Assessing the Impact of Federal and State Taxes on the Domestic Minerals Industry

Gao ID: EMD-81-13 June 8, 1981

A quantitative assessment was made of one quantitative method for assessing the effects of Federal and State taxes on the profitability of domestic mines and mineral deposits and the attendant implications for domestic mineral production. On the Federal level, GAO analyzed the depletion allowance, the investment tax credit, and the provision for expensive exploration and development costs. Property, severance, and income taxes were analyzed on the State level. In seeking to develop a method for measuring the impact of Federal and State taxes on domestic mineral profitability, production, and investment, GAO used a computer model developed by the Bureau of Mines. The model calculates net present values and discounted cash-flow rates of return for currently producing mines and for undeveloped deposits. Further, the analysis was performed on four mineral commodities. Copper, lead, zinc, and molybdenum were selected because the United States is a competitive producer of these minerals. These minerals are also important to the Nation's economy; they contribute $2.6 billion toward the gross national product and provide employment for 65,000 people.

In its review, GAO found that: (1) sufficient quantitative studies have not been performed to analyze the effectiveness of percentage depletion as an incentive for mineral production, investment, and exploration; (2) sufficient analysis has not been undertaken on the investment tax credit or on the tax benefits to the minerals industry through the expensing of exploration and development costs; (3) 97 percent of depletion allowance-tax expenditure benefits accrue to mines which would be profitable even in the absence of this incentive; (4) only a small percentage of the benefits go to marginal mines which might not produce otherwise; (5) modifications could be applied which would increase the benefits of the allowance to marginal mines and could result in increased production; (6) the investment tax credit has little or no significant effect on unprofitable mines because they have no Federal tax liability against which the credit might be applied; (7) the model results show that 34 percent of the available investment tax credit cannot be used by domestic copper, lead/zinc, and molybdenum mines; (8) the present model is not capable of determining whether the credit rewards production would have occurred regardless or whether it encourages new investment; and (9) changes in the bases, rates, and timing of State taxes can significantly affect the present value of producing mines and the investment potential of nonproducing deposits.


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