Since 1872, hardrock mining on federal lands has been governed by the General Mining Law, which allows virtually free access to open public domain lands for mineral prospecting, staking claims, exploration and development, and extraction without payment of a royalty. And until annual moratoria were imposed by Congress starting in 1994, claimants on hardrock mineral lands could take title to both the mineral rights and the land, after paying to the U.S. Department of Interior (DOI) the required fee or either $2.50 or $5.00 per acre, and after demonstrating diligent development of the mining claim. Proposals to reform the Mining Law have been made almost from the time it was signed by President Grant, and throughout its 135 year history. Many Presidents—Presidents Roosevelt, Nixon, Carter, and Clinton—have endeavored to reform the law, as have many in Congress. One of the contentious issues has been that the law makes no provision for the payment of a royalty on the production of the hardrock minerals from federal lands. The royalty-free treatment of the hardrock mineral industry is unlike mining arrangements (leases) on private and state lands, mining of the leasable energy minerals (coal, oil, and gas) on federal lands, and even unlike hardrock minerals on acquired (as contrasted with public) federal lands, all of which provide for a royalty payment to the landowner. In recent years, the Congress has repeatedly considered, but not passed, reform of the Mining Law, including, in part, to require the payment of royalties. In 1990, committees held several hearings on proposed Mining Law reform, e.g., on S. 1126 , (101 st Congress) which among other things would have imposed an 8% ad-valorem royalty. In 1993, President Clinton's comprehensive economic proposal, part of the State of the Union Address, included claims fees and a 12.5% ad-valorem royalty. Several bills were introduced in the 103 rd Congress to impose a royalty ( H.R. 322 , H.R. 1708 , S. 257 , S. 375 , and S. 775 ) and hearings were held in 1993. S. 775 passed the Senate in May 1993 and was incorporated into H.R. 322 which was approved by the House in November 1993. H.R. 322 went to conference in 1994 but was not approved reportedly because of opposition from Western lawmakers, mainly over the royalty issue. In 1995, there was an unsuccessful attempt to incorporate a royalty as part of the FY1996 budget. In its FY1998 budget proposal, and again in FY2001, the Clinton Administration proposed a 5% "net smelter" royalty but, like previous efforts, this failed. At this writing, the major reform bill in the House—there is currently no Senate bill—is H.R. 2262 , which, among other things, would impose an 8% ad-valorem royalty based on the value of the minerals as defined under the gross income definition of the income tax code (essentially the mining firm's sales revenue) and use the proceeds for the cleanup of abandoned sites. The 8% royalty would apply to new production. Production from existing mining operations would pay a 4% royalty. On October 2, 2007, the Subcommittee on Energy and Minerals of the House Natural Resources Committee held a hearing on this bill. A substitute bill was marked up and approved by the full committee (the House Natural Resources Committee) on October 23. The House approved this committee bill, with minor amendments, on November 1 by a vote of 244 to 166. A summary of the provisions of the House-approved version of H.R. 2262 is described in the Appendix to this report. The comparable bill in the Senate is S. 2750 , which also proposes an 8% royalty on new production and a 4% royalty on production from existing leases. This report analyzes the economic issues underlying proposals to impose a royalty on hardrock (locatable) minerals on public domain lands. It also discusses the federal tax treatment of the hardrock mineral industry. In particular, the report addresses the following questions: What exactly is a royalty, and how does a royalty differ from other rental payments or, for that matter, taxes? Were a royalty imposed, what would be the best way to structure such a royalty? Should the royalty be an ad-valorem type (i.e., one based on the value or price of the mineral), a fixed unit based royalty (i.e., one based only on mineral output), or a net profits royalty (i.e., one based on the net income or profit of the mining company)? If there is to be an ad-valorem royalty based on price or value, at what stage in the mineral producing process should value (or price) be measured? Should it be based on gross income (value of the mineral at the mine) or net smelter return (the value at the smelter less certain deductions)? When does a mining company produce a saleable or marketable product whose value can be measured? What deductions, if any, should be allowed from that price? What should the