Nevada’s constitution hinders efforts to raise mining taxes

Nevada's mining industry produces plenty of treasure.

But there's debate over whether enough of that treasure makes it into the state's treasury.

Nevada's mining tax is enshrined in the state's constitution as a maximum 5 percent levy on net proceeds of minerals. The tax is like an income tax, letting mining companies deduct costs of extraction, processing, marketing and delivery.

Smaller operators, such as limestone mines, don't always pay 5 percent, because they don't produce as much and their commodities' prices aren't high. The state's major gold miners, Barrick Gold Corp. and Newmont Gold Corp., reach the maximum every year, says Carole Vilardo, president of the Nevada Taxpayers Association.

Still, some advocacy groups say the maximum percentage isn't enough. Mining representatives respond that anything higher would hurt industry investment and subject the state to feast-or-famine fiscal cycles. 

Miners don't pay enough because they play fast and loose with deductions, says Bob Fulkerson, executive director of the Progressive Leadership Alliance of Nevada, a nonprofit that lobbies for education spending. For example, he says, companies have "double-dipped" on the deduction for employee health care, writing it off on both payroll and net proceeds taxes.

PLAN tried for a 2010 ballot referendum to eliminate all deductions, but failed to get enough signatures after a legal challenge from the mining industry held up the initiative.

More recently, businessman Monte Miller proposed raising the net proceeds tax to 9 percent to avoid a broader business tax. He dropped his plan in April, saying he didn't think a broad tax would get legislative action.

So Fulkerson's group has turned its support to Nevada Senate Joint Resolution 15, which would strip mining taxes from the constitution and let the Legislature set levies. The resolution would come before the Legislature when it meets in February.

Changing the tax structure is essential because mining isn't taxed here as it is elsewhere, and that's costing the state revenue, Fulkerson says.

Other states charge a severance tax, which doesn't allow deductions and is levied even on unprofitable operations. The principle is that mining companies "sever" a resource forever. It's not like a restaurant or a car dealership; you can't turn over merchandise and sell more to raise additional taxes.

Mining companies in other states also pay corporate income taxes, and in other countries, they pay royalties to extract resources from public lands.

"There's an utter lack of revenue for our state, and we can't afford to pay for basic education for our kids," Fulkerson says. "Mining companies, because of their sweetheart deals in the constitution, are exporting all the money they dig out of Nevada and sending it to Canada, South Africa or other states. They're not using it to build schools in Nevada, and that's just wrong."

Mining-industry analysts, however, say it's difficult to compare mining taxes from state to state.

Steve Ralbovsky, global mining tax leader at PricewaterhouseCoopers in Phoenix, says jurisdictions have such different laws that no analysis can determine if Nevada's mining tax burden is equitable.

He says the better measure is what mining pays in comparison to other Nevada industries.

DEFINING 'FAIR SHARE'

Numbers from Las Vegas research firm Applied Analysis show that mining pays $24,756 in taxes per employee if you include sales and use taxes, property taxes and industry-specific taxes.

Manufacturing ranked No. 2, at $9,395, while leisure and hospitality was No. 3, at $7,762. Single out industry-specific taxes, and mining pays $14,882 per worker, compared with $2,092 per employee in leisure and hospitality.

Fulkerson says throwing in other taxes isn't a valid comparison, because mining companies deduct some of those levies from net proceeds. He points to a report his group commissioned that found Barrick's Cortez mine made $1.4 billion in gross proceeds in 2010, but posted $890.3 million in net proceeds after deductions.

Barrick officials note that some net proceeds cover exploration and other improvements. The company will spend $200 million or more on exploration in North America, mostly in Nevada, in 2012. It's also spending $350 million to upgrade its autoclave plant at Goldstrike.

Those investments can't erase the fact that Barrick paid just $47.3 million in local and state General Fund taxes on Cortez, for an effective General Fund tax rate of 1.1 percent, Fulkerson says. He adds that a 5 percent tax on gross proceeds would be more equitable.

Vilardo, of the taxpayers' group, dismisses the idea of pinning down mining's fair share.

"If you can identify 'fair share' to me, that would be great," she says. " 'Fair share' is usually in the eye of the beholder. I've been hearing it for 40 years, and I still have no idea what it means. What someone is really saying is, 'I don't like the idea that they're making this much money and they're not paying more to support programs or projects I want.'

"There's always a movement afoot by a group or government that is generally the recipient of money to want more revenue. And the easiest way to get more revenue is to point your finger at the fellow behind the tree."

COSTS FLUCTUATE

Plus, Ralbovsky says, just because gold prices have spiked doesn't mean companies always fare better. Profits can suffer even in good times as costs rise.

That happened to Barrick in the second quarter, when its companywide net cash production cost jumped 59 percent, from $336 to $534 per ounce, as its quarterly profit fell 35 percent, from $1.16 billion to $750 million. And dozens of Nevada mines are smaller operations extracting less lucrative commodities such as turquoise, geothermal heat and gypsum, a mineral mined in Clark County and used in wallboard.

"If you look at gypsum, there's a tipping point where you would absorb too much overhead," says Tim Crowley, president of the Nevada Mining Association. "It's the same as any other business. We're in this to be prosperous, and everybody has a bottom line. It's really hard to articulate it when you look at the gold industry, because the gold industry is doing well, so this falls on deaf ears."

Fulkerson accuses the industry of "trying to hide behind the little guys." He suggests exempting geothermal power from higher taxes and imposing a levy that phases in gradually so smaller companies aren't hit.

But even for big companies, higher or unstable taxes can complicate operations, Crowley says. It can take $1 billion and 10 years in permitting to open a mine. Investors might not take the risk if they don't know what regulations will be in a decade.

"The fear that those investment dollars would dry up is real," he says.

What's more, mining is cyclical. Twelve years ago, gold prices were $280 an ounce. Nevada mining had 6,000 employees in 2003, half of what it has today. The industry paid $25.2 million in net proceeds in fiscal 2003, 10 percent of the $253.3 million it paid in fiscal 2012.

"It's a longer-term business," Ralbovsky says. "There will be times when things are going really well, and times when the industry goes through a trough and things aren't so good. You don't just turn mines off and on."

Adds Vilardo: "Like any commodity, gold fluctuates up and down over time. To say it will provide us with a stable revenue source is a fallacy. If you relied on it to the point where you were using it for operating budgets, you would have a major problem."

That's why the Nevada Mining Association's official position is that the industry will pay taxes - if other businesses do, too.

Nevada saw what happened when it relied too much on tourism and construction, and narrowing the tax base again would be a mistake, Crowley says. The association would support a "reasonable, broad-based business tax."

"We're not running away from taxes. We're running away from bad tax policy."