A special case

Michelle Howe-Stark owns a Sparks sandwich shop, Yellow Submarine. She knows what it takes to run a business, including taxation. So the notion that one industry’s taxes are capped by the Nevada Constitution doesn’t sit well with her.

“That shouldn’t be a privilege for one,” she said.

She’s not even sure that she would want that special treatment extended to the restaurant industry.

“That’s a yes and a no,” she said. “It could go either way, depending on the taxation, what it’s for, where it’s going.”

She’s not alone. Barbers, homebuilders, dry cleaners, jewelers, butchers, bakers, candlestick makers, all are on a level playing field with each other—and a lower field than mining. The Nevada Constitution caps the taxes of mining corporations at “a rate not to exceed 5 percent of the net proceeds.”

It’s a tax loophole other industries would love. And the mining industry is working hard to keep it. In 2011, the Nevada Legislature approved a constitutional amendment to remove the mining tax cap. It must pass a second legislature to get on the ballot for voter approval. It would not raise or cut taxes, merely put mining on the same level with other industries.

If the amendment is approved this year, the public would vote on it in 2014.

A long tradition

Nevada mining always considered itself a special case—as, indeed, more important than statehood itself. In 1863 it tried to get a good tax deal at the first Nevada constitutional convention. When it failed, it helped defeat the first constitution, delaying statehood.

At the second constitutional convention in 1864, its supporters said that without mining, there was no Nevada. Delegate E.F. Dunne, a Humboldt County lawyer, said he opposed statehood altogether because it meant taxing mines. “I do not believe the mines should be taxed at all,” he said. He acknowledged that the farming areas of western Nevada would have to take up the slack of paying for public services if the mines did not pay. That was fine with him. “In reply to that, I ask, What is [agriculture] without the mines?”

Delegate Neely Johnson, a Carson City lawyer and former California governor, responded. “You pay on more property than we, because you have more, but you are not willing to pay on all you possess, whilst you insist that we must pay on all we have.” His faction, he said, proposed that “all property shall be taxed equally.”

This time, the mining corporations won. Their golden tax loophole capping mining taxes was placed in the proposed constitution, which was then approved by voters, and statehood went ahead.

But mining was serious when it said it shouldn’t have to pay at all. Eventually it simply ignored its small Nevada tax. By refusing to pay their taxes, mining corporations headed by figures like John Mackay and James Fair starved the Storey County government and residents of the Comstock—and then loaned them money to deal with the emergency. Conditions on the Comstock were dire, and a relief committee was formed. The corporations dragged the resulting court case out for years, took it all the way to the U.S. Supreme Court (Forbes vs. Gracey 1877) and lost. Then they refused to pay the penalties and started the whole process again. It lost that fight, too, but won enactment by the easily corruptible Nevada Legislature of deduction of a wide variety of mining costs—whereupon the companies’ declaration of their costs rose dramatically and was accepted amiably by mining-friendly state agencies. This cozy arrangement continued for more than a century, until 2011.

Along the way over the decades, the industry usually operated in a regulation-free climate. Miners died in unsafe working conditions. Mining did a lot of damage to the environment and left dangerous mining shafts and pits behind. Not until 1997 did the Nevada Legislature enact a mining reclamation law by passing a measure sponsored by Washoe Assembly-member Vivian Freeman.

When mine pits in Ruth and Weed Heights were shut down because of falling copper prices, the corporations blamed environmental regulation.

Meanwhile, Nevada was changing. The increasingly urban state was less and less receptive to the mining industry’s claims of primacy. In Gold Hill in 1979, a battle between a mining company and tourism found the locals on the side of tourism. In the late 1970s, when the state’s only U.S. House member, James Santini, styled himself “Mr. Minerals” as an advocate of mining, it damaged his political appeal statewide. In 1986, Harry Reid beat Santini for the U.S. Senate by running against mining, a campaign strategy that would once have been considered insane in the Silver State.

And history was repeating itself. Just as the capital from mining was shipped out of state during the Comstock and later mining periods, all but one of the major mining companies operating in Nevada in the 1980s were based not only out of state but out of the United States.

In 1989, Gov. Robert Miller needed funding for his class-size reduction plan. By then the state had gone through many mining booms and busts and was now the gold mining center of the nation. Miller targeted the barely taxed mining industry and ran up against its golden loophole. The industry was no more ready to be taxed than in 1863, but it did increase its charitable giving in the state and start a public relations campaign—“Mining. It works for Nevada.”

“It doesn’t work hard enough,” Miller told the legislature. He succeeded in increasing the industry’s taxes slightly and even in amending the constitution to do it—but left the golden loophole intact.

Modernity dawns

There were times when state legislators, faced with bringing mining into modern times, tried to make it as painless as possible because rural residents were affected. But the industry and its lobbyists didn’t make it easy. What one lawmaker called the industry’s “sense of entitlement” kept getting in the way. As the 20th century gave way to the 21st, legislators were running out of patience and the industry out of time. In 2011 push came to shove.

