M8879dggs.alaska.gov/webpubs/usbm/ic/text/ic8879.pdf · By Phillip N. Yasnowsky 1 and Annette P. Graham ABSTRACT This Bureau of Mines report summarizes State severance taxes imposed

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State Severance Taxes: A "Su/riy aand an Analysis of- th Imt'e :

Changes on Copper Recovery.cOts

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Information Circular 8879

State Severance Taxes: A Summaryand an Analysis of the Impact of RateChanges on Copper Recovery Costs

By Phillip N. Yasnowsky and Annette P. Graham

UNITED STATES DEPARTMENT OF THE INTERIOR

James G. Watt, Secretary

BUREAU OF MINESRobert C. Horton, Director

I

Yasnowsky, Phillip NState severance taxes: a summary and an analysis of the im-

pact of rate changes on copper recovery costs.

(Information circular / U.S. Dept. of the Interior, Bureau of Mines;8879)

Bibliography: p. 23.

Supt. of Docs. no.: I 28.27:8879.

1. Mines and mineral resources-Taxation-United States. 2. Min-eral industries-Taxation-United States. 3. Mineral industries-UnitedStates-Accounting. 4. Copper industry and trade-Taxation-UnitedStates. 5. Taxation, State. I. Graham, Annette P. II. Title. III.Series: Information circular (United States. Bureau of Mines) ; 8879.

TN295.U4 [HD9540.8.U52] 622s [336.2'7833385] 82-600058AACR2

As the Nation's principal conservation agency, the Department of the Interiorhas responsibility for most of our nationally owned public lands and naturalresources. This includes fostering the wisest use of our land and water re-sources, protecting our fish and wildlife, preserving the environmental andcultural values of our national parks and historical places, and providing forthe enjoyment of life through outdoor recreation. The Department assessesour energy and mineral resources and works to assure that their development isin the best interests of all our people. The Department also has a major re-sponsibility for American Indian reservation communities and for people wholive in Island Territories under U.S. administration.

This publication has been cataloged as follows:

For sale by the Superintendent of Documents, U.S. Government Printing OfficeWashington, D.C. 20402

CONTENTSPage

Abstract ....................................................................... 1Introduction ................................................................... 1Acknowledgments.............. .................................................. 2Summary of State severance taxes............... ................................ 2Hypothetical illustration of the State severance tax on minerals--impact oncash flow .................................................................... 13

Estimated effect of severance tax rate changes on copper recovery costs ........ 15Methodology .............................................................. 15Results of analysis............. .... ...................................... 17Significance of results ............................. ...... ...... 22

Conclusion..................................................................... 22References..................................................................... 23

TABLES

1. Summary of State severance taxes on mineral production as of July 1, 1981.. 32. Hypothetical illustration of the use of the State severance tax on a

nonfuel mineral .................. .......... .............................. 143. Effect of assumed severance tax rate changes on copper recovery cost at

given levels of potential availability, domestic properties .............. 184. Effect of assumed severance tax rate changes on copper recovery cost at

given levels of potential availability, producing domestic properties .... 205. Effect of assumed severance tax rate changes on copper recovery cost at

given levels of potential availability, nonproducing domestic properties. 21

STATE SEVERANCE TAXES: A SUMMARY AND AN ANALYSIS OF THE IMPACTOF RATE CHANGES ON COPPER RECOVERY COSTS

By Phillip N. Yasnowsky 1 and Annette P. Graham

ABSTRACT

This Bureau of Mines report summarizes State severance taxesimposed on minerals and mineral fuels, provides a hypothetical exampleof how a State severance tax affects selected components of a firm'sincome statement, and uses the Bureau's Minerals Availability System(MAS) to estimate the effect of assumed changes in State severance taxrates on copper recovery cost at given levels of potential copper avail-ability. A reduction of the rates to zero or a doubling of them resultsin changes in costs that are of the same order of magnitude as the costof transporting copper to the United States from major foreign producingcountries.

INTRODUCTION

This Bureau of Mines report provides information and analysesregarding State severance taxes on minerals. Severance taxes may belevied on the "severing" of any natural resource such as minerals, tim-ber, or fish. However, severance taxes on minerals are of specialinterest because they are the most important in dollar terms and also infrequency of application. Although the tax system of an individualState is the prerogative of that State, State taxes affect the mineralindustries and mineral supplies; therefore, they are of interest to theBureau of Mines. Only the overall or general effects of severance taxesare analyzed in this paper; an analysis of individual State severancetaxes is not undertaken.

This report is an update and expansion of work done previously bythe authors (10-11).2 For a comprehensive background study of severancetaxes, the reader is referred to Information Circular 8788 (6). TheBureau of Mines Minerals Availability System (2, 5, 9) is used to ana-lyze the possible effect of severance taxes on copper recovery costs.

1Economist, Branch of Economic Analysis, Bureau of Mines, Washington, D.C.2Underlined numbers in parentheses refer to items in the list of references at the

end of this report.

2

ACKNOWLEDGMENTS

The authors wish to thank Aldo F.Barsotti, supply analysis studies coordi-nator, Division of Minerals Availability,Bureau of Mines, Washington, D.C., andRobert L. Davidoff, mineral economist,

Minerals AvailabilityBureau of Mines, Denver,assistance in the use ofysis Model.

Field Office,Colo., for theirthe Supply Anal-

SUMMARY OF STATE SEVERANCE TAXES

Severance taxes have been defined as"taxes imposed distinctively on removalof natural products--that is, oil, gas,other minerals, timber, fish, etc.--fromland or water and measured by value orquantity of products removed or sold"

(8). These taxes are generally levied bythe State governments.

