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**Testimony of Ryan Alexander**

### **President, Taxpayers for Common Sense**

**before**

**Senate Energy and Natural Resources Committee**

**Hearing on**

**The Reform of the Mining Law of 1872**

**January 24, 2008**

Good morning Chairman Bingaman, Ranking Member Domenici, members of the
Subcommittee. Thank you for the opportunity to testify before you this
morning on reform of the Mining Law of 1872. My name is Ryan Alexander
and I am President of Taxpayers for Common Sense, a national
non-partisan budget watchdog group.

Since its inception in 1995, TCS has advocated reform of the General
Mining Law of 1872 for one simple reason: this anachronistic law is a
clear example of taxpayer injustice. Public lands are taxpayer assets,
and should be managed in a way that preserves their value, ensures a
fair return from private interests using them for profit, and avoids
future liability.

Unfortunately, the system of "management" set out in the 1872 law has
allowed public lands and valuable public assets to be exploited for
private profit at the expense of taxpayers. There are three primary
ongoing injuries to taxpayers under the 1872 law that must be addressed
by any meaningful reform effort: the giveaway of federal lands; the
extraction of federal mineral assets without taxpayer compensation; and
the creation of taxpayer liability by allowing the abandonment of
contaminated mine lands.

Under the 1872 Mining law billions of dollars of gold, uranium, silver,
and copper are taken from public lands by mining interests each year.
Unlike other extractive industries, companies that mine for gold,
silver, copper, uranium and other precious metals do not have to pay a
fee when operating on federal land, essentially allowing these valuable
minerals to be given away for free. In contrast, the oil, gas and coal
industries pay more than a 12% royalty, and they and the hardrock mining
companies may pay even more when mining on private, state or tribal
lands.

The law also allows the sale of federal lands at 19^th^ century prices.
Under the law, federal lands are sold for no more than \$5 an
acre\--considerably below today's market value. Not only have mining
companies been able to gain title to land valued at tens of millions of
dollars for as little as tens of thousands of dollars, but the land can
be developed for other purposes, including commercial enterprises, such
as condominiums, ski resorts and casinos.

The 1872 law also saddles taxpayers with the hefty clean-up costs of the
toxic aftermath of mining operations. Not only do American taxpayers
underwrite the profits, but they are also forced to pay for the damages
left behind. These damages have been estimated to cost upwards of
**[\$50 billion.]{.underline}**

# Giveaway of Federal Land

Under the Mining Law of 1872, a claimant can "patent" or purchase a
mining claim for either \$2.50 or \$5.00 per acre -- the public is
prohibited from charging market value for land subject to a claim. Just
to put that in perspective, the 2006 purchasing power of \$2.50 from
1872 is just 15 cents, \$5.00 is 31 cents. That's how little we are
valuing taxpayer's property. Staking a claim on federal land simply
requires an annual maintenance fee of \$125 per acre plus an additional
\$30 location fee and \$15 new mining claim service fee for first
timers.

A couple examples of taxpayers getting soaked by patenting:

-   In Crested Butte, Colorado the federal government sold 155 acres to
    the Phelps Dodge mining company for approximately \$790, despite a
    company estimate that the land could produce up to \$158 million in
    after-tax profits over 11 years. This is in an area where land
    prices range as high as \$1 million per acre.

-   In Nevada, in 1994, American Barrick paid \$9,765 for 1,950 acres
    that contained an estimated \$10 billion in gold.

In some cases, it appears that mining patents have been little more than
a ruse for developers to get their hands on valuable federal property
before flipping it for other, more lucrative uses. A few examples:

-   In 1983, the Forest Service sold 160 acres near the Keystone, CO ski
    resort for \$400. Six years later the land sold for \$1 million.

-   In 1970, a businessman bought 61 acres in Arizona for \$153. Just
    ten years later he sold it to a developer for \$400,000, plus a
    share of future profits

In FY1995, Congress began enacting one-year patent moratoriums. Patent
applications that were in the pipeline have been grandfathered, but new
patents have not been issued since then. However, continuing the
decade-long practice of one-year extensions makes little sense for the
mining industry or taxpayers.

We urge the Senate to permanently end the patenting of federal land. The
Congressional Research Service points out a critical fact: ending the
practice of patenting "will not stop the production of valuable mineral
resources from the public lands, but will prevent the further transfer
of ownership of public lands to the private sector." Transfer of public
lands to the private sector at bargain basement prices should be stopped
permanently.

