Vol. 12, No. 12 Week of March 25, 2007
Providing coverage of Alaska and Northwest Canada's mineral industry

MINING NEWS: Industry opposes Alaska mining tax reform

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Pebble controversy is raising public awareness of mining taxes; Rep. Seaton says legislative action could stave off ballot initiative

By Sarah Hurst

For Mining News

Should the mining industry’s tax rate in Alaska be compared with that of the much larger oil and gas industry, because they both deal with non-renewable resources, or is it fairer to align mining with industries like fishing and tourism, which generate comparable amounts of revenue? That’s one of the questions raised by Rep. Paul Seaton’s bill in the Legislature, House Bill 156, which would reform mining taxes for the first time in decades.

Significantly, the bill changes the calculation of the royalty for mineral mining on state land from 3 percent of net income to a 3 percent net smelter return tax. Most land owners in Alaska, other than the state, negotiate for an NSR royalty between 2 percent and 5 percent. Seaton argues that if mines that are not on state land can afford an NSR, then mines on state land should be able to afford something similar.

Rep. Seaton, R-Homer, first introduced a version of his bill last year. The bill is now co-sponsored by Rep. Andrea Doll, D-Juneau. It makes changes to the existing mining license tax and to minerals and coal royalties, as well as the rentals for mining activity on state land. In a change from last year, the bill allows the state to accept coal as royalty in kind, similar to how the state accepts oil. The University of Alaska Fairbanks has a coal-fired electric plant and would benefit from not having to purchase coal, according to Seaton’s sponsor statement. The Department of Natural Resources has told Seaton that this reform would save the state about $2.5 million a year.

“Alaska’s mining industry bears a light tax burden compared to Alaska’s other high-value resource industries,” the sponsor statement says. “The state receives less than 1 percent of the mined resource value as tax revenue, while an additional 1 percent is paid to municipalities primarily as property tax (based on 2005 figures). The state receives 12.5 percent royalty on oil and gas on state lands plus an additional 22.5 percent of net profits. The oil and gas industry also pays 20 mils in property tax to the state and municipalities. State revenues from fisheries amount to about 2.8 percent of the total production value while an additional 2.5 percent is paid in severance and use taxes to municipalities. Additionally, vessels, docks and processing plants pay property tax to municipalities.”

Mining license tax last changed in 1955

The current mining license tax was first enacted by the Territorial Legislature in 1913, the House Special Committee on Ways and Means heard in a briefing from the Department of Revenue’s Johanna Bales March 14. The last major change to that tax was made in 1955, establishing the structure that exists today. The mining license tax is a 7 percent net profits tax that applies to all mining operations, regardless of land ownership. In addition, mining companies pay the 9 percent Alaska corporate income tax, a 3 percent net profits production royalty for operations on state land, claim rentals on state and federal lands, and property taxes or payments in lieu of tax.

There is an exemption in the mining license tax for the first three-and-a-half years of production, but many companies operate at a loss during that time anyway, Bales said. After the briefing, the committee reconvened March 16 to hear Rep. Seaton present his bill and to begin listening to public testimony. Seaton referred other legislators to two documents that are controversial within the mining industry: the annual Fraser Institute survey of mining companies and a Hellenthal & Associates poll conducted in February that was commissioned by the Renewable Resources Coalition, the leading group that opposes the development of Pebble mine.

Poll found majority favor higher mining tax

In the poll, 45.4 percent of respondents said that they would strongly favor a statewide ballot initiative that would require large mines to pay 10 percent of their gross profit to the state. Another 24.5 percent said they would somewhat favor a 10 percent tax on gross profits. Respondents also supported a 15 percent tax, a 20 percent tax and a 25 percent tax, with 38.0 percent strongly in favor of the highest suggested rate and 9.0 percent somewhat in favor (12.7 percent were neutral, 12.0 percent were somewhat opposed and 28.3 percent were very opposed).

“It does give one look, though it may not be the whole look, of course, at what that means for the state,” Seaton told the committee. “People are kind of under the opinion that, you know, the mining industry taxes aren’t too high.” The Legislature considered a cruise ship head tax for four years, but failed to pass a bill, Seaton pointed out. When the issue was taken to the people in a statewide ballot initiative last year, voters enacted a higher tax than the Legislature had envisaged. “So the broad brush that the electorate uses is not nearly as direct or precise as what we use. The bill that is before you is attempting to be very precise ... not trying to kill an industry, not trying to overwhelm an industry, but to make reasonable adjustments,” Seaton said.

Alaska rated second most favorable mining tax regime

The Fraser Institute’s survey last year rated Alaska as second out of 64 jurisdictions around the world in terms of having a favorable taxation regime, Seaton told the committee. (This year Alaska was second out of 65, behind Alberta.) “To the mining industry that’s not a problem, to you and I representing the people of the state, as far as being charged with getting back a reasonable return on the revenue to the people of the state based on their ownership of those resources, we have to question that,” Seaton said.

Rep. Bob Roses, R-Anchorage, suggested that legislators should look at how much the mining industry in Alaska is generating compared with jurisdictions like Venezuela and Zimbabwe that are cited in the Fraser report as having unfavorable tax regimes. He also pointed out that almost one-third of respondents in the Hellenthal survey said they considered mining to be “somewhat unimportant” or “very unimportant” in promoting Alaska’s heritage and legacy, and that it would be interesting to see if those who don’t care if the mining industry exists correlate with those who said they were in favor of higher taxes on the industry.

Rep. Seaton admitted that he didn’t know what the ideal tax structure would be to balance a fair return for the people of Alaska with the need to encourage investment by mining companies, but he said it was possible to reform taxes, as had been shown by the “grueling process” that the legislature went through last year to reform the oil and gas taxation structure.

No Henry Hub price for coal

In public testimony, Neil MacKinnon, the president of Juneau-based Hyak Mining, strongly opposed the taxation bill. Hyak is a small company and would have trouble coping with increased bureaucracy, MacKinnon told the committee. The mining industry is only just starting to make higher profits after many bad years, he noted. “The goose hasn’t quite laid the egg yet, and you’re getting ready to choke it off,” MacKinnon said. Every mineral deposit differs in the type and grade of ore it contains, and the mining industry shouldn’t be compared to the oil and gas industry, he added.

“The Hellenthal report is nothing to do with mining; it has everything to do with one mine, excuse me, one project,” Charlie Boddy, Usibelli Coal Mine’s vice president for government relations, told the committee. Respondents to the survey were giving their opinions about Pebble, not about the mining industry as a whole, he said. Boddy also stressed that the mining industry shouldn’t be compared to the oil and gas industry. “We work under totally different scenarios, we don’t have a Henry Hub price for coal,” he said.

The committee should consider the taxes that the coal industry specifically pays, including a reclamation fee of 35 cents per ton and compulsory contributions to a black lung benefits fund, Boddy said. Legislators should also bear in mind that companies have to spend an enormous amount on the development of Alaska’s resources, accessing green belt areas primarily by helicopter, and that numerous contractors are employed by the mining industry, which also benefits the state, Boddy added.

The Alaska Miners Association opposes HB 156 and points out that historically the worldwide mining industry has averaged about a 5 percent return on investment, which is significantly lower than other major industries in Alaska. Due to these low rates of return, a net profits tax is the only type of tax that can be paid on a sustainable basis, according to the AMA.

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