Currently 33 States impose severancetaxes on minerals. Table 1 lists theStates and summarizes their severancetaxes on minerals as of July 1, 1981.State statutes or appropriate summariesof statutes should be consulted ifgreater detail is needed. For severancetax use, various States apply uniquedefinitions to terms such as gross value,market value, or taxable value. Forexample, the New Mexico Severance TaxLaw defines gross value for potash as"33-1/3% of proceeds realized fromthe sale of potash products requiringprocessing or beneficiation and 33-1/3%of the value of potash products consumedin producing other potash products, less50% of such value as a deduction forexpenses" (1).

Generally severance taxes are leviedon a physical unit or value basis. Thechoice of a physical unit or value basismay be of considerable importance duringperiods of price changes. Some Statesrecognize this when setting rates. For

example, Minnesota and North Dakota tiesome physical-unit-based taxes to priceindexes. The number of States using eachor both bases of taxation is as follows:

Basis Number of States

Unit and value.........Value only.............Unit only..............

17115

The bases of individual taxes differamong States, making comparison of taxrates difficult. Generally, the rates

based on gross value range from 2% to30%. On a physical unit basis, oil issubject to rates ranging from less than

l/bbl to 804/bbl. The rates on naturalgas are from less than 1£ to 12.6w per1,000 cubic feet. For the nonfuel miner-

als, rates based on physical units arefrom 0.54/ton on salt in brine used formanufacturing (Louisiana) to $1.67/tonfor phosphate rock in Florida.

Of the States with severance taxeson minerals, 16 States have broad-basedtaxes in the sense that they cover a widerange of minerals. The imposition of aseverance tax does not necessarily meanthat a mineral is currently produced in a

State. For example, both Georgia andNorth Carolina tax oil and gas; however,there is no production of these fuelswithin these States at present.

State and commodity

Alabama:Iron ore................Oil and gas.............Oil, gas, and otherhydrocarbons.

Coal....................Coal and lignite........

Alaska:Oil.....................

Gas.....................

Oil.....................

Arizona: All minerals....

Arkansas:Barite, bauxite, titaniumore, manganese and manga-niferous ores, zinc ore,cinnabar, and lead ore.

Coal, lignite, and iron oreGypsum (sold for use out ofState), chemical-gradelimestone, silica sand,and dimension stone.Crushed stone, includingchert, granite, slate,novaculite, limestone,construction sand,gravel, clay, chalk,shale, marl.

Brine...................Salt water used as rawmaterial for bromine.Oil ....................

3

TABLE 1. - Summary of State severance taxes on mineralproduction as of July 1, 1981

Tax

Iron ore mining.......Oil and gas productionOil and gas severance.

Coal severance.......Coal and ligniteseverance.

Oil and gas production.

..... do...............

Regulation andconservation.

Transaction privilege..

Natural resourcesseverance.

... .do..............

..... do...............

..do ........

...... do..............

.. ..do...............

. do...............

Rate and basis

3C/ton.2% of gross value.6% of gross value (4%for new wells for 10years).13.5C/ton.20C/ton.

15% of gross value (12.25%for new wells for 5 years)or 80¢/bbl (greater amount).

10% of gross value or6.4¢/1,000 cu ft (greateramount).

0.125¢/bbl.

2.5% of gross income.

15¢/ton.

2C/ton.1.5C/ton.

1C/ton.

30¢/1,000 bbl.$2/1,000 bbl.

4% of market value ifproducing 10 bbl/dayor less plus 2.5C/bbl.5% of market value ifproducing more than 10bbl/day plus 2.5¢/bbl.

0.3¢/1,000 cu ft.Gas..................... ...... do ...............

State and commodity

Arkansas - continuedDiamond, fuller's earth,ochre, natural asphalt,native sulfur, salt,pearls, other preciousstones, whetstone, nova-culite, all other naturalresources except gypsum.

Oil......................Gas......................

California: Oil and gas...

Colorado:Oil and gas..............

Coal......................

Metallic minerals (exceptmolybdenum).

Molybdenum ore...........Oil and gas..............

Oil shale................

Connecticut...............

Delaware...................

Florida:Oil......................Escaped oil..............Gas... ..................Solid minerals (exceptphosphate rock andheavy minerals).Phosphate rock...........

Heavy minerals...........

4

TABLE 1. - Summary of State severance taxes on mineralproduction as of July 1, 1981--Continued

Tax


Oil and gas conservation... .do...............

Oil and gas production..

Oil and gas conservation

Severance..............

... .do...............

...... do................

...... do................

.... .do...............

No mineral severance tax

... do...............

Oil and gas production..do...............

...... do...............Solid minerals..........

...... do................

... .do...............

Rate and basis

5% of market value.

Not to exceed 2.5¢/bbl.Not to exceed 0.5¢/1,000 cu ft.

Rate determined annually byDepartment of Conservation.The bases are barrels andcubic feet.

Not to exceed 0.1C/$1 ofmarket value.

-60C/ton plus a price indexadjustment.2.25% of gross income over$11 million.

15¢/ton.2% of gross income (g.i.)under $25,000.3% from $25,000 and under$100,000 g.i.

4% from $100,000 and under$300,000 g.i.

5% when g.i. exceeds $300,000.4% of gross proceeds.

I

8% of20.5%5% of5% of

gross value.of gross value.gross value.market value.

$1.67/ton plus a priceindex adjustment.84C/ton plus a price indexadjustment.

State and commodity

Georgia:Oil.....................Gas.....................

Hawaii: All minerals....

Idaho:Ores...................Oil.....................

Gas.....................

Oil and gas.............

Illinois........... ......

Indiana: Oil, gas andother hydrocarbons.

Iowa......................

Kansas:Oil.....................Gas.....................

Kentucky:Oil.....................Coal....................

All minerals (except coaland oil).

Louisiana:Oil.....................

Gas......................Distillate, condensate, orsimilar natural resourcessevered with oil or gas.

Natural gasoline, casing-head gasoline and othernatural gas liquids,ethane or methane re-covered through process-ing gas after separationof oil, distillate, orsimilar natural resources.

5


Tax

Oil and gas production.... .do..............

