GENERAL COMMENTS ON TAXATION OF MINERAL RESOURCES
There has been a noticeable tendency in recent years to regard mineral resources as a heritage of the people, to be held in trust, rather than as property to be acquired and managed solely for private interest. This tendency has been indicated by the adoption in various parts of the world of laws affecting rights to explore and acquire minerals on the public domain; laws relating to the right of eminent domain over minerals already alienated from the government; laws regulating the exploitation of minerals in the interests of conservation; laws relating to tariffs and other restrictions on the export of mineral commodities; and laws relating to taxation.
The feeling that mineral resources really do not belong in private hands has undoubtedly been an underlying factor in the imposition of heavy taxes. Contributing to this action also are the popular belief in the intrinsic bonanza values in mineral resources, the failure to recognize the large element of value which is put into such resources by human efforts, and the failure to realize that the social surplus in the aggregate is small. To some tax officials an ore is an ore, more or less regardless of situation, of conditions of mining, of the demand for the product, and of the time when the demand will allow the ore to be mined,—in short, more or less regardless of what the ore may be made to yield as a going business. In this way heavy taxes are sometimes imposed on mineral reserves, which are based on unwarrantably high appraisals of future possibilities, and which cannot be paid out of earnings.
Ultimately, a tax must be adjusted to the capacity of the mine to pay out of its earnings, and this capacity in turn is determined both by the physical characters of the ore and by the success with which it may be made available for consumption. This view of valuation for taxing purposes is sometimes opposed by mining men on the grounds that it taxes brains, skill, and initiative, and that it puts a premium on shiftless management. The same argument might be applied to the valuing of any business or profession. To the writer the argument is not sound, in that it fails to recognize the element of human energy in resource values. If value were to be confined solely to the intrinsic character of the ore itself, there would be required an almost impossible degree of discrimination on the part of taxing officials to dissociate this value from other considerations; and there would be required further the differentiation between efficient and inefficient management, which involves so many considerations that the conclusion would be worthless.
In the application of income taxes to mining operations, there is sometimes another tendency toward over-taxation in that the income is regarded as more or less permanent, and insufficient allowance is made for exhaustion of the mineral deposit. Under the United States income tax, mineral deposits are definitely recognized as wasting assets and this factor is allowed for; but in state income taxes and in England and other parts of the world, allowances for this purpose are small.
There is wide belief that heavy taxation of mineral resources, particularly on the ad valorem basis, retards exploration and prevents the development of the reserves which are necessary to stabilize the mineral industry. High taxes have undoubtedly had this effect in some cases, especially where taxes have been imposed on resources long prior to development; but, in the writer's view, this tendency in general has not yet passed the danger point, and is not likely to do so until taxes become positively confiscatory of the industry. To argue that increase of taxes may even have certain beneficial results on the mineral industry may lead to suspicion of one's mental soundness; but it is hard to escape the conclusion that the incidence of high taxes has led to a much more careful study of the question of reserves, has eliminated in some cases the expenditure of money for development of excessive reserves to be used far in the future, and has tended to prevent over-production.
Where mineral reserves are developed too far ahead of demand, the interest on the investment piles up an economic loss to be charged against the industry. It may be assumed that the urge for exploration will continue as long as there is demand for mineral resources; and that, to keep the industry on a sound basis, a certain amount should be set aside and charged to cost for the purpose of keeping up reserves in a proper ratio to production. Much remains to be learned about the most desirable ratio between reserves and production. In many camps, before the incidence of high taxes, this ratio was not properly determined; and there was a tendency, due to natural acquisitiveness and in the absence of anything to hinder it, to build up reserves indefinitely. The first effect of high taxes in such camps has frequently been the curtailment of exploration and development. Later, as production has begun to approach the end of the reserves, exploration has been resumed, but only on a scale necessary to insure production for a limited period in advance.
The argument that high taxes inhibit exploration is good only beyond the point where the industry itself becomes no longer profitable. If there is sufficient demand for the resource, it is obvious that such a condition cannot long continue; for, as production and the development of reserves fall off, the resulting increase in the price received for the product is likely to offset any effect of taxes, and to restimulate production and exploration.