# Gold and Other Valuable Minerals for Free

After charging a pittance for the land, the Mining Law of 1872 gives
private interests valuable minerals for free. Despite the private sector
extracting public assets from the ground, taxpayers receive no
compensation whatsoever. Since enactment of the 1872 law, the total
value of minerals that have been taken without compensation is an
estimated \$245 billion. 

By comparison, the oil and gas industry generally pays 12.5 percent in
royalties on what they extract from onshore federal lands. Private
landowners and states also routinely require payment for mining on their
lands. Taxpayers for Common Sense would like to see Congress pass a
12.5% gross income royalty, commensurate with other extractive
industries.

A gross income or net smelter return is essentially the gross income for
the mineral product that the mine receives from a refinery or smelter.
This ensures that the royalty automatically adjusts to changes in the
market and does not over- or undercharge. TCS is aware of other
proposals such as net revenue or net profits royalty, but we believe
these offer too much opportunity for gamesmanship on what the deductible
costs will be.  A royalty based on net smelter or gross income will be
the easiest system to administer for the federal government and will
require the least complex enforcement systems.  In a recent report the
World Bank recently found more than 68% of the countries imposing a
royalty use the gross income or net-smelter system.  

Mineral Business Appraisal, geologic and mining experts in the appraisal
of all types of mineral property, describe net profits royalty, noting
"\[t\]here are virtually no buyers for this type of royalty because of
the creative accounting that the mining operator can use to depress the
royalty payment amount. The distinguishing feature of a net profits
royalty is that, depending upon the exact definitions in the mining
lease and the actual calculations, it will very often be zero."

The state of Alaska provides a glaring example of how big a loss a
net-proceeds royalty would be for US taxpayers.  The state imposes a 3%
net-proceeds royalty on mining operations on state lands.  Over the last
ten years Alaska has collected only \$1.2 million in royalties despite
the extraction of more than \$1.2 billion worth of gold from state
lands.  According to these figures provided by the Alaska Department of
Natural Resources, Alaska has imposed a less than one/tenth of one
percent royalty on mining operations.  Clearly, this type of royalty
would continue the federal government's massive giveaway.

According to Mineral Business Appraisal, net smelter "royalty payments
are also fairly simple to calculate and administer in that only the
selling price and quantity of mineral product produced or sold are
required for their determination." In addition, "this type of royalty
will usually have the highest market value of all the royalty types."
Simple, predictable, and valuable -- that is the way to calculate
royalties in the best interest of the taxpayer.

## High Costs of Clean-Up

Finally, failure to reform the General Mining Law of 1872 will leave
taxpayers with a huge and growing liability for toxic waste and water
contamination left behind by abandoned mines. Too often, after all the
minerals have been removed, mining operations cease, move their jobs out
of town to another -- often related---mining operator, and leave
communities with a mess and taxpayers holding the bag to pay for clean
up. A 2004 report by the U.S. Environmental Protection Agency (EPA)
Inspector General indicated that the Superfund National Priority List
contained 63 hardrock mining sites and another nearly 100 sites could be
added in the future. The price tag for cleaning up all of these sites
was \$7 - \$24 billion, with more than half of that amount likely to be
stuck on taxpayers. Because clean-up takes such a long time, it is
likely that some of the businesses currently on the hook will no longer
remain viable and the taxpayer's share of clean-up will increase.

The potential unfunded liability from hardrock mining sites is even
larger. A 2004 report by the EPA put the cost of remediation of hard
rock mines at \$20 - \$54 billion. Although regulations for bonding were
tightened with Section 3809 rules, they are still too weak to adequately
protect taxpayers. According to a June 2005 report by the Government
Accountability Office (GAO), the Bureau of Land Management (BLM)
indicated that 48 hardrock operations on BLM land had ceased without
reclamation since the agency began requesting some form of financial
assurances in 1981. BLM estimated the costs of reclaiming 43 sites at
\$136 million, which the GAO says is a low-ball estimate.

To address these unfunded liabilities, TCS asks the Senate to require
financial assurance and operation plans, and restrict mining in areas
where the risk of an expensive clean-up is too great. Moreover, we urge
the Senate to consider legislation that would enable a portion of the
revenue generated by mining fees and royalties to be deposited in the
General Treasury, once liabilities at the time of enactment have been
discharged. Mining fees and royalties collected should also be directed
towards the highest priority clean-up sites: ones with the greatest
public safety concerns or highest risks for further environmental
damage, rather than directed to states with the largest current
production.