Deductibility of expenses associated with mining had cost the state millions over the decades—and put more of the burden of taxation on others. But it was something that flew below the radar of legislative oversight until recession began in 2006.

As the state’s economy was crippled by the nation’s highest foreclosure and unemployment rates, legislators looked in nooks and crannies both for places to cut spending and places to find revenue that they had seldom explored before. In 2011 they zeroed in on mining deductions and told taxation agency officials to increase scrutiny. With disclosure of sweetheart regulation enjoyed by the industry impending, Nevada Mining Association chief Tim Crowley got out ahead of the problem with a confession. On April 14, he sent a letter to the state tax department identifying deductions corporations had sought and the state had granted even though they fell outside the law. Supposedly the law allowed only deductions directly associated with extraction and milling of minerals. But state officials over the years had adopted regulations allowing other deductions, very likely as a result of lobbying. Crowley said the corporations took deductions for things like exploration, employee severance, marketing and travel. His spin blamed state officials for allowing the deductions, not the corporations who applied for them—or lobbyists who may have helped create them. Legisla-tors found still other deductions that seemed to fall outside the law, such as employee health care and sales taxes.

The difficulty of working around the industry’s loophole in the Nevada Constitution was shown in a particularly egregious way. At a 2010 special session of the legislature, to avert any move toward the golden loophole or pre-payments on their usual taxes, the industry volunteered to be taxed on mining claims. Under time pressure in a special session, the legislature went along, only to see the “claim tax” challenged in court and overturned. Lawmakers arriving for the 2011 legislature found the ruling had cost the state $38 million. And some legislators were not at all certain the industry had not planned it that way.

“This was some idea that they suggested. We didn’t have a hearing, we adopted it, it got challenged and we lost,” Senate Democratic floor leader Steven Horsford said. “Now we’re in a predicament.”

Other sectors of the business community did not cause these kinds of problems, lawmakers said, and some of them were fed up with it.

“You say you want to be treated like every other business but, oh—you deduct your sales tax,” Washoe Sen. Sheila Leslie said to Crowley. “And, oh—you also get to deduct your health insurance twice. You can understand our frustration.”

The 2011 legislature approved Senate Joint Resolution 15, a constitutional amendment that would remove the golden loophole. Leslie guided the measure to a successful enactment. It was a historic moment.

In Nevada, constitutional amendments proposed by the legislature must pass two sessions and then be voted on by the public. The industry lost the 2011 session. It set about making sure it would not lose the 2013 session. The method: campaign contributions.

Whoever has the gold

During the 2012 campaign, the industry carefully targeted money to key legislators, and Leslie was specially targeted for defeat. Her opponent, Greg Brower, received at least $29,350 in mining contributions. Leslie lost.

The money cascaded across the state from Coeur d’Alene Mines, Comstock Mining, Barrick Goldstrike, Cortez Gold, Gold Corp USA, Kinross Gold, Marigold Mining, Midway Gold, Round Mountain Gold, Robinson Nevada, Nevada Mining Exploration Coalition, Newmont Mining and the Nevada Mining Association itself.

Though the Democrats provided most of the votes for the constitutional amendment, the industry did not assume those votes were carved in stone. The Nevada Democratic Party got at least $125,000 in mining money and the Assembly Democratic Caucus got $33,500. GOP groups also got money, but that was expected. So much mining money was floating around that a thousand dollars slipped through to Leslie!

By October of election year 2012, the Las Vegas Sun was reporting that Democrats were losing interest in the effort to pass the constitutional amendment.

“I don’t know where I’m at with that,” said Sen. Moises Denis, who voted for SJR 15 in 2011 and was slated to be Democratic floor leader in the 2013 Senate. “Other issues are more pressing than that type of issue.” Denis received at least $20,500 in mining money and his political action committee received at least $17,500.

When the 2013 Nevada Legislature went into session last month, only one of the 12 members of the Assembly Taxation Committee did not report taking money from the industry. On the Senate side, only two of the seven members of the Revenue Committee did not take mining money. Some received well into four figures, others five.

While spreading money over the political landscape, the industry—unable to come up with a convincing argument for why it is legitimate to treat the industry differently from others—employed arguments that diverted attention from the issue of equal taxation. One such claim was that repeal would cost the state money.

The theory went something like this: If the constitutional language is repealed, that would also remove the language that allows the industry to be taxed in the first place. So all mining taxation would be voided by repeal.

This was Crowley on KTVN News in Reno last month: “What the constitution does is, it requires us to pay another quarter billion dollars in taxes. So, their calculations are flawed. SJR 15 would eliminate the net proceeds on minerals and erase it from the books. And in essence we would no longer pay that quarter billion dollars in taxes.”