General excise.........

Ore severance..........Oil and gas production.

..... do..............

Additional oil and gasproduction.

No mineral severance tax.

Petroleum production.....


Oil and gas production........ do.................

Oil production..........Coal severance...........

Natural resourceseverance.

Natural resourcesseverance.... .do..................... do................

.... .do................

Rate and basis

0.5C/bbl.0.05(/1,000 cu ft.

0.5% of gross proceeds.

2% of net value.Determined annually, but notto exceed 0.50/bbl.

Determined annually, but notto exceed 0.5¢/50,000 cu ft.2% of market value.

1% of value.

0.4C/bbl.0.085¢/1,000 cu ft.

4.5% of market value.4.5% of gross value (minimumof 50o/ton).4.5% of gross value.

12.5% of value.

1.3C to 7¢/1,000 cu ft.12.5% of value.

10C/bbl.

State and commodity

Louisiana - continuedButane and propane recov-ered through processinggas after separation ofoil.Coal....................Gravel..................Marble..................Ores....................Salt....................Salt content in brineused for manufacturing.

Sand ....................Shells..................Stone...................Sulfur..................

Maine.....................

Maryland..................

Massachusetts.............

Michigan:Gas....................

Oil.....................

Minnesota:Taconite, semitaconite,and iron sulfides.

Other iron ore..........

Taconite, semitaconite,and iron sulfides.Other iron ores.........Taconite and iron sul-fides.

6


Tax


..... do..................... do... ... .. ... ...

..... do.................

...... do................

..... do.................

..... do ...............

... .do................

...... do.................

..... do................

... .do................


..... do.................

... do................

Gas and oil severance.

...... do.................

Iron severance...........

... .do................

Ore royalty..............

...... do................Taconite, iron sulfides,and agglomerate.

Rate and basis

5¢/bbl.

10¢/ton.3C/ton.20C/ton.10¢/ton.6C/ton.0.5C/ton.

3C/ton.4C/ton.3C/ton.$1.03/long ton.

5% of market value plus feenot to exceed 1% of previousyear's value.6.6% of market value plus feenot to exceed 1% of previousyear's value.

15% of value (minus certaincosts).15.5% of value (minus certaincosts).15% of royalty received.

15.5% of royalty received.$1.25/long ton merchantableiron ore concentrate (5C/longton for agglomerates) plusfactors based on iron contentand a price index.

I

State and commodity

Minnesota - ContinuedSemitaconite............

Copper-nickel ores......Do..................

Do..................

Mississippi:Oil.....................

Oil.....................

Gas (including casing-head gas).

Do...................

Salt....................

Missouri..................

Montana:Coal ....................Note: For both surfaceand underground, usethe basis (per ton orvalue) that providesthe greater yield.

7


Tax

Semitaconite.............

Occupation...............Mining, quarrying, andproduction of concentra-tes.

Ore royalty..............

Oil and gas severance....

Oil and gas boardmaintenance.Oil and gas severance...

Oil and gas boardmaintenance.Salt severance..............

No minerals severance tax

Coal severance..........

Surface.................

Underground..............

Rate and basis

10¢/ton of merchantableconcentrate (5C/ton ifagglomerated in State) plusfactor based on iron content.1% of value.2.5¢/long ton plus factorbased on content.

1% of royalties plus 1% ofroyalties paid on gold,silver, platinum, and otherprecious metals.

6¢/bbl or 6% of value(greater amount).

0.8C/bbl.

0.3¢/1,000 cu ft or 6% ofvalue (greater amount).0.08¢/1,000 cu ft.

3% of value of production.

Applies to production greaterthan 5,000 tons/quarter asfollows:7,000 or less Btu/lb, 12C/tonor 20% of value.

More than 7,000 to 8,000Btu/lb, 22C/ton or 30% of value.More than 8,000 to 9,000 Btu/lb,34C/ton or 30% of value.

More than 9,000 Btu/lb, 40C/tonor 30% of value.7,000 or less Btu/lb, 5C/ton or3% of value.

More than 7,000 to 8,000 Btu/lb,8C/ton or 4% of value.

More than 8,000 to 9,000 Btu/lb,10C/ton or 4% of value.

More than 9,000 Btu/lb, 12C/tonor 4% of value.

State and commodity

Montana - continuedMetals, precious orsemiprecious gems orstones.

Oil and gas.............

Do...................Perlite, vermiculite,kerrite, maconite, orother micaceous minerals.

All minerals...........

Nebraska:Oil and gas.............

Do..................

Nevada:All minerals............

Oil.....................Gas.....................

New Hampshire.............

New Jersey...............

New Mexico:General (excluding oil,gas, other liquid hydro-carbons, and carbondioxide).

Potash..................Do..................

Molybdenum .............Other taxable resources.Copper.................Potash.................

8


Tax

Metalliferous mineslicense.

Oil and gas producers'severance.

Oil and gas severance....Micaceous mineralslicense.

Mineral mining...........

Oil and gas severance....Oil and gas conservation.

Net proceeds of mines....

Oil and gas conservation....... do................


..... do................

Resources excise.........

Resources................Processors' or service......... do.................... .do................Severance................... do................

Rate and basis

0.15% of gross value (g.v.)on first $100,000.0.575% on g.v. exceeding $100,000to $250,000.

0.86% on g.v. exceeding $250,000to $400,000.1.15% on g.v. exceeding $400,000to $500,000.1.438% on g.v. exceeding$500,000.

Oil 5% and gas 2.65% ofgross value.0.05% of market value.5C/ton.

0.5% of gross value over$5,000 plus $25.

3% of value.0.1¢/$1 of value.

Property tax rate of minelocation applied to netproceeds.0.5C/bbl.0.5C/50,000 cu ft.

Natural resources subject toeither resources or pro-cessors' or service tax.

0.5% of taxable value.0.125% of taxable value.