Over the years, the Department of Interior has had to be prodded
repeatedly to require adequate financial assurances in the form of
surety bonds and other tangible assets. Clearly, further legislation to
ensure taxpayers are not stuck with the tab for cleaning up mining
messes is required.

**Other Considerations**

In addition to not paying a royalty for the valuable resources they
extract from public lands, hardrock mining companies enjoy preferential
tax treatment that other industries do not receive. They are allowed to
expense certain costs for exploration and development; they receive a
depletion allowance, which is a fixed percentage deduction against gross
income; and, they are allowed to deduct the costs of closing a mine and
the associated reclamation costs [before a mine is actually
closed.]{.underline}

Because of the way the depletion allowance is applied, mining companies
may actually receive more in deduction credits than their investment in
the mine. And the combination of tax preferences and other more standard
deductions available to them means that mining companies often pay an
effective tax rate much lower than the statutory corporate rate of 30
percent.

Taxpayers for Common Sense also supports the end of the percentage
depletion allowance tax break for the mining industry.  We support the
Elimination of Double Subsidies for Hardrock Mining Industry Act of 2007
introduced by Senators Feingold and Cantwell and urge the committee to
include this in their larger mining reform legislation. 

**Progress Towards Reform**

Taxpayers for Common Sense believes there are many lessons to be learned
from the recent efforts towards reform of the 1872 General Mining Law.
We were pleased to see the inclusion of a royalty on all mines in the
recently passed reform bill in the House of Representatives. As a means
to ease the transition, H.R. 2262 implements a 4% royalty on existing
mines -- half of the royalty payment required of new mines. We do not
believe this is the most appropriate way to address the concerns of
ongoing operations concerned with an adjustment to a royalty payment for
the extraction of taxpayer-owned minerals. Rather, this approach
deprives taxpayers of compensation from operations that have long been
exploiting our assets while at the same time failing to address the
underlying transition concern of a sudden change in the cost of doing
business. Instead, we would support a three year graduated phase in of a
royalty for existing mines. While this may present a short term increase
in administrative costs, we believe it is a more fair approach for both
the taxpayer and the mining industry.

The House passed bill establishes two trust funds which absorb all of
the revenue generated by the royalties and other fees associated with
the legislation. As the Senate considers this legislation TCS urges
Congress to direct a portion of the revenue generated by mining reform
legislation to be deposited in the General Treasury. The minerals are
extracted from land owned by all taxpayers, and all taxpayers should
reap the financial benefits.

Finally, two arguments that were offered by those fighting reform in the
House of Representatives are worthy of a brief mention in order to save
the Senate from lengthy consideration of these specious arguments.
First, many advocates of the status quo argued that mining operations in
the United States would be dramatically undercut by the implementation
of a royalty for minerals extracted from public lands. The evidence
simply does not support this claim: mining companies continue to mine
state lands where royalties are required and routinely pay royalties to
owners as a part of structured agreements to mine private lands.
Moreover, the mining industry is hardly an industry on the margins of
profitability. To quote PriceWaterhouseCoopers' 2007 annual report on
the mining industry, which covers over 80 percent of the industry, "net
profits increased by 64% compared to 2005, and are now 1,423% higher
than their 2002 level."

In addition, the contention has been made that the imposition of a
royalty on future revenues from mining operations on public lands would
give rise to legitimate claims under the Takings Clause under the Fifth
Amendment of the U.S. Constitution.  This contention is frivolous and it
should be rejected.  Property rights in general, but in particular when
it is based on a grant of rights in public lands, do not create immunity
from reasonable regulation to protect the public interest.   Moreover,
the imposition of fees, royalties, and other similar monetary
assessments, including taxes, has generally been viewed as outside the
scope of the Takings Clause.  A royalty on minerals extracted from
public lands is especially appropriate given the fact that the claims at
issue are based on a grant from the federal government. Actual title to
the minerals and the lands on which they are located remain with the
United States, and the exploitation of these interests has significant
effects on other publicly owned lands.

## Conclusion

Taxpayers have waited far too long for real reform of the Mining Law of
1872.

Taxpayers for Common Sense forward to working with the committee to
ensure key taxpayer reforms to the General Mining law of 1872 are
enacted into law.