The Economic Aspect of Geology Part 36

The state of Minnesota divides its iron ore deposits into a series of cla.s.ses, 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 cla.s.ses through a series of years, however, as well as the a.s.signing of specific ores to the different cla.s.ses, 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 a.s.sumption 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 a.s.sets, and therefore a considerable part of the income may under the law be regarded as a distribution of capital a.s.sets, 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 a.s.signed 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 a.s.sets 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 princ.i.p.al 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 a.s.sume 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 subst.i.tuted 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.

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 a.s.sets 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, r.e.t.a.r.ds 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 pa.s.sed 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 a.s.sumed 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 a.s.sets, allowing recent discoveries to be included with total a.s.sets for depletion purposes, and recognizing special and peculiar circ.u.mstances 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 sh.o.r.e 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 regime in Russia, and to a slight extent in other parts of the world, mineral t.i.tles 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 cla.s.sifications 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 t.i.tle, 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.

ON THE PUBLIC DOMAIN

Where the development of mineral resources began before the lands had pa.s.sed from governmental ownership, special mining laws were enacted.

Looked at broadly, these laws may be regarded as based on two partly conflicting considerations.

(1) The a.s.sumption that mineral resources, which are wasting a.s.sets, acc.u.mulated through long geologic periods, are peculiarly public property,--not to be allowed to go into private ownership, but to be treated as a heritage for the people as a whole and to be transferred to posterity in the best possible condition. Some of the early minerals to be developed were used either for money or for war purposes, leading naturally to the acceptance of the idea that these belonged to the government or to the sovereign.

(2) The a.s.sumption that the discovery and development of mineral resources requires a free field for individual initiative, and that the fewest possible obstacles are to be put in the way of private ownership.

Governments have not as a rule been greatly interested nor particularly successful in exploration. Therefore, in framing laws of ownership, concessions have been made to encourage private initiative in exploration and development. In the case of the United States this idea was coupled with the broad doctrine that the government held public lands only in the interest of the people, and that its people were ent.i.tled to secure these lands for private ownership with the least possible restriction.

A survey of the mining laws affecting the public domain or non-alienated lands of different parts of the world, as well as the history of changes in the mining laws, indicates a wide range of relative emphasis on these two underlying considerations. In the United States, at one extreme, the laws have been such as to give the maximum possible freedom to private initiative, and to allow easy acquirement of mineral resources from the government. At the other extreme, in South Africa, Australia, and South America, it is impossible for the individual to secure t.i.tle in fee simple from the government; he must develop the mineral resources on what amounts to a lease or rental basis, the ownership remaining in the government.

The trend of events in mineral laws is toward the latter procedure. This is evidenced in the United States by the withdrawal of large areas of public lands from entry, and by the recent enactment subst.i.tuting leasing privileges for specified minerals for the outright ownership which was allowed under the federal law before the lands were withdrawn from entry. The withdrawal of oil lands from public entry in other parts of the world is another ill.u.s.tration (see pp. 131-132).

NATIONALIZATION OF MINERAL RESOURCES

Nationalization, as this term is popularly understood, means financial control and management of mineral resources by the government, either through actual ownership or through measures of public control designed to eliminate private interest from the active direction of the resources. In a broader sense, it may be used to include a considerable variety of restrictive and coercive measures adopted by the government in the proposed interests of public welfare,--as ill.u.s.trated by the war-time measures inst.i.tuted by the United States and other governments relating to the mining and distribution of coal, and to coal prices. In this broader sense various aspects of nationalization are indicated under other headings in this and other chapters.

It is clear that other countries of the world have gone farther in the direction of nationalization of mineral resources than the United States. The tendency was manifest before the war, and has been strongly emphasized during and since the war. In the United States, notwithstanding war-time measures, the subject has not yet come prominently forward, at least by name. On the other hand, there has been growing recognition of the dependence of public welfare on the proper handling of mineral resources--particularly of the energy resources, coal and oil,--as evidenced by a variety of proposals and measures under consideration in legislative and administrative branches of our national and state governments. Even taxation, both local and national, has in effect reached a stage where private interest has become considerably minimized by the increasing burdens laid on the industry by government requirements. The immediate purpose of taxation is to raise money for the needs of the government; but in the formulation of tax measures there is clearly to be discerned a growth of underlying sentiment that natural resources belong in some fashion to the public, and that private control is to be regarded not as a sacred property right but as a trust held on sufferance of the public.

In view of the obvious trend toward nationalization in other parts of the world and the significant tendencies in the United States, it seems likely that the subject of nationalization of mineral resources will come prominently to the front in this country in the comparatively near future. If so, it is time that students of mineral resources should recognize the comprehensiveness of this problem, and should attempt to develop basic principles to serve as a guide in the direction and formulation of the numerous and complex measures which are sure to be proposed. At present there is no government or technical organization related to the industry which is studying the problem in its broader aspects and is in a position to advise wisely with public officials interested in this problem.