The Economic Aspect of Geology

by C. K. Leith

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.

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.