Do.0.75% of taxable value.0.5% of gross value.2.5% of gross value.

I

State and commodity

New Mexico - continuedGold, lead, silver, zinc,molybdenum, manganese,thorium, rare earth andother metals.

Clay, gravel, gypsum,sand, pumice, and othernonmetals.Coal .....................

Uranium ..................

Oil and other liquidhydrocarbons.Gas......................Carbon dioxide...........Oil, gas, liquid hydro-carbons, and carbondioxide.Do...................

Oil, gas, liquid hydro-carbons, geothermalenergy and carbondioxide, coal anduranium.

Gas and hydrocarbonsincidental to process-ing.

New York....................

North Carolina:Oil......................Gas......................

North Dakota:Oil and gas..............Coal .....................

Oil......................

9


Tax

Severance................

.... do.................

...... do.................

...... do................

Oil and gas severance....

...... do................

..... do.................Oil and gas privilege....

Oil and gas ad valoremproduction.Oil and gas conservation.

Natural gas processors'..


Oil and gas conservation....... do.................

Oil and gas production...Coal severance.............

Oil extraction...........

Rate and basis

0.125% of gross value.

Do.

82.6C/ton plus a priceindex adjustment.

Rates per pound of U308 rangefrom 2% for taxable value of$5 or less to $3.15 plus12.5% of excess over $40for taxable value of $40or more.

3.75% of taxable value.

12.6c/1,000 cu ft.3.75% of taxable value.2.55% of value.

Rate certified to Oil andGas Accounting Division.

0.19% of value.

0.45% of value.

May notMay notcu ft.

exceed 0.5C/bbl.exceed 0.05¢/1,000

5% of gross value.85C/ton plus increase basedon a price index.6.5% of gross value.

State and commodity

Ohio:Coal and salt............Limestone and dolomite...Sand and gravel..........Oil......................Gas......................

Oklahoma:Asphalt, ores bearinglead, zinc, jack, gold,silver, and copper.

Oil or other crude ormineral oils, naturaland casinghead gas.

Uranium..................Gas (natural and/orcasinghead).

Coal.....................

Oregon.....................

Pennsylvania...............

Rhode Island...............

South Carolina.............

South Dakota:Energy minerals..........Gold and silver..........

Tennessee:Oil and gas..............Coal.....................

Texas:Oil......................

Gas......................Sulfur...................

Utah:Gold, silver, copper,lead, iron, zinc, tung-sten, uranium, or othervaluable metal.

10


Tax

Resource severance........... do................... .do....................... do..................... do................

Oil, gas, and mineralgross production.

.,. .do...............

...... do.................Natural gas and casing-head gas conservationexcise.

Coal production.........


...... do................

.. .. do .................

...... do................

Energy minerals severancePrecious metals severance.

Oil and gas severance.....Coal severance...........

Oil production...........

Natural gas production....Sulfur production........

Mining occupation........

Rate and basis

4C/ton.1I/ton.1¢/ton.3C/bbl.1¢/1,000 cu ft.



5% of gross value.7¢/1,000 cu ft of gasproduced and saved, less7% of gross value.

5C/ton.

4.5% of taxable value.6% of total receipts.

1.5% of sales price.20C/ton.

4.6% of market value plus0.1875C/bbl.7.5% of market value.$1.03/long ton.

1% of gross value.

State and commodity

Utah - continuedOil, gas, and otherhydrocarbons.Oil and gas..............

Vermont....................

Virginia...................

Washington: All minerals..

West Virginia:Limestone or sandstone,quarried or mined.

Mineral products notquarried or mined.Coal.....................Oil......................Natural gas..............

Other minerals...........

Wisconsin: Metalliferousminerals.

Wyoming:Oil and gas..............Trona and uranium........

Oil, natural gas.........Oil shale and otherfossil fuels (exceptcoal, oil, gas).

11


Tax

Mining occupation........

Oil and gas conservation.


...... do................

Business and occupation..

Occupational gross income.

... .do.................

... .do.................... .do...................... do.................

.... .do.................

Metalliferous mineralsoccupation.

Oil and gas production...Mining excise andseverance.... .do..................... .do................

Rate and basis

2% of gross value.

0.15C/$1 of market value.

0.44% of value.

2.2% of gross proceeds ofproduction (g.p.p.).4.34% of g.p.p.

3.85% of g.p.p.4.34% of g.p.p.8.63% of g.p.p.$5,000.

2.86% of g.p.p.

if over

6% when average netproceeds (a.n.p.) in pre-ceding 3 years are

$100,001 to $4,000,000.12% when a.n.p. are$4,000,001 to $10,000,000.

16% when a.n.p. are$10,000,001 to $20,000,000.

18% when a.n.p. are$20,000,001 to $30,000,000.

20% when a.n.p. exceed$30,000,000.

0.06C/$1 of value.5.5% of gross value (g.v.).

6% of g.v.4% of g.v.

12


State and commodity Tax Rate and basis

Wyoming - continuedCoal..................... Mining excise and 10.5% of g.v.

severance.Other minerals do........................ 2% of g.v.

NOTE. -- This summary of mineral severance taxes is comprehensive in that an efforthas been made to include all State taxes that specify some sort of uniquetreatment with regard to mineral production. Therefore, some State taxesincluded here may not be considered severance taxes in other compilations.

Source: Commerce Clearing House, Inc. State Tax Guide: All States. New York,Chicago, and Washington, 1980 (with updated supplements).

13

HYPOTHETICAL ILLUSTRATION OF THE STATE SEVERANCE TAXON MINERALS--IMPACT ON CASH FLOW

A major concern of mining operationssubject to State severance taxes is theirnegative impact on cash flow.3 The fol-lowing is a simplified, hypotheticalillustration of how the severance tax atvarious rates affects cash flow. Thecomponents of cash flow used are thestandard, basic ones used by most bus-inesses. The addition of the percentagedepletion allowance amount to cashflow is unique for those businessesengaged in mining. Other types of busi-nesses may have more or fewer compon-ents of cash flow, depending .on theiroperations.