Nevertheless, in this period of high taxes following the war, there is much discouragement in the matter of exploration, suggesting that the danger point is being approached. Some relief has been afforded by recent special provisions of the federal income tax law, recognizing mineral resources as wasting assets, allowing recent discoveries to be included with total assets for depletion purposes, and recognizing special and peculiar circumstances with reference to each mine. Also a certain amount of exploration goes on through the momentum gained from past conditions, without sufficiently full recognition of the effect of present high taxes. This is not surprising when it is remembered that the people actively engaged in field exploration often do not think sufficiently fully of the tax situation, until after a discovery or development has brought them face to face with it.
Because of the vital importance of the reserve factor in mineral valuation, geologic aid and advice are extensively sought by both public and private organizations. Mining geologists are playing an important part in the application of the national income tax. A larger number are acting for private companies in appraisals required by this tax. Many geologists are used in making valuations for state taxes, and in two cases the state geological surveys have complete charge of appraisals. These appraisals include not only examinations of specific properties, but general surveys of large regions, to ascertain possible values of undeveloped lands and to establish broad principles of valuation based on a consideration of all the physical factors in the situation.
CHAPTER XVI
LAWS RELATING TO MINERAL RESOURCES
This heading is likely to suggest mining law and the vast literature devoted to it. Mining law has mainly to do with questions of the ownership and leasing of mineral deposits. In addition, there are laws relating to the extraction of mineral products, including those having to do with methods of mining and with safety and welfare measures. There are laws affecting the distribution of mineral products, such as those relating to tariffs, duties, international trade agreements, and many other matters. There are laws relating to underground water, to shore lines, and to various geologic engineering fields.
In the formulation of these laws, as well as in the litigation growing out of their infraction, basic geologic principles are involved; and thus it is that the geologist finds much practice in the application of his science to legal questions. It will be convenient to consider some of the laws relating to mineral resources under three headings: first, ownership and control; second, extraction; and third, distribution.
I
LAWS RELATING TO OWNERSHIP AND CONTROL OF MINERAL RESOURCES
Large use of mineral resources is of comparatively recent date. Some of the mineral industries are not more than a decade or two old and the greater number of them are scarcely a century old. In the United States the mineral industry dates mainly from the gold rush to California in 1849. The formulation of laws relating to the ownership of minerals has on the whole followed rather than preceded the development of the mineral industries; and hence mining laws relating to ownership are not of great age, although historical precedent may be traced far back.
On Alienated Lands
Where lands came into private ownership, or were "alienated" from the governments before the formulation of mining laws, varied procedures have been followed in different countries.
In England and the United States, under the old régime in Russia, and to a slight extent in other parts of the world, mineral titles remain with the owner of the land and the government does not exercise the right of eminent domain. But even in England, where private property rights have been held peculiarly sacred, the discovery of oil during the later years of the war led to an attempt to expropriate the oil rights for the government. Because of the objection of landowners this attempt has not reached the statute books, but the movement is today an extremely live political question in England. A somewhat similar question is involved also in the movement to nationalize the coal resources of England, now being so vigorously urged by the labor party. In the United States, no serious attempt has yet been made to take over mineral resources from private ownership.
Other countries have gone farther in retroactive measures in regard to alienated lands. Under the leadership of France, most of the countries of western Europe have appropriated to their governments the undiscovered mineral resources on private ground, particularly those beneath the surface, except where previously they had been specifically conveyed to the private owners, or with the exception of certain designated areas and minerals which had been conveyed to private ownership prior to certain dates. Some minerals occurring at the surface, variously specified and defined in different countries, are allowed to remain with the private owners, although often subject to government regulation in regard to their development and use.
In varying degree this treatment of mineral resources on alienated lands is followed in the British colonial laws—in South Africa, Australia, New Zealand, and Canada—and in the Latin-American laws. The laws are usually based on specified classifications of minerals. Those occurring at or near the surface, and called "quarries," "placer deposits," "non-mines," or "surface deposits," usually remain with the surface owners. Those beneath the surface, called "sub-surface deposits" or "mines," in general belong to the government. In some of the countries of South America the state exercises eminent domain even over the surface deposits; and in others even sub-surface minerals remain in private ownership, where specifically granted, or where the transfer of property took place prior to certain dates.
Where the government has acquired mineral ownership of lands previously alienated, the resources are open for development either by the owners of the surface or by others, on a rental, lease, specific tax, labor, or concession basis. The government holds the title, exacts tribute, and more or less directs and controls the operation. Exceptionally, as in Ontario, British Columbia, Quebec, and Newfoundland, the government grants patents, that is, it disposes of its rights to purchasers.