The Economic Aspect of Geology

by C. K. Leith

Other Methods of Mineral Valuation and Taxation

We have discussed the ad valorem method of valuation at some length because it is the one in widest commercial use, and also because the principles involved underlie practically all other methods of mineral valuation. The ad valorem method is used in appraisals for taxation in some districts and for some commodities, as, for instance, the iron mines of Michigan and Wisconsin. Its application, however, requires skill and judgment if equitable results are to be secured. For taxation purposes, therefore, it is not uncommon to adopt purely arbitrary or empirical methods which eliminate the element of judgment, and which often result in valuations quite different from those used commercially.

The state of Minnesota divides its iron ore deposits into a series of classes, on each of which a more or less arbitrary flat value per ton is placed, based on the spread between cost and selling price. The adjustments of flat values on the several classes through a series of years, however, as well as the assigning of specific ores to the different classes, have been based on the same factors as are used in ad valorem valuations.

The state of Wisconsin uses a so-called "equated income" method of valuation and taxation for the lead and zinc deposits of the southwestern part of the state. Under this method the state puts such a tax on the mine incomes for the preceding year as will yield approximately the same total return as under the ad valorem method,—the whole being based on the assumption that each deposit has about the average life figured for the mines of the entire district. So far as individual ore deposits vary from this average life, the value fixed departs from the true or ad valorem value.

Several states impose specific taxes based on the operations of the mines for the preceding year or for some combination of preceding years, as expressed in tonnage output or net profits or net proceeds, regardless of life or reserves. So far as output or net proceeds for a year are proportional to the real value of the property, a rough approximation to equitable taxation as between mines is accomplished. Often, however, the valuation thus obtained has little relation to the true value, because it does not take into account the great differences between properties in reserves, in life, and in capacity for future profit.

Income taxes, national and state, are of course based on the profits of the preceding year; but in the collection of these taxes from mineral operations, it is recognized that mineral deposits are wasting assets, and therefore a considerable part of the income may under the law be regarded as a distribution of capital assets, and be deducted from taxable income. The amount to be deducted obviously depends on the size of the reserves and the life,—with the result that progressive adjustment of income tax valuations tends to take into consideration exactly the same factors as are used in the ad valorem method. It is obviously unjust, for instance, to collect the same proportion of tax from the annual income of a mine which has a life of only two years as from a mine which has a life of fifty years. Under the federal income tax a capital value is placed on the mineral deposit as of March 1, 1913, which total capital value may be increased with subsequent discoveries. As the ore is taken out of the ground and sold, income tax is paid only on the difference between the assigned capital value per unit and the selling profit. If, for instance, the capital value as of March 1, 1913, is placed at 50c. per ton of mineral in the ground, and ten years later a ton is sold for a profit of $1, income tax is paid on 50c. The figure of 50c. per ton as value in the ground is actually obtained by estimating a profit, when the ore is ultimately mined and sold, of $1 per ton, and discounting this dollar to present worth as of March 1, 1913. Therefore the total amounts on which taxes are paid during the life of the mine should represent approximately the total accruals of interest from March 1, 1913. In this manner the proportion of annual income to be taxed becomes larger with the length of the life period. With a deposit having a life of thirty years the net result is that about half of the aggregate income is taxed, though this figure of course varies somewhat with the interest rate used.

In the collection of income taxes from coal mines in England, and in the collection of certain state income taxes in the United States, a considerably smaller allowance is made for the retirement of capital value (or for depletion, as this is commonly called). In these cases the deduction allowed is a small fixed percentage of the capital value, regardless of the actual life of the property.

The treatment of mineral resources as wasting assets in the United States income tax law meets one considerable practical difficulty—namely, that the law really requires physical or ad valorem valuation of every mineral property by the government, as a check on the claims for depletion allowance. This immense and expensive task is too much for the tax collection agencies as now organized, and it may be questionable whether it will ever be desirable to expand these agencies to the extent required for such a purpose. This is the principal argument for the use of arbitrary depletion factors such as those sometimes used abroad.

There are many advocates of the straight tonnage tax on mineral deposits, on the ground that it is simple, definite, and easily applied. The present tendency is to extend the application of this form of tax. It is clear, however, that to assume the same value per ton for taxing purposes on a property making a large profit, and on another property which, because of physical conditions, is barely able to operate at a profit, imposes a relative injustice. To meet this difficulty, it is sometimes proposed that the tonnage tax should be graded in such a manner as to allow for differences in physical conditions and in profit at different mines. When one attempts to apply a graded tonnage tax, however, it soon becomes apparent that, in order to make such a valuation equitable as between properties, it is necessary to use all of the factors of the ad valorem method for each of the properties. The wide appeal of arguments for a flat tonnage tax is based partly on popular misconception of the complexity of elements entering into mineral valuations.

There are many forms of more or less indirect tax which are substituted in different parts of the world for direct taxes. For instance, certain states in South America do not tax ores in the ground, but collect the revenue in the form of mining licenses or export taxes.