MINING LIKES ITS TAX NEVADA’S WAY

By Lisa Mascaro

Saturday, Oct. 20, 2007 | 7:15 a.m.

WASHINGTON - Even as Nevadans wonder whether to increase the tax on wealthy casinos, Nevada's booming commercial gold miners are facing criticism for exploiting enormous, tax-busting loopholes in the state's Comstock Lode-era mining law.

Nevada's 5 percent mining tax is essentially whittled down to about 1 percent because of the liberal deductions the industry is allowed to claim, critics complain.

The industry wants its sweet Nevada deal to be adopted at the federal level as Congress, retooling the nation's hard rock mining law, considers imposing royalties on companies that mine for gold, silver and other metals.

Unlike the oil or coal industries, metal mining has never paid a federal royalty on the minerals it pulls from public lands. It's been that way since the law was written in 1872, when the Grant administration was encouraging westward expansion.

The mining industry knows those days are over, and the companies are willing to cut a deal to pay some sort of tax.

Taxing the lucrative gold mining industry has long been a desire of environmentalists and a growing coalition of sportsmen groups and taxpayer watchdogs. As soon as Democrats took over Congress this year, legislation to impose an 8 percent gross royalty on new mines was introduced as part of a sweeping reform of mining law. Senate Majority Leader Harry Reid, the industry's longtime champion who has benefited from industry campaign contributions, has said he is willing to consider reasonable changes.

But the devil is in the details and the stakes are huge: For every $1 billion in gold, silver and other minerals that would be mined on the nation's public lands, the proposed 8 percent royalty would generate $80 million annually - money to clean up abandoned mines that pose health and safety risks across the West.

But if the Nevada model is adopted, the companies could end up paying only a fraction of that amount.

Alan Septoff, research director at Washington-based Earthworks, a mining watchdog group, said Nevada's net profits tax lets companies write off so much of their operating expenses that Nevada taxpayers are getting fleeced.

Research compiled by Earthworks shows that in recent years, as the price of gold has reached unprecedented highs, gold mining companies in Nevada have written off all their operating expenses, thanks to deductions allowed under the Nevada law, which taxes mining on private as well as public land.

The state's largest gold mines, operated by global giants Barrick and Newmont, have deducted about $500 million three times - at Barrick's Goldstrike in 2001 and 2002, and at Newmont's Carlin mines in 2005 - wiping out their tax bill.

It's a scenario environmental and taxpayer groups are trying to prevent at the federal level.

"You don't get to deduct all of your expenses and pay zero," said Jill Lancelot, co-founder of Taxpayers for Common Sense.

Next week, the House Natural Resources Committee is expected to give final approval to a massive mining reform bill that calls for a 4 percent gross royalty on existing mines, and an 8 percent royalty on new ones. The bill's author, committee Chairman Nick J. Rahall, D-W.Va., is confident the bill will pass the full House before Thanksgiving.

But at a hearing this week, Nevada Republican Rep. Dean Heller, whose district includes more gold mines than anywhere in the nation, introduced an amendment to strike the gross royalty provisions in favor of a 5 percent net royalty modeled after Nevada's 5 percent tax on profits.

The Heller amendment was struck down by voice vote, but a roll call vote is expected Tuesday , and Heller pledged to continue pushing for it as the bill makes its way through Congress.

Heller told the committee the 8 percent gross royalty would be the highest in the world and said the 5 percent net "works well for the state of Nevada."

These are old battles in Nevada and Washington.

When Congress last entertained a royalty on hard rock mining in the early 1990s, the negotiations between the House and Senate broke down in part as the industry pushed to change the House-passed 8 percent gross royalty to a net tax.

"Critics like myself said that was sham reform and it wasn't worth going forward," Rahall said. "By the time you allowed all these deductions there was nothing left for the federal taxpayer."

In Nevada, a similar debate has played out over the years.

Almost 20 years ago, as the state was on the verge of increasing the mining tax from about 3 percent to the 5 percent levied today, then-Gov. Bob Miller stunned the industry by announcing he wanted an even greater slice.

Miller's target: the industry's prized deductions.

Miller wanted to cap the amount mining companies could deduct as write-offs, hoping to raise an additional $25 million annually for all-day kindergarten and school class-size reduction.

In his 1989 State of the State speech, Miller made a famous play on the mining industry's slogan, saying, " 'Mining, it works for Nevada.' It is not working hard enough."

Today, Nevada's mining tax works much like a standard corporate income tax, and the many deductions allowed mirror those that other states offer companies - from costs of operations to new development.

The mining industry in Nevada and nationwide has long argued that a gross receipts tax would be unfair because it fails to take into account the vast infrastructure costs of establishing and running a mine.

The oil, gas and coal industries pay Washington gross royalties of 8 percent to 16 percent. But the hard rockers argue that gold mining requires greater investment than simply digging out coal or drilling for oil.

When the price of gold dips below operating costs, as it did in 2001 when energy costs soared and Barrick wrote off its entire $500 million operation at Goldstrike, the deductions enable work to continue without layoffs, said Vince Borg, a spokesman for Barrick in Toronto.

"We could have decided to shut down for a short period of time, but you can't do that if you plan on being in business for a long time," Borg said.

UNR economist John Dobra said he has warned lawmakers that eliminating the deductions would lead the mining companies to change the way they operate to avoid paying tax on the final product. Rather than selling gold, they would simply sell a pile of rocks to a sister company that would then process the ore into the more valuable commodity.

Dobra and others warn that a federal royalty would cost Nevada because companies would be able to write it off as an expense and lower their state tax bill.

Even though the proposed bill would return much of a federal royalty to Nevada for mine cleanup, the money would need to be appropriated every year by Congress and is not guaranteed.

When Congress talks about mining law reform, it's mostly talking about gold mining in Nevada and the West.

Nevada leads the nation in gold mining, and by itself ranks among the world's top five gold -producing nations. As the price of gold has soared this decade, production reached a record $4.3 billion in Nevada in 2006, a 30 percent increase from the previous year.

Tax revenue from state mining also increased by nearly 60 percent to $61 million in 2006 - $52 million from gold and silver mining. About one-third of Nevada's gold is mined on public land.

But Septoff encourages Nevadans to do the math: Nevada's gold miners are essentially paying barely a 1 percent tax.

If Congress were to follow Nevada's lead, the estimated $1 billion worth of metals now being mined annually on federal lands nationwide would generate only $10 million annually in taxes, rather than $40 million that would be generated by the 4 percent gross royalty on existing mines. On future mines taxed at an 8 percent royalty, the difference would be even greater.

Worldwide, the industry usually pays a gross receipts tax, with only some provinces of Canada and Australia allowing write-offs, said James Otto, a mining consultant who co-wrote "Mining Royalties," a World Bank book on mining laws.

Otto said any royalty above 5 percent poses risks.

But he says there's a reason why most other countries choose a gross tax rather than the profit-based model as in Nevada.

With a net tax as in Nevada, Otto said, companies can develop tax limiting strategies.