mining lobbyist Jim Wadhams appeared before state tax regulators last week, days after a mining trade group acknowledged the industry has been receiving tax breaks that might conflict with state law.

The industry, which is reaping record profits as gold prices soar, welcomed a review of those tax breaks, Wadhams told the Nevada Tax Commission. But, he warned, don’t expect anything but “precisely the same result.”

Wadhams had good reason to be confident. Thanks to lawyers and lobbyists such as Wadhams, the mining industry has repeatedly persuaded commissioners in recent decades to expand its tax breaks, according to a review of three decades of records by the Las Vegas Sun.

In approving and modifying what mining companies are allowed to deduct from their tax bills, commissioners have frequently sided with the industry over their own staff as they ruled on what is and is not allowed under state law. In some cases, commissioners have ignored their legal counsel to mining’s benefit.

Commissioners aren’t solely to blame.

The Legislature’s lawyers signed off on the changes in deductions — including one who oversaw a major rewrite of regulations in 1984, only to leave a year later to work for the Nevada Mining Association.

State law allows mining companies to deduct from their gross proceeds the actual costs of extracting and processing ore into a salable product. This year, the industry is projected to deduct more than $4.2 billion from its gross proceeds.

Since the 1980s, the Tax Commission has undertaken three major rewrites of the regulations governing mining tax deductions. Each time the industry won expanded deductions:

• In 1984, at the industry’s urging, the commission approved regulations allowing companies to deduct state and local taxes other than the net proceeds tax and costs for out-of-state corporate offices, despite the tax director testifying that “the problem with taxes is it’s not in the statute.”

• In 2001, again at the industry’s urging, the commission approved a deduction for sales tax paid on equipment or material as a qualified expense. The industry also won deductions for employee housing.

Also in 2001, the industry succeeded on winning deductions for pension costs, despite an attorney general’s opinion stating they were not deductible. The deputy attorney general said he would simply pull that opinion so it wouldn’t conflict with the new regulation.

To be fair, the commission also specifically disallowed a number of deductions at the same time, including for health clubs, pre-employment expenses, union trust funds, day-care facilities and general liability insurance.

But even the refusals show how aggressive the industry has been in seeking tax breaks.

• In 2005, the commission adopted regulations allowing deductions for the cost of reclamation — the federally required act of returning disturbed land to its natural state. The commission disregarded pleas from counties and school districts not to allow it because it would hurt their budgets.

Again, the commission sided with the industry’s request to deduct 90 percent of the expense against staff recommendations for a 75 percent reduction.

Asked about this issue, Wadhams said: “I don’t know why it shouldn’t be 100 percent.”

The commission also ignored a county official who pointed out that reclamation costs are not included in state law and advised them to debate the issue before the Legislature.

The paper trail of commission meeting transcripts and amended regulations raises the question of whether Nevada’s mining regulators have fallen prey to what economists call “regulatory capture” — the term used to describe an agency that acts in the interest of the industry it was established to regulate. For example, critics say the 2008 financial crisis was caused by banking regulators who were captured by the financial services industry and failed to spot trouble on the horizon.

Regulatory capture is rarely the result of corruption. It is more commonly the outcome of relationship-building between regulators and industry employees.

“You get to know the people and work with them and start to become sympathetic for the people you deal with all of the time,” UNR economist Elliott Parker said. “A lot of it is simply that you’re not dealing with corporate interests in black hats, you’re dealing with regular folks who maybe have similar backgrounds, and after a while you just start to see them as reasonable.”

When that happens, regulators often start to trust information provided by the industry over that contributed by the public, Parker said.

Parker stopped short of saying three decades worth of Nevada tax regulators have fallen victim to regulatory capture, but agreed the record raises it as a concern.

Indeed, even the state law establishing the Tax Commission created conditions ripe for regulatory capture by requiring four industries to have representatives: mining, utilities, finance and agriculture.

