Preserve the Percentage Depletion Tax Deduction
Congress should be very careful in considering unwarranted proposals that would significantly harm the competitiveness of American natural resources industries by eliminating or reducing the present-law percentage depletion tax deduction. U.S. mineral, coal, natural stone, aggregates, and independent oil and gas producers, play an integral role in fostering continued American economic prosperity and energy security. The percentage depletion deduction is vitally important to these U.S. natural resources operations and must be retained.
Current Tax Law on Percentage Depletion:
Under longstanding law, taxpayers producing from mines, wells, and other natural deposits are allowed to claim as a deduction for depletion a percentage of the gross income from these properties. This percentage deduction rate varies depending on the type of product produced. For example, and subject to various tax law limitations, the percentage depletion deduction is 5 percent for sand and gravel, 10 percent for coal, and 15 percent for gold, silver, copper, iron ore, and certain oil and natural gas production.
The percentage depletion deduction is an essential component of American mineral, coal and other natural resources production operations and must be retained. The percentage depletion tax deduction recognizes the unique nature of resources investments, which require significant financial commitments to long-term projects to deliver a competitive product at a low margin.
Congress created percentage depletion because it recognized that the limitations of cost depletion resulted in premature loss of important mineral resources. With percentage depletion, Congress intended to ensure that these essential national assets would be fully developed and produced.
The percentage depletion deduction provides an effective way to account for the diminution of reserves within mines, wells, and other natural deposits, encouraging domestic production by providing a tax incentive to improve the cash flow for production operations. The quantity and quality of reserves for any particular property may be uncertain and most natural resources projects require a large amount of investment and long lead time to produce a product with unknown revenue streams. Percentage depletion was enacted so that the natural resources industries could account for the uncertainty in reserves and future revenues when investing in and developing and operating production projects in the United States. Maintaining a strong natural resources production sector and limiting our dependence on foreign production is critical to the growth of the U.S. economy.
Even with the percentage depletion tax deduction, the U.S. tax burden on mining and other American resources operations puts them at a significant competitive disadvantage.
Mining producers provide nearly 35% of the nation’s electricity through affordable coal power and an additional 20% through uranium powered nuclear plants – totaling 60% of our nation’s electricity supply. Hardrock mining provides essential minerals for commercial use as cost-effective inputs for farms, national defense systems, and high technology such as cell phones, hybrid cars and minerals for the manufacturing base. Ores and metals are used in the production of capital goods for manufacturing and construction. Essential electronic, telecommunications and medical processes depend on metals. Non-metallic minerals are used in agriculture as fertilizers, in medicine as pharmaceuticals and in construction and other industrial processes.
The mining industry has a combined direct and indirect employment of almost 2 million jobs in all 50 states. U.S. mining’s total direct and indirect economic contribution to GDP was over $225 billion in 2012 -- generating almost $46 billion in tax payments to federal, state and local governments. The value added to GDP by major industries that consume processed mineral materials was $2.5 trillion in 2014. Mining exports added $20 billion in positive contributions to America’s balance of trade.
U.S. Aggregates Producers
Production of aggregates (crushed stone, sand and gravel) in the U.S. in 2014 totaled 2.17 billion metric ton at a value of approximately $20.3 billion, contributing $40 billion to the GDP of the United States. The aggregates industry workforce is made up of approximately 100,000 men and women. Every $1 million in aggregate sales creates 19.5 jobs, and every dollar of industry output returns $1.58 to the economy. Nearly two-thirds of the non-fuel minerals mined each year in the U.S. are aggregates. There are more than 10,000 construction aggregate operations nationwide, including in virtually every congressional district. Construction aggregates are used primarily in asphalt and concrete. Ninety-four percent of asphalt pavement is aggregate; 80 percent of concrete is aggregate, whether pavement ("horizontal construction") or buildings, dams, sewage treatment plants and the like ("vertical construction"). About 10 tons of aggregates per person are used annually in America. Every mile of interstate contains 38,000 tons of aggregates; about 400 tons of aggregates are used in construction of the average home. Crushed stone, sand and gravel products go into the manufacture of glass, paper, paint, pharmaceuticals, cosmetics, chewing gum, household cleansers and many other consumer goods, and are essential for the safety, security and high quality of life of all Americans.
According to the United States Geological Survey (USGS), the total estimated value of US production of industrial minerals, or non-fuel minerals, in 2012 was $41.6 billion, and the industry employed over 70,000 men and women. Industrial minerals are a vital part of our everyday lives. These minerals, such as limestone, silica, soda ash, talc, kaolin, and calcium carbonate, are used extensively in various manufacturing processes. In an average working day you likely will come into contact with at least 100 items that have been manufactured from industrial minerals. Glass, paint, ceramic tiles and plates, wood flooring, drinking water, wines/beers, salt, sugar, detergents and even cat litter are all manufactured using industrial minerals.