Depreciation, depletion, amortiza-tion, and deferred deductions are"book deductions" for tax purposes,and these deductions correspond toactual expenditures only by coincidence(7). These "book deductions" and netprofit are available to be reinvestedby the owners of a business. Netprofit plus the aforementioned noncashexpenditures make up the cash flow of abusiness.

The impact of the State severancetax at various rates is presented in ahypothetical case in table 2. The abbre-viated income statement in table 2 showsthe effects of severance taxes of 2.5% to30% (of gross income from mining) on cashflow. It should be pointed out that thisillustration does not take into con-sideration any exemptions, credits, orother special provisions provided bymost States to businesses subject tothe tax. Additionally, the Federal

corporate income tax rate israte used currently.

the highest

Cash flow represents the true inflowand outflow of purchasing power for thebusiness. Any expense requiring a cashoutlay reduces earnings. Severancetaxes, like State income taxes and othertaxes on income, require cash outlays.For Federal income tax purposes theseexpenses reduce taxable income in theyear that they are paid. Despite thisseemingly positive aspect of the sever-ance tax as an expense item, table 2shows that the impact on cash flow forour hypothetical business is a negativeone. With expenses (except those listedseparately), depreciation and percentagedepletion remaining at the same levels(for severance tax rates of 2.5% to 20%),it can be seen that the impact of theseverance tax is to lower net income, acomponent of cash flow. Cash flowdecreases from $410 million with a zeroseverance tax to $304 million with a 20%severance tax. At the 2.5% rate cashflow is 97% of the zero severance taxamount. Cash flow drops significantly to74% of the zero severance tax amount whena 20% rate is applied.

The difficulties inherent in tryingto isolate and analyze the impact of onetax are brought into focus with theapplication of the 30% tax rate. Theseverance tax of $296 million generatedby this rate acts to reduce income beforedepletion and Federal income tax to alevel such that the 50% limitation forpercentage depletion comes into play.Under the other five cases the allowable

percentage depletion is $148 million.With a 30% severance tax rate, the incomeon which percentage depletion is calcu-lated is reduced such that the amountallowed under the 50% limitation is only$124 million.

3Cash flow is the after-tax money thatremains available to a company or anindividual to pay off its debts andinvest in new projects from sales reve-nue after paying all of its operatingexpenses and income taxes (7).

E M M

TABLE 2. - Hypothetical illustration of the use of the State severance tax on a nonfuel mineral

(Million dollars)

Assume Assume Assume Assume Assume Assumeno 2.5% rate 5.0% rate 10% rate 20% rate 30% rate

severance tax

Gross income frommining .......... 987 987 987 987 987 987Expenses (exceptthose listedseparately below) (395) (395) (395) (395) (395) (395)

Income beforedepreciation,depletion andtaxes ........... 592 592 592 592 592 592

Depreciation ..... (49) (49) (49) (49) (49) (49)Percentage deple-tion allowance 1/ (148) (148) (148) (148) (148) 2/(124)State severancetax............. .. 0 (25) (49) (99) (197) (296)Income beforetaxes ........... 395 370 346 296 198 123Federal income tax(rate 46%) 3/... (182) (170) (159) (136) (91) (57)

Net income ...... 213 200 187 160 107 66

Cash flow:Net income ...... 213 200 187 160 107 66Depreciation.... 49 49 49 49 49 49Depletion....... 148 148 148 148 148 124

Total ......... 410 397 384 357 304 239

NOTE. - Parentheses indicate enclosed figure is to be subtracted to obtain following entry; e.g., gross income frommining minus expenses = income before depreciation, depletion, and taxes.

1/ Percentage depletion allowance calculated at 15% of gross income not to exceed 50% of taxable incomecalculated before the percentage depletion allowance deduction.

2/ 50% taxable income limit for percentage depletion allowance is used.3/ Currently the highest statutory rate for corporate income tax.

15

ESTIMATED EFFECT OF SEVERANCE TAX RATE CHANGES ON COPPER RECOVERY COSTS

Methodology

This study uses the Bureau of MinesMinerals Availability System (MAS) toestimate the effect of assumed changes inState severance tax rates on copperrecovery costs at given levels of domes-tic copper availability. Availability isused here to mean the same thing as pro-duction. The following two paragraphsprovide a brief and simplified explana-tion of the MAS, which is described indetail elsewhere (2, 5, 9).

The MAS is a Bureau system for de-termining potential mineral availability

by identifying and then performingcost evaluations on major mineral depos-its. The Supply Analysis Model (SAM),which uses the discounted cash flowrate-of-return method, contains thefinancial analysis component of theMAS. The domestic copper part of theMAS consists of the 73 propertiesshown below, which are also the proper-ties used in the subsequent analysis.The analysis also considers separatelythe 34 producing and the 39 nonproduc-ing properties (status as of January1980).

Producing NonDroducineArizona:

1. Bagdad2. Bluebird3. Christmas4. Cyprus Johnson Camp5. Esperanza6. Inspiration Area7. Lakeshore8. Magma (Superior)9. Metcalf10. Miami Leach11. Mineral Park12. Mission San Xavier13. Morenci14. New Cornelia (Ajo)15. Ox Hide16. Pima17. Pinto Valley18. Ray19. Sacaton20. San Manuel-Kalamazoo21. Sierrita22. Silver Bell23. Twin Buttes

Michigan:24. White Pine

Montana:25. Butte

Nevada:26. New Ruth27. Victoria28. Yerrington

Alaska:1. Arctic Camp2. Bond Creek, Orange Hill3. Bornite4. Brady Glacier5. Yakobi Island