royalty rate be? And how does Congress decide what a fair royalty rate is? How does one balance the various considerations, such as efficiency and administrative considerations in deciding whether to impose a royalty? What would be the economic effects of introducing a system of royalty payments and other rental payments where one did not exist? Would a royalty harm the domestic and international competitiveness of the U.S. hardrock mining industry? Finally, what taxes and fees does the hardrock mineral industry pay, and do they have any bearing on the question of whether to impose, or the magnitude of, a royalty? The first section of this report provides a brief history of the 1872 Mining Law, including the mineral leasing system and royalty payment requirements for the energy minerals. The second section discusses the economic rationale for the payment of royalties on hardrock minerals. It (1) addresses the question of the appropriate economic basis for payment of royalties to the federal government as landowner, (2) compares royalties based on market value with alternative criteria such as royalties based on gross income from depletion and net smelter return, (3) examines the question of an appropriate royalty rate, and (4) discusses some of the likely economic effects of royalty-free provision of public lands, as well as the effects of introducing a royalty. The fifth and final section examines the federal tax provisions, including the three tax subsidies that affect the hardrock minerals industry, as well as claims and patent fees that the industry pays. Note that the question of payment of royalties from hardrock mineral production on public lands is part of a much broader debate relating to reform of the Mining Law of 1872, which encompasses many other issues—such as whether public domain lands should be patented—which are not addressed in this report. The General Mining Law of 1872 (17 Stat. 91) can be traced to 16 th Century English and Spanish property and mineral rights laws and customs, which, as practiced in Colonial America, formed the basis for the granting of the rights to lands including those containing minerals, including a share of the minerals (a royalty). One of the earliest statutes was the "Royal Code of 1783." This Spanish law became the basis for acquiring mineral rights in Spanish colonies in the Americas, and was used to settle claims disputes. Also, the land charters issued by England to the original thirteen colonies provided generally that 1/5 th of the minerals on chartered lands were reserved for the crown. Independence for the American colonies meant that issues of land and mineral ownership between the national government, the states, localities, and even private individuals had to be decided. Several ordinances were enacted—the Ordinance of 1785, the Land Act of 1796, and the Preemption Act of 1841—but these did not address the question of mineral royalties specifically. The "California gold rush" of 1849 and the silver strike in Nevada of 1860 caused a significant westward population migration for the purposes of prospecting and claiming public domain lands. During this pre-Mining Law period, the issue of land ownership and easy and free access to federal lands was very controversial and fiercely debated. The Congress had approved several temporary leasing or land sales acts for gold, silver, lead, and iron—which were administered by the War Department—but prospectors disregarded them, trespassed onto federal lands, laid their claims anyway, and paid no royalty to the federal government. Also after the Civil War, congressional policy became more openly geared to encouraging westward migration, and the economic development of the West. These practices and policies became embodied in two statutes that became the precursors to the General Mining Law of 1872: the Lode Law of 1866, which provided free and open access to federal lands with lode deposits for prospecting, claiming, and patenting, and the Placer Act of 1870, which applied the same provisions to placer deposits. The General Mining Law of 1872, approved by President Ulysses S. Grant on May 10, 1872, was the consolidation of amended versions of both the 1866 Lode Law and the 1870 Placer Act. Under this law, as amended, public lands with hardrock minerals (metals such as gold, silver, copper, lead, etc., and non-metals such as uranium, barite, and fluorspar) are conveyed, rather than leased for a rent and royalty to the federal government as landowner. More specifically, the law permits citizens and businesses to prospect for hardrock minerals on those public lands not withdrawn from mining, and to file a claim, which gives them the right to explore, develop, mine, and sell hardrock minerals from the claim (such as gold, silver, platinum, copper, lead, tin, etc.) without paying a royalty.