This claim was first tried out at the 2011 legislature, and some people bought it. At a meeting of the Churchill County Commission on April 7 that year, Bjorn Selinder of Public Policy Innovations told the commissioners, “The first thing that happens with that—with the loss of the net proceeds formula—is that the counties who [have] mining and are the recipients of net proceeds of mines, will lose the funding.”

During his campaign last year, Sen. Justin Jones said, “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.”

There is one deficiency in the claim. It’s false. The golden loophole doesn’t authorize mining taxes, it caps them. The language authorizing taxation of corporations will remain in the constitution if the loophole is repealed, preserving the small mining tax. In 2011, Leslie carefully addressed the matter in a committee hearing with legislative lawyer Brenda Erdoes.

Erdoes: “It leaves the legislature free to tax mines and mining proceeds in the manner as currently taxed. … The taxes on mining would remain the same until the legislature made a change to chapter 362 of Nevada Revised Statutes to change the manner in which the taxation is applied to mining.”

Leslie: “If this were passed this [2011] session, nothing would change in terms of how taxes are paid by the mining industry.”

Erdoes: “That is correct.”

Leslie: “If it were passed again the second time in 2013, nothing would change.”

Erodes: “That is correct.”

Leslie: “If approved by the voters, nothing would change unless the legislature changed the way mining was taxed.”

Erdoes: “That is correct.”

Crowley has also tried to use mining-generated economic activity as a diversion. He wrote in a letter to the Reno Gazette-Journal that Leslie “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. Ms. Leslie’s seen mining putting Nevadans to work and keeping unemployment low in counties like Lander (5.7 percent) and Elko (7.1 percent).” But even if those claims were accurate, they avoid the issue—that mining taxes are capped while no other industry’s are.

There have also been hints from time to time that if SJR 15 is approved, the industry would leave the state. Leaving aside how to move a mine out of state, the industry would not find more agreeable conditions in other Western states. Las Vegas columnist Hugh Jackson, a former Wyoming reporter, recently published figures comparing Nevada and Wyoming state mining taxes. Precious metals are rarely mined in Wyoming, but coal and oil and gas are, and they are taxed well above the Nevada level:

• Wyoming:

Base severance tax/7 percent on coal, 6 percent on oil and gas.

County gross proceeds tax/6.3 percent (statewide average).

• Nevada:

State net proceeds tax/5 percent.

And article 15, section 3 of the Wyoming Constitution allows policymakers greater latitude than in Nevada.

Nor is leaving the U.S. beneficial to the industry. In the Dominican Republic, Barrick Gold—one of the largest corporations operating in Nevada—has just signed a new contract with the government, which will receive an estimated $11 billion for a single mine during the contract period, reflecting 3.2 percent of gross production, 25 percent for income tax and 8.75 percent from net earnings.

Dénouement

As the moment of truth that will reveal the results of the industry’s money torrent nears, activists are closely watching to see what the Democrats will do. One revealing fact is that since Leslie’s election defeat, no Democrat in the legislature has stepped forward to manage SJR 15. Asked what legislator will lead the fight, Progressive Leadership Alliance of Nevada director Bob Fulkerson said, “No one has made this the hill they want to die on. … The people are going to have to lead on this.”

Mining critics have seen this before. After Harry Reid won election to the U.S. Senate by attacking the Nevada Mining Association, he made his peace with it and backed the Mining Law of 1872, a federal golden loophole. After Bob Miller as governor made his fight against the industry, he retired to a law practice and is a consultant to the board of Newmont Mining.

Last week’s unexpected endorsement of repeal of the state golden loophole by Senate Republicans may mean there is now more enthusiasm for repeal in the GOP than among Democrats.

The industry will need all the juice its campaign contributions bring it. The vote this year comes amid a lot of bad industry publicity. Last month, Barrick Cortez, Barrick Gold US and Homestake Mining—all Nevada operators—were fined $618,000 for failing to properly report toxic releases and waste management activities. In Papua New Guinea, Barrick Gold is under fire for chronic rapes of locals by its workers, and for conditioning help for the victims on waivers of legal action. (A Nevada women’s studies instructor described the Barrick stance as “so wrong!”) In December and January the U.S. Environmental Protection Agency put more than a dozen Nevada streams and reservoirs on the state “list of impaired waters” because of mercury detected in fish tissues.

But it remains uncertain whether SJR 15 will get voted on in the Nevada Legislature.

While mining-compromised streams and reservoirs in Nevada are on a federal watch list, at her Sparks restaurant Michelle Howe-Stark will be watching, too—watching whether the mostly Canadian mining companies will continue being a special case and she and other businesspeople have to go on paying part of mining’s share.

“That’s not a good thing for our community,” she said. “We should keep the money here locally. I try to help out with my community as much as I can. We all have to pay taxes, understandably. It’s just like anything. It should just be a fair share all around.”