Mr. President, today I am very pleased to be joined by Senators Cantwell and Feinstein in introducing legislation to eliminate from the federal tax code the “Percentage Depletion Allowance” for hardrock minerals mined on federal public lands. Elimination of this double subsidy will produce estimated savings of at least $500 million over five years, based on the most recent year for which figures are available from the Joint Committee on Taxation and the Clinton Administration’s FY 2001 budget proposal. These savings will help fund the reclamation and restoration of abandoned mines through an Abandoned Mine Reclamation Fund, that my bill creates, and the remaining three-quarters of savings will be returned to the federal treasury.
Percentage depletion allowances were initiated by the Corporation Excise Act of 1909. That’s right, these allowances were initiated nearly one hundred years ago. Provisions for a depletion allowance based on the value of the mine were made under a 1912 Treasury Department regulation, but difficulty in applying this accounting principle to mineral production led to the initial codification of the mineral depletion allowance in the Tariff Act of 1913. The Revenue Act of 1926 established percentage depletion much in its present form for oil and gas. The percentage depletion allowance was then extended to metal mines, coal, and other hardrock minerals by the Revenue Act of 1932, and has been adjusted several times since.
Percentage depletion allowances were historically placed in the tax code to reduce the effective tax rates in the mineral and extraction industries far below tax rates on other industries, providing incentives to increase investment, exploration, and output. The problem, however, is that percentage depletion also makes it possible to recover many times the amount of the original investment.
There are two methods of calculating a deduction to allow a firm to recover the costs of its capital investment: cost depletion and percentage depletion. Cost depletion allows for the recovery of the actual capital investment—the costs of discovering, purchasing, and developing a mineral reserve—over the period during which the reserve produces income. Under the cost depletion method, the total deductions cannot exceed the original capital investment.
Under percentage depletion, however, the deduction for recovery of a company's investment is a fixed percentage of “gross income,” namely, sales revenue from the sale of the mineral. Under this method, total deductions typically exceed the capital that the company invested. The set rates for percentage depletion are quite significant. Section 613 of the Internal Revenue Code contains depletion allowances for more than 70 metals and minerals, at rates ranging from 10 to 22 percent.
There is no restriction in the tax code to ensure that over time companies do not deduct more than the capital that a company has invested. Furthermore, a Percentage Deduction Allowance makes sense only so long as the deducting company actually pays for the investment for which it claims the deduction.
The result is a double subsidy for hardrock mining companies: first they can mine on public lands for free under the General Mining Law of 1872, and then they are allowed to take a deduction for capital investment that they have not made for the privilege to mine on public lands. My legislation would eliminate the use of the Percentage Depletion Allowance for mining on public lands (resulting in an estimated savings of $450 million over five years), while continuing to allow companies to recover reasonable cost depletion.
My bill would also create a new fund, called the Abandoned Mine Reclamation Fund. One-fourth of the revenue raised by the bill, or approximately $110 million dollars, would be deposited into an interest-bearing fund in the Treasury to be used to clean up abandoned hardrock mines in states that are subject to the 1872 Mining Law. Though there is no comprehensive inventory of abandoned mines, estimates put the figure at upwards of 100,000 abandoned mines on public lands.
There are currently no comprehensive federal or state programs to address the need to clean up old mine sites. Reclaiming these sites requires the enactment of a program with explicit authority to clean up abandoned mine sites and the resources to do it. My legislation is a first step toward providing the needed authority and resources.
In today’s budget climate, we are faced with the question of who should bear the costs of exploration, development, and production of natural resources: the taxpayers, or the users and producers of the resource? For more than a century, the mining industry has been paying next to nothing for the privilege of extracting minerals from public lands and then abandoning its mines. Now those mines are adding to the nation’s environmental and financial burdens. We face serious budget choices this fiscal year, and one of those choices is whether to continue the special tax breaks provided to the mining industry.
The measure I am introducing is straightforward. It eliminates the Percentage Depletion Allowance for hardrock minerals mined on public lands while continuing to allow companies to recover reasonable cost depletion.
Though at one time there may have been an appropriate role for a government-driven incentive for enhanced mineral production, there is now sufficient reason to adopt a more reasonable depletion allowance that is consistent with depreciation rates given to other businesses. This corporate subsidy is simply not justified.
