Assessing the Impact of Federal and State Taxes on the Domestic Minerals Industry
EMD-81-13: Published: Jun 8, 1981. Publicly Released: Jun 8, 1981.
- Full Report:
A quantitative assessment was made of one quantitative method for assessing the effects of Federal and State taxes on the profitability of domestic mines and mineral deposits and the attendant implications for domestic mineral production. On the Federal level, GAO analyzed the depletion allowance, the investment tax credit, and the provision for expensive exploration and development costs. Property, severance, and income taxes were analyzed on the State level. In seeking to develop a method for measuring the impact of Federal and State taxes on domestic mineral profitability, production, and investment, GAO used a computer model developed by the Bureau of Mines. The model calculates net present values and discounted cash-flow rates of return for currently producing mines and for undeveloped deposits. Further, the analysis was performed on four mineral commodities. Copper, lead, zinc, and molybdenum were selected because the United States is a competitive producer of these minerals. These minerals are also important to the Nation's economy; they contribute $2.6 billion toward the gross national product and provide employment for 65,000 people.
In its review, GAO found that: (1) sufficient quantitative studies have not been performed to analyze the effectiveness of percentage depletion as an incentive for mineral production, investment, and exploration; (2) sufficient analysis has not been undertaken on the investment tax credit or on the tax benefits to the minerals industry through the expensing of exploration and development costs; (3) 97 percent of depletion allowance-tax expenditure benefits accrue to mines which would be profitable even in the absence of this incentive; (4) only a small percentage of the benefits go to marginal mines which might not produce otherwise; (5) modifications could be applied which would increase the benefits of the allowance to marginal mines and could result in increased production; (6) the investment tax credit has little or no significant effect on unprofitable mines because they have no Federal tax liability against which the credit might be applied; (7) the model results show that 34 percent of the available investment tax credit cannot be used by domestic copper, lead/zinc, and molybdenum mines; (8) the present model is not capable of determining whether the credit rewards production would have occurred regardless or whether it encourages new investment; and (9) changes in the bases, rates, and timing of State taxes can significantly affect the present value of producing mines and the investment potential of nonproducing deposits.
Recommendation for Executive Action
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Recommendation: The Secretary of the Interior should take the lead in developing and refining a framework to quantitatively analyze the link between taxes and mineral policy, and report to Congress on his findings. At such time as the President formally designates an organization within the Executive Office of the President to be responsible for policy assessments under the 1980 Act, the Secretary of the Interior should inform the head of that organization of the progress and nature of the Interior study and invite any assistance in its completion and evaluation. When completed, the study could be used by such an organization in its policy analysis and decisionmaking functions. The Secretary of the Interior's studies should include a broadening and sharpening of the analysis of percentage depletion presented herein. The analysis should be broadened to include the 23 critical minerals included in the Bureau of Mines Minerals Availability System database and eligible for percentage depletion. It should be sharpened to reduce the uncertainty in the major assumptions, especially those relating to cost, price, and the treatment of each mine as a separate taxpayer. Sensitivity analysis should be performed to determine the importance of the assumption to the results. This analysis should not be either a defense or support of percentage depletion, but rather, it should objectively examine the effectiveness of percentage depletion as a tax incentive for production, investment, and exploration. The studies should include a more refined analysis to determine the effects of the proposal to refund the unused portion of the investment tax credit. Given that a substantial portion of the investment tax credit is unused, and that the beneficiaries of refunding the unused credit would be marginal and unprofitable mines, further attention should be paid to this type of refund as a way to stimulate production at marginal mines and to provide a source of funds for mineral exploration and development.The studies should also include further work on the provisions for expensing exploration and development costs. This should include an analysis of the effect of the recapture provision for exploration costs on the profitability of domestic deposits.
Agency Affected: Department of the Interior