Arizona:6. Casa Grande7. Copper Basin8. Dubacher Canyon9. Florence Conoco

10. Helvetia East11. Helvetia West12. Miami East13. Oracle Ridge14. Palo Verde15. Peacock16. Red Mountain17. Safford Inspiration18. Safford Kennecott19. Safford Phelps Dodge20. Van Dyke21. Vekol Hills

California:22. Lights Creek23. Walker

Michigan:24. Presque Isle

Minnesota:25. Minnamax26. Ely Spruce

16

Producing NonproducingNew Mexico:

29. Chino30. Continental--Underground31. Continental--Surface32. Tyrone

Tennessee:33. Copperhill

Utah:34. Bingham

Montana:27. Heddleston28.- Stillwater29. Troy

Nevada:30. Hall

New Mexico:31. Hillsboro (Copper Flat)32. Nacimiento33. Pinos Altos

Utah:34. Carr Forkl

Washington:35. Sunrise

Wisconsin:36. Crandon37. Flambeau38. Pelican River

Wyoming:39. Kirwin

1A producing property starting in October 1979.

Domestic copper availability isdetermined by first performing a dis-counted cash flow rate-of-return analysisusing January 1980 costs for each prop-erty in the desired group. Then the 73(or 34 or 39 as the case may be) proper-ties are ranked on the basis of the costper unit of output required to bring theminto operation. The amount of copperpotentially available annually or intotal is derived from the data for theindividual properties. The increases inavailability occur in a stepwise fashionin unequal increments with increasedcosts because the properties generallydiffer in the amount of copper availablefrom them. Because this ranking of theproperties to determine copper availabil-ity is done on the basis of cost, some

With Severance Taxes

nonproducing properties may beprior to some producers.

phased in

The sensitivity of copper recoverycosts to changes in severance tax rateswas estimated by assuming four cases ofrates: (1) Base case, which holds sever-ance taxes at current levels, (2) allseverance tax rates reduced to zero, (3)all severance tax rates doubled, and (4)all severance tax rates quadrupled. Nochanges were made in the taxes of Statesnot utilizing severance taxes, nor wereany changes made in the bases of the sev-erance taxes. The following tabulationshows which of the States where the73 copper properties are located levyseverance taxes on copper:

Without Severance Taxes

ArizonaMinnesotaMontanaNevadaNew Mexico

UtahWashingtonWisconsinWyoming

AlaskaCaliforniaMichiganTennessee

The assumed cases, which are fairlyextreme, are merely used to give an indi-cation of the impact of severance taxes

onbeit

copper recovery costs and should notconsidered realistic. Furthermore,is not likely that all States with

17

severance taxes would act in such a con-certed fashion as is assumed here. How-ever, there have been some major changesin severance taxes affecting copper inrecent years; for example, in Wisconsin(1). Also, legislation that would haveraised a severance tax rate from 1.4% to30% for surface and 15% for undergroundmines was recently considered in Montana(3). In Arizona, the severance tax oncopper was reduced from 2.5% to 2.0% fromJune 1, 1978, to June 30, 1980, to helpalleviate industry difficulties (1).

There are several final points tobe made in this discussion of themethodology:

1. It is assumed that the effect ofthe tax is solely on cost, and that thereis no shifting of the tax forward to theconsumer. This is probably realisticbecause copper is traded in world marketsand individual producers do not have con-trol over the price. In essence, statu-tory incidence is the same as economicincidence.

2. The time period necessary tobring the properties into operation isnot considered. Lead time is an impor-tant factor in determining miner-als availability, 'and its omissionhere should be kept in mind. The SAMdoes have the capability for handlinglead time, but it is not used in thisreport.

3. The analysis here is on a prop-erty or project basis. In actuality,decisions to invest and bring mineralproperties into operation are much morecomplex than is indicated in this paper.Individual companies, some with businesspursuits in addition to mining, must maketheir decisions to invest on the basisof their own analyses of any givensituation.

4. The cost figures in this paperinclude a 15% rate of return on investedcapital.

Results of Analysis

Table 3 shows the estimated effectof assumed severance tax rate changes oncopper recovery costs for all of the 73domestic properties listed above. Annualrecoverable copper is shown ranging from500,000 to 2.5 million metric tons inincrements of 500,000 tons. The maximumannual recoverable copper from all 73domestic properties under the given con-ditions is 2.7 million metric tons.Total recoverable copper is shown rangingfrom 20 million to 60 million metric tonsin increments of 10 million tons. Themaximum total recoverable amounts to69 million metric tons. In 1979, thequantity of copper actually recoveredfrom domestic mines was 1,444,000 metrictons.

As shown in table 3, the assumedchanges in State severance tax rates fromcurrent levels cause changes in copperrecovery costs ranging from -66 to 12tper pound for the given levels ofannual copper availability. The first500,000 metric tons of copper would beavailable at the same recovery costregardless of which severance tax case isassumed. However, a considerable changein recovery cost occurs when the givenlevel of copper availability is increasedto 1 million metric tons annually.Reducing severance tax rates to zeroresults in a reduction in recovery costof 6i (8.2%) per pound, and doubling therates increases recovery cost by 66(8.2%). The results become more mixed athigher levels of copper availability,depending on the severance tax case. Forexample, at a given level of copperavailability of 1.5 million metric tons,a zero level of severance taxes reducesrecovery cost by only 14 (1.1%) perpound, but doubling the tax rateincreases the cost by 76 (7.9%). Theassumed changes in severance tax ratesaffect the recovery cost of copper fromdomestic properties in a generally mixedfashion for reasons mentioned followingthe discussions of tables 4 and 5.

Copper availability,million metrictons 2/

Costper lb

Annual recoverable:0.5..............1................1.5..............2...............2.5..............

Total recoverable:20...............30...............40...............50...............60...............

