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Serving Northern St. Louis County, Minnesota

Local tax windfall from PolyMet? Not so much

Proposed mine would not be subject to the state’s production tax


REGIONAL— If PolyMet Mining’s NorthMet mine is ultimately approved and brought into production, taxes on salaries and wages would generate millions of dollars in tax revenues for the federal government, but significantly less for the state local governments than other mines currently operating on the Iron Range.

And you can thank an interesting chapter in Minnesota history for that. Back in the early 1960s, state officials were encouraging companies like US Steel to invest in the state’s budding taconite industry. But having been stung for years by high taxes on their traditional iron ore operations, company officials said they needed a guarantee of significantly lower taxes on a more-or-less permanent basis before making the multi-million dollar investments required for a taconite processing facility.

The voters of the state gave such a guarantee in 1964, when they approved a constitutional amendment establishing the taconite production tax for the first time.

While the initial tax rate of 12¢ per ton was quite low, especially compared to tax rates for traditional iron ore operations in the region, the production tax has nonetheless raised billions in tax revenues since it first took effect in 1965, and has averaged about $100 million annually in recent years. By statute, those funds go to a number of regional entities, including cities, townships, schools, and counties in the taconite tax relief area. The Iron Range Resources and Rehabilitation Board also claims its share for a wide range of purposes.

Iron Range taconite producers pay other taxes as well, including the occupation tax, sales and use taxes, withholding on mining royalties, and property taxes, but those amounts are dwarfed by the production tax. In 2013, for example, taconite producers paid approximately $101 million in production taxes, while paying $41 million in all other taxes combined.

As Minnesota’s potentially first copper-nickel mine, PolyMet would be exempt from the production tax, since the tax only applies to taconite producers. The NorthMet mine, if it ultimately opens, would be subject to the occupation tax, which is based on a percentage of the overall value of a mine and its associated plant. The occupation tax paid by companies varies dramatically from year to year and is often as little as zero in years when metal values decline. The Northshore taconite operation, which is significantly larger in scale than PolyMet, paid as little as $25,000 in 2005 to as much as $2.015 million in 2011, when iron ore prices hit historic highs. On average, the operation paid out $913,000 annually from 2005-2012. That compares to the $12.6 million the company paid in production taxes in 2012.

The revenues raised by the occupation tax are paid entirely to the state, where 50 percent is allocated to the state’s general fund, 40 percent to the state’s K-12 schools, and 10 percent to the University of Minnesota.

PolyMet would, however, be subject to a tax, known as the net proceeds tax, that isn’t currently levied on any other mine in the state. Under current state statute, the tax amounts to two percent on the net proceeds from a mining operation. That’s defined as the gross proceeds, or total revenues, minus the cost of converting raw ore to marketable quality. This means the cost of mining and processing could be deducted for purposes of the tax, while other costs, such as shipping, marketing, and stockpiling, or not deductible. In the case of PolyMet, however, where the volume of the metals involved is measured in pounds and ounces, rather than tons, shipping and stockpiling costs will be relatively minor.

In effect, the net proceeds tax would act more like a two-percent tax on PolyMet’s profits. Based on projections produced by PolyMet, that could generate as much as $4 million a year, but those projections were based on metal prices that are significantly higher than at present. At current metal prices, a net proceeds tax on PolyMet would generate much less than that, according to the company’s most recent definitive feasibility study.

Unlike the occupation tax, revenues generated by the net proceeds tax would remain primarily in the region, where they would be distributed in much the same manner as the taconite production tax.

While most other mining operations in the region also pay royalties to the state of Minnesota, which holds mineral rights to millions of acres in the region, PolyMet would be an exception, at least as currently envisioned. “The state has no metallic mineral leases with PolyMet at this time,” said Jim Sellner, Manager of Engineering and Mineral Development at the DNR’s Office of Lands and Minerals in Hibbing.

While the state does have rights along portions of what is known as the Duluth Complex footwall, Sellner said PolyMet’s current mine plan doesn’t include any of those minerals.

By contrast, iron ore mining operations pay a combined total of approximately $40 million a year in royalties, about two-thirds of that to the state’s school trust fund, with the University of Minnesota claiming most of the rest.

The state would receive some revenue from surface leases where PolyMet-owned utilities, roads, or rail lines pass through state-owned land. In the case of PolyMet, however, most of that infrastructure is already in place and is being leased either to PolyMet or Cliffs Natural Resources, so it is unclear whether the state would realize any additional revenue beyond current payments for that infrastructure.