Fool's Gold

IN AN ATTEMPT to overhaul an 1872 mining law, the House quietly passed the Hardrock Mining and Reclamation Act last Thursday, imposing royalty taxes on the mineral mining industry. Rep. Nick Rahall, chair of the House Natural Resources Committee and a sponsor of the bill, says it will protect the environment and stop the "blatant abuse" of the mining industry's current royalty-free use of federal lands.

The impact--an 8 percent tax on gross income for new mining operations and a 4 percent tax for existing operations--would be staggering, and not just for mining companies, but for the entire economy. Costs will be passed along to the manufacturing industry in one form or another, which in turn will mean higher costs for everyone in the economic food chain. Many consumer products--from computers to cars (and yes even the environmentally friendly hybrids)--will be more expensive, not to mention all residential and commercial construction projects.

The bill pits House and Senate Democrats against each other, as Sen. Majority Leader Harry Reid, from the gold mining state of Nevada, has denounced parts of the legislation. Nevada is the top gold producer in the country, and the fifth largest in the world, according to the National Mining Association. Reid is concerned about the jobs of those in the rural communities of his state, spokesman Jon Summers told me. In total, 170,000 mineral mining jobs are at risk.

The bill passed by a margin of 244 votes to 166. Besides Reid, Democratic lawmakers from heavy mining and manufacturing states are not happy with the bill either. Representatives Shelley Berkley, also from Nevada, Stephanie Herseth Sandlin of South Dakota, and Dan Boren of Oklahoma voted against the act. All of their offices either did not respond to requests for comment or were unavailable for comment.

After the vote passed, Reid released a statement indicating he was in the process of devising a "constructive counterpoint to the Rahall-Costa bill." He continued, "While I cannot support many of the provisions in the House bill, I believe that the opportunity still exists for common sense reform." Well, that's a bit of a euphemism: Reid is against all royalty taxes for existing companies. House and Senate staffers said it was too premature to say whether a deal could be struck.

In the global commodities marketplace, the United States is already far from maximizing its potential, and this bill further exacerbates concerns ranging from national security to higher prices to lost investment.

The United States is rich with mineral resources, but its global share of exploration investments has dropped; from 1993 to 2006 it went from 20 percent to 8 percent. Even though the United States has the highest number of commodity metals and minerals available compared with any other country, our country has actually increased dependency on imports. At least 45 commodities used in the country are imported more than half of the time, up from just 22 in 1996, according to the U.S. Geological Survey.

A 2006 World Bank study sums it up well: "A decline in exploration expenditures relative to other countries often provides the first indication that a country is losing its competitiveness in attracting investment into its mineral sector."

Investments are already declining, and an 8 percent tax on new companies will stifle potential growth. While Rahall says that "multi-national conglomerates" are taking over federal lands for mining purposes, of the 6,603 mining companies in the country, 99 percent, or 6,542, are small businesses with less than 500 employees. The bill won't just hit mineral mining states like Nevada, Arizona, Colorado, New Mexico, Utah, Alaska, and California.

Mining companies will be hard pressed to pass the bulk of the royalties along to manufacturers, since commodity prices are determined on a global level. But imports are more expensive for manufacturers, who in turn are forced to pass the costs along to the consumers. "It makes the cost of doing business that much more expensive," said Keith McCoy, vice president of energy and resources for the National Association of Manufacturers.

And like energy production, less domestic production of minerals has national security implications--increased dependence on foreign commodities for the manufacture of military equipment.

The National Research Council cited "increased world demand for mineral commodities," "diminished domestic supply and processing capability along with greater dependence on foreign sources," and "higher risk of uncertainty about supply disruptions" as the three major threats to the supply of national defense equipment in a recent report on managing military materials.