Dimension stone is natural stone or rock that has been selected and fabricated to specific sizes or shapes. According to the USGS, approximately 2.25 million tons of dimension stone, valued at $451 million, was sold or used by U.S. producers in 2014, and the industry employed approximately 4,700 people. Dimension stone was produced by 208 companies, operating 274 quarries, in 33 States. Dimension stone is used for numerous purposes including making countertops, tiles, stone monuments, building exteriors, roofing slate, street curbs, and flagstones.
There are three primary nutrients, nitrogen (N), phosphorous (P) and potassium (K), which are essential for healthy plant growth and high quality food crop yields. Of these three essential nutrients, phosphorous and potassium are natural resources which are mined from the Earth.
Phosphate is a nonrenewable resource, and mined phosphate rock is the only known source of phosphate suitable for processing into phosphatic plant nutrients suitable for large scale crop yields necessary for domestic food security. Phosphorous, used for crop nutrition, is essential for plant photosynthesis and comes only from shallow-rock deposits around the globe, which are of limited extent within the United States. Without a reliable domestic supply of phosphate rock to process into plant nutrients, the security and economic stability of the U.S. food supply is at risk.
Potassium (NA), or potash, is also a natural resource necessary for the production of food crops. Potash is produced in only eleven countries worldwide. Two of those countries, China and Brazil, utilize all the potash they produce and import significant quantities. In fact, more than 100 countries are dependent on imported potash and must secure their supply from the 9 countries that have potash to export. The United States, the largest importer of potash, typically relies on imports for 85-90 percent of its potash supply. Therefore, any existing or new domestic sources should be utilized to help reduce our dependence on imports. The latest forecasts regarding potash show that worldwide demand will increase at an annual rate of 3 percent through 2017.
Currently, fertilizer use is responsible for approximately 50 percent of the world's food production. By 2050, the world must produce 70 percent more food to meet the needs of a growing population. In fact, 77 percent of the increase must come from higher yields, with 14 percent coming from increased cropping intensity and 9 percent coming from bringing more land into production. Without a reliable supply of essential nutrients like phosphorus and potash, it will simply be impossible to meet this demand for food.
Independent Oil and Gas Producers and Royalty Owners
Percentage depletion is a small and marginal oil and natural gas producer and royalty owner issue because of the limitations placed on the deduction, for oil and natural gas, by current tax law. Marginal wells are unique to the United States; other countries shut down these small operations. The percentage depletion deduction is essential to keeping marginal wells in operation. A change in existing law to deny percentage depletion could make many wells unprofitable on an after-tax basis and result in early abandonment (i.e., resources becoming shut in). Once shut down, marginal wells cannot be re-opened. A significant decline in marginal well production in the United States could increase the country’s dependence on imported energy, exacerbate the problem of the trade deficit, and again make the United States vulnerable to concerted political or market action by foreign producers. Currently the U.S. marginal oil and natural gas base is significant. Approximately 80 percent of oil wells in the U.S. are marginal wells that produce 20 percent of U.S. oil, and 67 percent of natural gas wells produce 12 percent of U.S. natural gas. There are an estimated 8-12 million oil and gas royalty owners in the United States. America’s royalty owners are farmers, ranchers and families that benefit from their ownership of mineral assets and use these royalties to supplement retirement income and their farm and ranch incomes.
According to a 2015 economic impact report produced by the National Stripper Well Association, elimination of the percentage depletion allowance will cause marginal wells to be abandoned, cutting into economic growth, cost jobs and labor income, and cost the federal government a net $2.5 billion in tax revenue by 2025, and another $1.1 billion in royalty revenue from oil and gas produced on federal land. In addition, over the next decade (2015-2025), the economic impact of eliminating the percentage depletion deduction from the tax code would cost the United States economy $184.5 billion in gross value-added, an average of 178,000 jobs per year and $115 billion in earned labor income as well as a decrease by 4.2 percent in number of operating wells, and new wells drilled would decrease by 23.5 percent. Daily national oil production would decrease by nearly four percent and daily gas production by two percent. The production cutback would result in more than 37,000 wells not drilled and 644 million barrels of oil, and 2.8 tcf of natural gas, not produced.
Congress should carefully consider the impacts of significant tax increase on U.S. mining, natural stone, aggregates or independent oil and gas operations by eliminating or reducing the percentage depletion deduction. This tax increase would raise the cost of doing business for U.S. producers and would threaten millions of U.S. jobs. Moreover, because mineral prices are established in world commodity markets, U.S. producers cannot easily pass on higher tax costs in the form of higher prices. A likely result of eliminating the percentage depletion deduction would be reduced American employment, increased electricity prices, and increased reliance on foreign producers for the materials used throughout our economy.