$0.50.67.88

1.211.69

.62

.83

.971.211.57

Severance tax ratesreduced to 0

Change fromcurrent levelPer lb

0$-.06-.01-.04-.04

-.02-.02-.01-.04-.05

00

TABLE 3. - Effect of assumed severance tax rate changes on copper recovery costat given levels of potential availability, domestic properties 1/

Assumed severance tax case

Pct

0.0-8.2-1.1-3.2-2.3

-3.1-2.4-1.0-3.2-3.1

$0.50.73.89

1.251.73

.64

.85

.981.251.62

Severance tax ratesat current level,cost per lb

Costper lb

Severance taxrates doubled

$0.50.79.96

1.281.77

.65

.88

.981.281.67

Per lb

Change fromcurrent level

D$.06.07.03.04

.01

.03

.03

.05

Pct

0.08.27.92.42.3

1.63.502.43.1

Costper

,-,-

lb

Severance taxrates quadrupled

$0.50.80

1.001.371.85

.70

.951.041.371.83

Per lb

0$.07.11.12.12

.06

.10

.06

.12

.21


Pct

0.09.6

12.49.66.9

9.411.86.19.6

13.0

D

------- ~-- -- - � .- | I-I---------I �

1/

2/

Cost includes a 15-percent rate of return on invested capital.listed in the text.Maximum annual recoverable copper is 2.7 million metric tons,metric tons.

Domestic properties include all of the 73 properties

and maximum total recoverable copper is 69 million

19

Table 4 shows the estimated effectof assumed severance tax rate changes oncopper recovery costs for the 34 produc-ing domestic properties. Annual recover-able copper is shown ranging from 250,000to 1.5 million metric tons in incrementsof 250,000 tons. The maximum annualrecoverable copper from these 34 produc-ing properties is 1.6 million metrictons. Total recoverable copper is shownin amounts ranging from 10 million to40 million metric tons in increments of10 million tons. The maximum totalrecoverable copper from these propertiesis 44 million metric tons.

As shown in table 4, there is noobvious pattern in the percentage changesin copper recovery costs of producingproperties due to the different severancetax cases or as levels of availabilityare changed. For example, reducing sev-erance taxes to zero reduces recoverycosts by 2I (2.3%) at an annual copperavailability level of 1 million metrictons. This reduction in cost is 1l(1.0%) and 34 (2.5%) at annual copperavailability levels of 1.25 million and1.5 million metric tons, respectively.

Table 5 shows the estimated effectof assumed severance tax rate changes oncopper recovery costs for the 39 nonpro-ducing domestic properties. Annualrecoverable copper is shown ranging from250,000 to 1 million metric tons inincrements of 250,000 tons. The maximumquantity of copper potentially availableannually from the nonproducing propertiesis 1.1 million metric tons. Totalrecoverable copper is given in a rangefrom 5 million to 20 million metric tonsin increments of 5 million tons. Themaximum total recoverable amount of cop-per from nonproducing domestic propertiesis 25 million metric tons.

As in tables 3 and 4, the data forchanges in recovery cost in table 5 donot exhibit any particular pattern. Theseverance tax rate level does have a con-siderable impact on the recovery costs ofthe first increment of copper potentially

available from nonproducing proper-ties. For the first 250,000 metric tons,reducing severance tax rates to zerodecreases the recovery cost by 7~ (9.5%),and doubling the rates increases thiscost by 9i (12.2%). The relative effectat subsequent levels of availability ismore moderate.

As noted in the methodology sectionabove, the 73 (or 34 or 39) propertiesare ranked according to per-unit cost,and a given level of availability isreached by adding up the quantitiesavailable from individual properties.The cost figure at a given level ofavailability is the cost required tobring into operation sufficient proper-ties to attain that level. Only the last(or last few) properties will have thatcost figure; the others will have lowercosts per unit.

The severance tax rate changesaffect not only the per-unit recoverycosts, but also the order in which theproperties are ranked. Only the proper-ties located in the States currentlyimposing severance taxes will have recov-ery costs affected by the rate changes.For example, assume State X has a sever-ance tax of 5% and State Y does notimpose one. At current rate levels, aproperty in State Y might be phased inprior to a property in State X. However,if severance tax rates are reduced tozero, the property in State X may then bephased in first. Furthermore, the quan-tities available from individual proper-ties, on either an annual or a totalbasis, differ. Therefore, a change inranking may also lead to a change in thenumber of properties required to reach agiven level of availability. As anillustration, when considering all 73domestic properties, it takes 23 proper-ties to achieve an annual level of copperavailability of 1 million metric tons,assuming severance tax rates at currentlevels. If severance tax rates arereduced to zero, it takes only 21 proper-ties to reach 1 million metric tons.


Annual recoverable:

0.25...............5.............75..............1.0..............1.25.............1.5..............

Total recoverable:

10...............20...............30...............40...............

Costper lb

$0.14.56.70.84.97

1.17

.14

.78

.881.21


Per lb

$-0.01-.02-.03-.02-.01-.03

-.01-.01

- nA

Pct


M- = - -

TABLE 4. - Effect of assumed severance tax rate changes on copper recovery costat given levels of potential availability, producing domestic properties 1/


-6.7-3.4-4.1-2.3-1.0-2.5

-6.7-1.3.0

-3.2

$0.15.58.73.86.98

1.20

.15

.79

.881.25


Costper lb

.


$0.15.60.78.88.98

1.23

.15

.79

.891.28

I

Per lb


D$.02.05.020.03

Pct

0.03.46.82.3.0

2.5

.0

.01.12.4

$0.17.64.80.93

1.001.30

.17

.80

.951.37

Costper lb

.-



$0.02.06.07.07.02.10

.02

.01

.07

.12

Per lb Pct

13.310.39.68.12.08.3

13.31.38.09.6

3D

.01

.03I V~

-------.----- ,-J-----.--- -- - -- - ~- ---1/

2/

Cost includes a 15-percent rate of return on invested capital. Producingproperties listed in the text.Maximum annual recoverable copper is 1.6 million metric tons, and maximum44 million metric tons.

domestic properties are the 34 producing

total recoverable copper is


Annual recoverable:

0.25 ..............5................75.............1.0..............

