Mining Study
Mining Tax Study Leads to Recommendation for Tax Relief, Preservation of Aid Distributions
St. Paul, MN—The Minnesota Taxpayers Association released on April 1, 2004, the culmination of a nine-month study that evaluated Minnesota’s taxation of the mining industry using principles of good tax policy. The study is not the report of a commission. Rather, MTA was hired by the Minnesota Department of Revenue and charged with evaluating Minnesota’s mining taxes with a goal of “seeking agreement on the specific problems with the current tax system and distribution of revenues to determine reform goals.” Such agreement was sought through an advisory committee consisting of various stakeholders from the Iron Range area, including the mining industry, labor, and local government, but the author of the report, Lynn Reed, Executive Director of the Minnesota Taxpayers Association, is solely responsible for its contents.
The final report combines two previous rough drafts: an assessment report (Phase I, September 2003), and a reforms report (Phase II, January 2004). In the assessment phase, the only considerations required to be used in evaluating the mining taxes were the principles of good tax policy, as stated in the report. Within the framework of that evaluation, several tax reforms were proposed in Phase II as ideas for consideration. Based on feedback from those rough drafts, the report was finalized with only one recommendation for reform. (All previous drafts are available on the Iron Range Resources website at http://www.irrrb.org/.)
The final report has been prepared in the hope that an outside voice speaking from the principles of good tax policy may be able to offer a tax reform scenario that could contribute to the long-term health of the mining industry and the Iron Range communities.
Some of the highlights of the report are:
Spending History
- The reputation of local governments on the Iron Range is one of spending that far exceeds what is typical in other Minnesota cities, but the most recent numbers available (2001) do not support that contention. It is necessary to see long-term historical trends to discover the source of that reputation for Iron Range communities.
In 1930, all Iron Range cities spent on average 378.5% more per capita than non-Range cities outside the Twin Cities area, or nearly 5 times as much per capita. This level of spending was supported primarily by the local property tax on unmined iron ore, significant amounts of which still remained in the ground at that time.
- By the mid-1950s, the most significant mining of iron ore was in the past. Values plummeted, and the property tax no longer was able to provide the levels of revenues to which these communities had grown accustomed. Significant adjustments were made relative to other cities, so that by 1971, Iron Range cities spent only 7.1% more than non-Range and non-Twin Cities area cities. Cities with over 2,500 population on the Range actually spent 7.4% less per capita on average than their non-Range counterparts in that year.
As taconite production increased and the production tax with it, significant aid distributions were again available to take the place of the lost property tax revenue on unmined iron ore, but spending on the Range was never again to compare to the iron ore days. The modern peak was in 1981, when Iron Range cities spent an average 39% more per capita than non-Range cities. Cities on the Range that are under 2,500 population continue to spend about 50% more than their counterparts in other parts of the state, but by 2001, cities over 2,500 population were spending only 10.5% more than non-Range cities of comparable size.
- The adjustments Iron Range communities have made in the past to precipitous drops in revenue show that they are well positioned today to adapt to changing conditions on the Range with regards to mining activity.
Tax Policy Principles
- Public finance economists use a nearly-standard set of principles to evaluate the strengths and weaknesses of public sector taxes. The principles normally include equity (fairness), efficiency (both economic and administrative), simplicity, visibility, stability and adequacy, and competitiveness. (See the report for how Minnesota’s mining taxes were rated according to these principles.)
A Reform Proposal
- Based on an evaluation of mining taxes using the tax policy principles above, recommended elements of a mining tax reform proposal for consideration to be enacted by the Legislature at the earliest possible time are shown in the table below. Each element shows an estimated per ton reduction and corresponding estimated reductions in total taxes collected.
Elements of the Reform Proposal and Rationale for Them
- Eliminate the 30.1 cents per ton Taconite Economic Development Fund rebate program and lower the statutory rate accordingly, from $2.103 per ton to $1.802 per ton.
Requiring companies first to pay 30.1 cents per ton to the IRR, then allowing them to receive it back as a rebate, with certain conditions attached for its investment in improving plant operations is not an efficient way to encourage investment.
- Further reduce the remaining taconite production tax statutory rate to $1.50 per ton.
This 30.2 cents per ton reduction contributes to making the taconite production tax more competitive with other jurisdictions, and helps mitigate the horizontal inequity of the mining industry’s 15.52% effective tax rate.
- Exempt all purchases by Minnesota mining companies from Minnesota’s sales and use tax.
This element of the recommended reform helps improve competitiveness and horizontal equity, but does so by reducing a tax that flows to the state’s general fund.
It is also recommended that the rebate program for capital equipment purchases be turned into a direct exemption for the mining industry, reducing the wait for the refunded tax and reducing administrative burden.
- Repeal the occupation tax on mining companies.
Like element number 3 above, the elimination of the occupation tax affects the state’s general fund, but only nominally. It modestly improves the competitiveness of the industry.
- Further reduce the taconite production tax to $1 per ton for tons produced over 32 million tons per year total.
A similar idea has been proposed by Range legislators in previous legislative sessions. It provides an incentive for the owners of Minnesota taconite mines to shift production to Minnesota rather than other mines they might own elsewhere, because taxes would be reduced on all production above 32 million tons. This element improves the competitiveness of Minnesota’s taconite while protecting property tax relief aid and the IRR budget.
- Eliminate the inflator for the taconite production tax.
An accountable tax system does not include automatic tax rate inflators. Elected officials should always be required to perform their representative duties by having to vote on tax increases.
- Eliminate distributions to non-mining school districts (not shown on the table above).
In order to limit taconite property tax relief to school districts in which mining actually occurs, it is recommended to eliminate the distribution of taconite production tax dollars for four school districts on the edge of the mining area. These four districts are Aitkin, Cook County, Crosby-Ironton, and Grand Rapids. The estimated distribution for 2004 is about $1.1 million.
Shortcomings of the Proposal
- Horizontal Inequity and Competitiveness Problems are only mitigated, not solved
- The Stability of Revenues is not markedly improved.
- he dependency of the Iron Range communities on aid is not lessened.
Conclusion
The tax policy problems of mining taxes are not easily solved. The competing objectives of improving horizontal equity (among Minnesota businesses) and competitiveness (among other jurisdictions) versus maintaining stability and adequacy of revenues for communities dependent on taconite aid are not easily resolved. Adequacy of aid revenues itself competes against the desired outcome of less dependence by Iron Range communities on such aid.
It was felt by the author that the stability of the aid system weighed more heavily than improving the competitiveness of the mining industry in deciding on a final recommendation at this time. Minnesota taconite pellets should be competitive in the North American market for the next several years, given the huge demand for pellets coming from China. At the same time, the lowered expectations of aid for Range communities, given the rather precipitous drop in the last few years, makes it a good time to reduce the production tax, because aid payments have already been reduced, and it is less costly to keep them at the most recent levels. Adjustments by the communities have already been made to cut spending. With the combination of the tax adjustments recommended in this report and a very competitive market that seems to presage increased production for the next few years, it seems like a good time to provide as much relief as possible without further cutting taconite aid to Range communities.