Golden loophole

Whether the mining industry’s tax loophole can be pried out of the Nevada Constitution now that its principal advocate, Sheila Leslie, has been defeated in her state senate race is very much on the minds of mining lobbyists.

The industry poured money into the campaign of her opponent, Greg Brower, and other legislators of both parties.

Among the contributors to Brower were Coeur d’Alene Mines, Barrick Goldstrike Mines Inc., Kinross Gold U.S.A., Inc., Newmont Mining Corporation, Nevada Mineral Exploration Coalition, the Nevada Mining Association Inc. Political Action Committee, Nevada Mineral Exploration Coalition. Newmont is the only U.S.-based mining corporation on the list.

Other funds also flowed indirectly from the mining corporations, such as $50,000 two of them gave to Gov. Brian Sandoval, who then contributed to legislative candidates from his own campaign fund. Brower received at least two $5,000 payments from Sandoval. And there are a number of contributions from anti-environmental groups like the Conservancy Trust. Leslie worries her defeat will serve as “a warning to other legislators that if you take on the mining industry, you are courting defeat.”

Whether the effort for repeal of the loophole will have the same momentum without Leslie to push it is causing concern for its supporters. She said, “That’s a good question. Without Steven Horsford or me there, I’m not sure, frankly.”

Horsford, the Senate Democratic floor leader, was elected to the U.S. House.

Mining is the only industry with a tax loophole written into the state constitution. Laundries, restaurants, and auto repair shops all do without such protection.

This tax break is a product of Nevada’s second constitutional convention, which met in 1864 and included language that prohibited taxation of the gross proceeds of mines, limiting such taxation to net. The section reads in part, “The legislature shall provide by law for a tax upon the net proceeds of all minerals, including oil, gas and other hydrocarbons, extracted in this state, at a rate not to exceed 5 percent of the net proceeds. No other tax may be imposed upon a mineral or its proceeds.” Only one other state—Alaska—shields mining corporations from taxes that way.

Since most mining companies, both then and now, are based outside Nevada—and now are mostly based outside the United States—that constitutional language sent tens of millions of dollars in capital out of the state, and continue to do so. For decades, Nevadans have groused that Comstock Lode riches built San Francisco.

Even with that loophole, the mining corporations considered themselves overtaxed. In the 1870s, major mining companies flatly refused to pay their state taxes. The state had to take them to court, and the scofflaw corporations took the case all the way to the U.S. Supreme Court (Forbes v. Gracey, Consolidated Virginia, Mackay and Fair) before finally being forced to pay. Then they refused to pay the penalties, prompting another court battle. In the end, however, they triumphed because they pushed legislation through a malleable Nevada Legislature giving them new deductions for mining expenses—the amount of which suddenly rose sharply, at least on paper. Those deductions, poorly audited, cost the state millions over the decades.

In addition, until relatively recently, mining was not held accountable for the environmental damage it caused. It was legal for corporations to walk away from exhausted mining sites. The state is pockmarked with nasty ecological hazards that became the responsibility of federal, state and local governments when the mining companies shut down and departed. In 1999, under the sponsorship of Washoe Assemblymember Vivian Freeman, the state finally enacted a law regulating mining in the environmental field.

Efforts to change the protective laws for industry always came to nothing until 2011, when Leslie won enactment of Senate Joint Resolution 15, which would repeal the loophole from the Constitution. Brower voted against repeal.

At the same time, lawmakers limited deductions and imposed greater oversight and auditing of the industry’s deductions, and revoked the power of mining corporations to condemn private property.

Repealing the constitutional loophole must go through two legislatures before the public votes on it, so it must be approved again in 2013. It would then go to voters in 2014.

After lawmakers went home in 2011, the mining lobby went to work undercutting S.J.R. 15 in the minds of legislators. They claimed that if the constitutional language was repealed, that would leave the state without any mining taxes coming in until the 2015 legislature met and reinstated.

That argument seemed to be having an impact. In October, for instance, Democratic senate candidate Justin Jones of Las Vegas, was quoted telling the Las Vegas Sun, “My visceral reaction is, ‘Why is mining deserving protection in the constitution?’ But if we simply took the provision out of the constitution, mining companies would pay less in taxes. That’s not the result that we’re looking for.” Jones was elected.

In fact, the problem is easily remedied. The 2013 legislature can—and, if it approved S.J.R. 15, presumably would—enact legislation in advance that would instantly reinstate the taxes if the loophole was repealed by voters. The power of the Legislature to enact legislation that does not take effect until a later date is well established.

Even if the lawmakers did not provide that kind of backup, repeal of the loophole would only leave the industry untaxed for a few weeks.

Perhaps more influential in affecting legislative votes has been mining money going into campaign treasuries. Democrats are no different than Republicans when it comes to political contributions making them weak in the knees, and the industry has had a year and a half since the first-round enactment of S.J.R. 15 to work on lawmakers.

If the Democrats hold firm on S.J.R 15, it will likely pass. In 2011, two Senate Republicans joined all the Democrats to provide a 13-8 vote in the 21-member house. In the Assembly every Democrat and one Republican voted for the measure, producing a 27-15 vote in the 42-member house.

“I’m sure the mining lobby is determined to kill it,” Leslie said. “There is enormous pressure from the mining industry.”

Moreover, advocates of repeal have had trouble keeping the issue defined as they would like—on whether mining should have a privilege in the state constitution that other businesses do not enjoy. The industry prefers to make it a taxation issue.

Nevada Mining Association president Tim Crowley, in a letter to the editor to the Reno Gazette-Journal during the campaign, wrote, “During her recent debate with State Sen. Greg Brower, Sheila Leslie repeated her campaign cry that Nevada mines aren’t paying their fair share. … She knows that despite mining providing only 1 percent of the state’s workforce and 4.4 percent of Nevada’s economic output, the industry contributes a disproportionately large 8.3 percent of the general fund. … Yet, Leslie’s drive for office trumps the use of facts or a focus on growing the economy.”

Former state archives administrator Guy Louis Rocha responded with his own letter, arguing that the issue is not whether mining pays or how much, but whether one industry should have privilege that other industries do not: “Nevadans are hard-pressed to put the issue on the table when mining enjoys a tax policy that is outlined in the state Constitution. … Most other businesses in Nevada don’t enjoy a constitutional buffer when it comes to tax policy.”

The industry describes itself as important to the Nevada economy. Economists have said that though it is important to the economies of some small counties, it is a blip on the radar of the state economy, particularly when so much of the capital realized goes out of the country. Its importance is enhanced in hard times when the price of minerals rise, but that is not the normal situation.