Mining’s representative on the commission is John Marvel, an Elko lawyer who represents mining clients, is a member of the Nevada Mining Association and receives income from Marvel Minerals, according to his financial disclosure report.

Marvel did not return calls seeking comment for this story.

To understand the process, a quick primer is in order.

Click to enlarge photo

Michael Ginsburg, left, a member of the Progressive Leadership Alliance of Nevada, and Andrew Davey, web director for Stonewall Democratic Club of Southern Nevada, picket in front of the main post office on Sunset Road Thursday, April 15, 2010. About a dozen protesters came out to support the services that taxes provide and to demand greater "tax fairness," such as an increase in mining taxes and a implementation of a broad-based business tax.

Statutes are written and adopted by legislators. The new laws often instruct state regulators to draft and adopt regulations, which in turn help state agencies administer the statutes. Regulations must comply with statutes to be valid. Essentially, the statute sets the guidelines and the regulations fill in the details.

In the case of the mining industry tax deductions, legislators have written a statute that allows 11 categories of deductions that relate directly to the actual costs of extracting and processing minerals.

The Tax Commission has written regulations that detail what costs mining companies can specifically deduct within those categories. The Tax Department then uses those regulations to guide it through the audit process of accepting and rejecting deductions.

In each case, regulations adopted by commissioners were reviewed for compliance with statute by legislative lawyers.

Commissioner George Kelesis expressed frustration last week that regulations allowing generous tax breaks didn’t seem to comport with the statute.

“Apparently some of these errors in broad interpretation occurred in 1984. That was over 20 years ago,” he said. “My question is where was the Legislature over the last 20 years if the Tax Commission was misinterpreting a statute?”

Industry lobbyists and lawyers are present at each step of the regulatory and legislative process.

Often, the regulations were taken up because of audit disagreements. The record reflects repeated disagreements between the industry and department auditors over what was an acceptable deduction dating from the 1970s. In some cases, deductions were approved for one company, but not another. Or the same deduction was approved one year and not the next.

“It’s fair to call upon the commission to review the deductions for clarity,” Wadhams said. “It’s a public process. Clarity is critical. The taxpayers want to pay what they owe.”

Each time the regulations were revamped, the industry succeeded in winning expansions of their deductions. In addition to arguing the proposed deductions reflected appropriate costs related to extraction and processing, the industry’s arguments were threefold:

• We’ve always done it this way, the department has been approving it, so let’s make it official.

• Just because it’s not in the statute doesn’t mean it’s not a qualified deduction. Wadhams uses the example of the gasoline used to power the trucks that move ore. Just because it isn’t named in statute, doesn’t mean it isn’t a legitimate deduction.

• If you don’t let us deduct this, we’ll deduct something else. A Newmont Mining Corp. staffer used this argument to win the employee housing deduction, saying employee housing cut travel costs.

Wadhams denied the Tax Commission has been “captured” by the industry and pledged to continue lobbying for what the industry believes are legal tax deductions.

“I’m prepared to have that discussion at every level — the department level, the commission level and the legislative level,” he said.

Steven Horsford

Steven Horsford

The history has some lawmakers less than confident that the industry’s influence won’t control the review process requested by Senate Majority Leader Steven Horsford, D-North Las Vegas.

Horsford said he supports a bill by Sen. Sheila Leslie, D-Reno, to create a commission, similar to the Nevada Gaming Commission, to regulate the mining industry separately from the Tax Commission.

“You need to listen to all sides and not just the position of the industry,” Horsford said.

Leslie, however, said the political environment has created ideal conditions for reform: Mining companies are thriving thanks to gold reaching $1,500 an ounce, while the rest of the Nevada economy founders and state government grapples with a $2.3 billion deficit.

That has both the public and lawmakers demanding the industry contribute more to help close the budget gap.

“The increased attention to this issue this session will make it much more difficult to quietly slip through regulations and decisions that benefit the mining industry,” Leslie said. “They know we’re all watching carefully.”

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