MINING
Falling behind
Value of production tax erodes even as ore values skyrocket
Marshall Helmberger
M. Helmberger
US Steel

REGIONAL—At a time when Minnesota mining companies continue to reap major windfalls from the historically high price of taconite produced on the Iron Range, state and local taxpayers are definitely not sharing in the bounty.

Indeed, on a percentage basis, the financial benefits from taconite mining, be it to local cities, counties, school districts, or for local economic development, are at an all-time low.

To understand just how badly state and local governments have fared in recent years, consider the taconite production tax, the primary means by which the state of Minnesota collects tax revenue from mining companies. The production tax was implemented decades ago as an alternative to levying property taxes on mining companies and their vast holdings in northeastern Minnesota.

As recently as 1991, the production tax annually collected about $82 million from mining companies operating on the Iron Range. At the time, the companies were producing about 39 million tons of taconite a year, which is virtually identical to production levels in recent years. At that time a ton of taconite was valued at $28, so the year’s annual production generated revenues or equivalent value of approximately $1.1 billion to the mining companies. The $82 million the companies paid to the state in production tax amounted to just over seven percent of the market value of the ore they produced.

In 2012, by comparison, the 39.7 million tons of taconite that mining companies produced on the Range enjoyed an average market value of $90/ton, netting the companies a combined $3.6 billion in total output value. Even adjusted for inflation, the mining companies enjoyed a 360 percent increase in output value compared to 20 years earlier. While the costs of mining have also increased, by about 90 percent over the same period, those cost increases have fallen well short of the increase in overall taconite prices.

Even as industry revenues have grown remarkably, the amount that mining companies paid in production taxes actually fell substantially, once adjusted for inflation. That $82 million in production taxes that the mining companies paid out in 1991, had the same buying power as $140 million today, based on the consumer price index, or CPI. Yet, the companies actually paid just $102 million, or just 2.84 percent of their operating revenues. That’s compared to more than seven percent of operating revenues that they paid 20 years earlier.

While the production tax formula includes an escalator provision, it clearly has not kept pace with the rate of inflation, much less the extraordinary rise in the price of taconite. Were the state’s production tax based on that same percentage of mining revenues as in 1991, Minnesota would be enjoying annual production tax revenues in excess of $284 million. And Iron Range cities, counties, and school districts would be flush with new revenues, and home and business owners would have seen major reductions in their property taxes, rather than the steady increases of recent years.

Some officials take notice

Such disparities have caught the attention of a least a couple local lawmakers, who say it’s well past time that Iron Range communities begin to see more of the benefits of their geological heritage.

“If you look at the tax rate relative to the price of ore, it’s miniscule compared to what the companies used to pay,” Rep. Carly Melin, DFL-Hibbing, said during a recent meeting of the Iron Range Resources and Rehabilitation Board. “On top of that, they get a pretty sizable rebate.”

That rebate, which amounts to roughly 13 percent of the production tax which goes back to mining companies through a reinvestment program, known as the Taconite Economic Development Fund, is designed to encourage updating of Iron Range taconite plants. That means that of the $102 million that mining companies paid in production taxes last year, they can expect to receive roughly $13 million of it back to help pay for plant improvements. Melin notes that the program, first instituted in 1992, depletes funding that used to go to help fund schools, cities, public works, and economic diversification efforts on the Iron Range. “There is no other business on the Iron Range that gets a big check back from St. Louis or Itasca counties on their property taxes each year,” notes Melin.

What’s worse, says Melin, the production tax was supposed to, in part, help fund economic diversification on the Iron Range. Just rebating it to the mining companies for plant improvements “is the opposite of diversification,” she says.

Melin said she’d like to see the rebate program end, but she also wants a serious discussion about raising the production tax to provide financial benefits to the region more in line with the past. She said she’s gotten plenty of positive feedback from Iron Rangers since she made her comments at the last IRRRB meeting. “Cliffs made over $100 million last quarter. People know these companies are making money hand over fist.”

Craig Pagel, President of the Iron Mining Association of Minnesota, dismissed the notion that the taconite industry is enjoying hefty profits. He said the global market for taconite is intensely competitive and higher taxes on the industry here in Minnesota could put the Iron Range at a disadvantage. He said some U.S. steel companies have experienced losses in recent years due to the dumping of Chinese steel products.

But Rep. Tom Anzelc, DFL-Balsam, who has looked at the steady erosion in the production tax in recent years, agrees with Melin. “I have concluded that the current state of the taconite production tax is a very good deal for the taconite producers. It is not as good a deal for the property taxpayers in the taconite relief area,” he said.

It’s also not a good deal for area cities and school districts, said Anzelc, since the erosion in the buying power of the production tax means more and more economic development and infrastructure projects, once funded by the production tax, go undone. “Clearly there are more projects and requests chasing a shrinking amount of public dollars generated off the production tax,” he said.

Melin notes that taconite is a finite resource and suggested state officials are remiss in not seeking to maximize the return on the state’s natural heritage, particularly at a time when taconite prices are historically high. “It’s a missed opportunity not to take advantage of it,” she said.