Total recoverable:

5...............10...............15...............20...............

Cost'per lb

----------


$0.671.311.571.83

.671.151.381.71

Per lb

$-0.07-.03-.05

0

1- M---

TABLE 5. - Effect of assumed severance tax rate changes on copper recovery costat given levels of potential availability, nonproducing domestic properties 1/



Pct


I

Costper lb


-

-9.5-2.2-3.1

.0

-9.5-1.7-2.1-2.3

$0.741.341.621.83

.741.171.411.75

$0.831.371.671.83

.961.201.451.79


Per lb

$0.09.03.05

0

Pct


.-

12.22.23.1.0

29.72.62.82.3

$0.991.441.832.19

.991.401.551.89

Costper lb

Per lb

$0.25.10.21.36

.25

.23

.14

.14

Pct

33.87.5

13.019.7

33.819.79.98.0


-.07-.02-.03-.04

.22

.03

.04

.04

- . . � . 1. �

1/ Cost includes a 15-percent39 nonproducing properties

2/ Maximum annual recoverable25 million metric tons.

rate of return on invested capital. Nonproducing domestic properties are thelisted in the text.copper is 1.1 million metric tons, and maximum total recoverable copper is

I.-

22

Significance of Results

Given the relatively extreme assumedtax changes, the resultant changes inrecovery costs are not particularly sig-nificant in an absolute sense. This ispartly because not all of the Statesincluded in the analysis levy severancetaxes, and in those that do, the ratesapplied are generally relatively low.Also, the effect of the severance tax islessened owing to its deductibility incomputing the Federal income tax. Ofcourse, the effect on any individualoperation could be significant.

The changes in recovery cost perpound of copper, ranging from -66 to 7^for the "all properties" cases of zeroseverance tax rates and a doubling of therates, (table 3), need to be placed inperspective to determine some sort ofrelative significance. The competitive-ness of the U.S. mineral industries inworld markets has been of concern inrecent years. Therefore, an appropriatemeasure against which to judge the sig-nificance of these cost changes would betransportation costs.

It has been observed that "most met-als and minerals are international com-modities in that only a few cents perpound can move them physically in the

major markets of the world" (4). Cer-tainly copper is one of these "inter-national commodities." The following isa sample of ocean liner rates (excludingbunker fuel surcharges) that existed inMarch 1980:

--Less than 4£ per pound forChilean and Peruvian copperbars to U.S. Atlantic andgulf coast ports.

--Between 26 and 56 per poundfor copper concentratesfrom South America, Africa,and the Far East.

These transportation cost figures are ofthe same general magnitude as the changesin the copper recovery cost figurescaused by the assumed changes inseverance tax rates. Of course, as notedearlier, it is not likely that all Stateswould make such changes in severance taxrates. However, major changes in sever-ance taxes on copper, which could be dueto changes in the rates or bases of pres-ent taxes or the imposition of new ones,could have a comparable effect on the taxburden of copper producers. Also, theseresults are more significant when it isremembered that the severance tax is onlyone of the taxes levied on copperproducers.

CONCLUSION

Currently 33 States levy severancetaxes on minerals. Most States use avalue base as opposed to a physical unitbase; however, a few States use priceindexes to adjust the rate on unit basedtaxes. Only 16 States have broad-basedseverance taxes that cover a range ofminerals.

The 73 domestic copper properties inthe Bureau of Mines Minerals AvailabilitySystem have been used to estimate theeffects of assumed changes in severance

tax rates on copper recovery costs. Thechanges in recovery costs are small giventhe relatively extreme assumed changes inseverance tax rates. However, theseresults are not insignificant because theseverance tax is only a small part of thetotal tax burden on copper producers.Furthermore, a reduction of the rates tozero or a doubling of them results inchanges in costs that are of the sameorder of magnitude as the cost of trans-porting copper to the United States frommajor foreign producing countries.

23

REFERENCES

1. Commerce Clearing House,State Tax Guide: All States. NewChicago and Washington, 2d ed.,2 vols. with updated supplements.

Inc.York,1980,

6. Starch, K. E.and the Severance Tax.1979, 65 pp.

Taxation, Mining,BuMines IC 8788,

2. Davidoff, R. L. Supply AnalysisModel (SAM): A Minerals AvailabilitySystem Methodology. BuMines IC 8820,1980, 45 pp.

3. Mining Journal (London). MiningWeek. Mar. 6, 1981, p. 167.

4. Morgan, J. D. Strategic Minerals:Overview. Pres. at U.S. Department ofState, Foreign Service Institute, ScienceSymposium Series, Strategic MaterialsSupply: An International MineralsCrisis?, Washington, D.C., Mar. 4, 1981,15 pp.; copy available from authors ofthis Information Circular.

5. Rosenkranz, R. D., R. L. Davidoff,and J. F. Lemons, Jr. Copper Availabil-ity--Domestic: A Minerals AvailabilitySystem Appraisal. BuMines IC 8809, 1979,31 pp.

7. Stermole, F. J. Economic Evalu-ation and Investment Decision Methods.Investment Evaluations Corp., Golden,Colo., 1974, 350 pp. plus index.

8. U.S. Bureau of the Census.Tax Collections in 1974.

State

9. U.S. Bureau of Mines--MineralSupply. The Bureau of Mines MineralsAvailability System and Resource Classi-fication Manual. BuMines IC 8654, 1974,199 pp. plus appendix, 15 pp.

10. Yasnowsky, P. N., and A. P.Graham. State Severance Taxes on MineralProduction. Proc. Council of Economics,105th Ann. Meeting, AIME, Las Vegas,Nev., Feb. 22-26, 1976, pp. 45-58.

11. . State Severance Taxes onNonfuel Minerals as of January 1, 1978.BuMines IC 8774, 1978, 6 pp.