Mining taxes under microscope as Pebble project moves ahead

Posted: Monday, April 11, 2005

As Northern Dynasty Mineral's Pebble Mine project gathers steam, state officials and members of the public are raising questions about whether the state's mining tax laws should be revised to give Alaska a bigger piece of the minerals pie.

Alaska's operating mines currently pay a state Mining License Tax, and just as all other corporations operating in the state, a Corporate Net Income Tax. Mines located on state land also pay a 3 percent net income royalty.

Those taxes, critics charge, have generated little in the way of revenue in recent years. Proponents of the status quo, on the other hand, say that while the mining industry may not pour great sums into state coffers, local governments get a goodly share through property taxes, and local economies benefit greatly where mines operate.

According to Alaska Department of Revenue, an estimated $2.9 billion in mineral value was extracted from Alaska claims in 2001 through 2003. During the same period, the industry paid the state a total of $18.4 million in various taxes, royalties and fees. Local governments, meanwhile, took in roughly $30 million.

But that represents roughly 1.6 percent of the $2.9 billion extracted.

"The economic returns from mining are weak," said Scott Brennan, director of Alaskans for Responsible Mining, an Anchorage-based nonprofit organization. The Mining License Tax, for example, "contributes less than 1 percent in any given year to Alaska's general fund," he said.

For the corporate net income tax, which is based on federal income taxes, essentially the same is true, he said.

Tax returns filed by state businesses are mostly confidential, but based on corporate balance sheets, there is little if any contribution from the corporate income tax, Brennan said. In fiscal year 2002, for example, Fairbanks Gold Mining Inc., operator of the Fort Knox Mine, declared taxable income of negative $17,470,149. But state mining taxes are applied to net profits, not gross value, as is the case with the raw fish tax or wellhead tax on oil.

"Thus, no corporate income tax was paid," Brennan said.

Tax revenues might have been higher except that the tax liabilities of operating mines also are reduced by a variety of exemptions and incentives offered by the state. For instance, new mining operations are exempt from the mining license tax for 3 1/2 years after production begins. Miners also get tax credits for contributions to accredited Alaska colleges and universities of up to a maximum of $150,000 per tax year.

The Minerals Exploration Incentive Credit, passed during the administration of former Gov. Tony Knowles, allows credit of up to $20 million to be applied against half the mining license liability over 15 years.

Applied as they were to the mining license tax in 2002, those deductions reduced revenue to the state's general fund to only about $450,000. Mine operators had a better year in 2001, but nevertheless collectively realized more than $3 million in tax credits on a $5.3 million tax bill, and the state got only about $1.73 million in mining license taxes, Brennan said.

According to the revenue department, mining companies reporting negative net income in any given year are not required to pay taxes and royalties in that year.

While state tax confidentiality rules prevent revelation of any single mine's taxable income, aggregate net income figures for all mining operations together are available for fiscal years 2003 and 2004. They show that of the 190 returns filed in 2003, those posting positive net income totaled only $9.2 million, while the value of returns showing negative net income totaled $133.6 million. The following year, the totals were $19.5 million in profits versus $53 million in losses for the 144 filed returns.

Thus the state got to apply its tax laws to less than $29 million in positive net income over those two years.

According to Brett Fried, a state economist with the revenue department, had the state applied a 3 percent flat tax against the gross value of mineral production rather than tax net profit as it does, the state's general fund would have realized more than $30 million in tax revenue. That's nearly equal to half the increase in state education funding proposed for fiscal year 2006.

Last month, the House Ways and Means Committee took testimony on the state mining license tax. Rep. Paul Seaton, R-Homer, pointed to the $5.8 million the state got in total mining revenue in calendar 2002.

"That's the full extent of the taxes that $1 billion of extracted value gave us," he said.

While the mining industry pays on net profit, the fishing and oil industries pay taxes levied on gross values (like the raw fish tax or tax on the wellhead price of oil). All industries should be treated equally in Alaska, Seaton said.

"I think it is fair to look at a gross extraction tax" for mines, he said.

Members of the Alaska Miners Association argue against messing with the state's "stable and progressive" tax and regulatory policies. Favorable tax laws make Alaska attractive to industry players.

"We think the tax structure is fine just the way it is," said Steve Borell, executive director of the AMA.

Nevada and Alaska are the only states that currently appear hospitable to new mining ventures, he said.

"The reasons are multitude, but taxation has to be considered as one of them," he said.

Borell said Seaton appeared to be the only member of the Legislature asking questions about the mining tax law.

"There is no groundswell to change the tax regime, and we are pleased to see that," Borell said.

Depressed world metal prices were the root cause of the limited tax stream from mining in recent years, but prices are rising and 2004 tax revenues should be "significantly higher," Borell said.

The AMA would vigorously oppose a gross value tax, Borell said. Had such a "parasitic" tax been applied during recent years it could have meant the closure of the state's major operations, Red Dog, Greens Creek, Fort Knox and Usibelli Coal mines, he said.

He also said the mining industry would never produce revenue on a par with the oil patch.

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