While the disparity in production tax rates today versus 20 years ago is dramatic, both Melin and Anzelc say there has been resistance at the Legislature, even from some members of the Iron Range delegation to the notion of returning the production tax to something approaching its value in the past.

“The mining companies up here hold everybody hostage,” said Melin. “They talk about decreasing production and laying people off,” she said, whenever the subject turns to a change in the production tax. “I think a lot of their threats are empty,” said Melin. “Cliffs pays four times as much in Quebec, and it hasn’t slowed their production there.”

Senate Majority Leader Tom Bakk, DFL-Cook, said he’s open to a discussion of the production tax, albeit with some reservations. “This is a very good discussion to have when times are good,” he said. But Bakk is concerned that generating new revenues from the production tax could create political backlash in St. Paul, from legislators who might think the Iron Range region needs less state funding. And that could hurt the region during the next downturn in the mining industry, when production tax revenues could fall substantially.

What’s more, Bakk said the tax is currently billed as a replacement for the property tax, and if it begins to exceed the level the companies would pay if property taxes wer actually assessed, it becomes harder to justify, said Bakk. At the same time, he acknowledged he’s not sure what the mining companies would be paying today if they were subject to property taxes.

Bakk said he would likely support taking another look at the rebate program now under fire from Melin and others. “It’s definitely a serious case of corporate welfare, ripe for review,” he said. “In the past, [Rep.] Rukavina opposed eliminating it.”

Mining industry officials in Minnesota note that the rebate program has encouraged mining companies to invest in Minnesota, and that all projects must have the support of their local unions. What’s more, they say the rising cost of taconite should not be a factor when determining rates for the production tax. “That rate, which is set statutorily and escalates automatically, is unaffected by dramatic changes in the sales price of iron ore or what it costs mines to produce a ton of iron ore,” said Sandra Karnowski, a spokesperson for Cliffs Natural Resources.  “The number of taxable tons changes each year based on a three-year average of production.  This structure provides for stability of the tax base, which keeps revenue fairly constant and helps insulate against the periodic downturns that have been characteristic of our industry,” Karnowski added.  “The Occupation Tax, on the other hand, is assessed based on mine value (including, in part, iron ore sale price) and is adjusted on an annual basis.”

Minnesota’s mining tax much lower than elsewhere

While Minnesota has a reputation as a high tax state, when it comes to the mining industry, its tax rates are lower than many other places. That’s become increasingly so in recent years as other countries, U.S. states, and Canadian provinces have taken steps to adjust their mining taxes to take advantage of the recent escalation in market prices for a wide range of metals and other basic commodities.

In Quebec, for example, the provincial government recently adopted a new mining tax regime that substantially boosted the province’s share of revenues from mining operations there. The new tax system sets a minimum mining tax of four percent on mines that generate more than $80 million in output value. Such a tax here in Minnesota could have generated over $140 million in 2013, based on an output value of approximately $3.6 billion from the region’s six taconite plants in 2012.

But Karnowski disputes that. “Unlike the Minnesota production tax, the Quebec mining tax is calculated based on the gross value of mining production with deductions permitted for processing, transportation, marketing and administration.  Allow-ances for depreciation and processing are also permitted,” said Karnowski. “The value reached when these deductions and allowances are factored in is used to calculate both the minimum tax and the profit tax. As a result, at least with regard to this specific tax, Cliffs does not currently pay anywhere near four times the Minnesota rates as referenced in the article.  In fact, our current and projected near term Quebec mining tax obligations are expected to be significantly lower than the Minnesota production tax, with regard to both our overall tax bill and when considered on a per-ton basis.”

Many countries and provinces also benefit from mining through corporate income taxes on mining company profits. In Quebec, the province levies an 11.9 percent tax on profits, which is assessed in addition to its minimum mining tax. Nearby Ontario levies a 10 percent tax on profits generated in the province. Australia, another significant mining region, assesses a 30 percent federal income tax and a separate 22.5 percent tax on mining profits, for an effective tax rate of 45.8 percent.

Minnesota, by contrast, assesses no corporate income tax on mining company profits. The state does levy an occupation tax, which is supposed to substitute for an income tax. But that tax generated just $21 million last year, or just over one-half of one percent of the gross value of taconite output on the Iron Range.

In 2012, in Minnesota, the iron mining industry paid a total of $118 million in various taxes, the vast majority through the production tax. That represents just three dollars for every ton of taconite produced, or just over three percent of the value. By contrast, the mining companies paid nearly $8 per ton for electricity to run their operations, $3.90 for royalties (some of which did go to the state of Minnesota), $5.27 for fuel, and $26.84 per ton for supplies and equipment. Labor costs, for both mining and processing, amounted to $7.36 per ton.

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1 comment on this item

I agree with the editor, Representatives Anzelc and Melin. My hope is that Senator Bakk and Representative Dill will also join Anzelc and Melin. It should be noted for full disclosure that Senator Bakk's son is a manager at U.S. Steel.

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