THE TAXATION OF MINERAL PROPERTIES BY FRANK L. McVEY CHAIRMAN OF THE MINNESOTA TAX COMMISSION ST. PAUL, MINN. Reprinted from the Addresses and Proceedings of the International Conference on State and Local Taxation held at Toronto, Canada Oct. 6-9, 1908 INTERNATIONAL TAX ASSOCIATION COLUMBUS THE TAXATION OF MINERAL PROPERTIES BY FRANK L. McVEY CHAIRMAN OF THE MINNESOTA TAX COMMISSION ST. PAUL, MINN. Reprinted from the Addresses and Proceedings of the International Conference on State and Local Taxation held at Toronto, Canada Oct. 6-9, 1908 INTERNATIONAL TAX ASSOCIATION COLUMBUS \\%£- Digitized by the Internet Archive in 2017 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/taxationofminera00mcve_0 5 " cv THE TAXATION OF MINERAL PROPERTIES By Frank L. McVey Chairman of the Minnesota Tax Commission, St. Paul, Minn. An examination of the reports of taxing officers and the as- sessment laws of the different States shows that little attention has been given to the taxation of mineral lands in the United States. Here and there some differentiation has been made from the principles of the general property tax, but in the main the same system of taxation applies to mineral properties as to houses and lots and agricultural lands. In this paper it is pro- posed to present briefly the methods used in a number of the States and foreign countries, and to show in such detail as the time permits the system of taxation developed in Minnesota during the last two years for the assessment of mineral proper- ties. I The methods adopted by the taxing authorities in securing revenue from mineral properties vary from the simplest form of the general property tax, where the assessor makes the valua- ( tion on what he sees in the form of improvements and on what he guesses there is in the ground, to a tonnage tax, or a combina- tion of a gross receipts tax and the general property tax. For purposes of classification the taxation of minerals as now car- ried on may be grouped under, (1) the general property tax, (2) the annual output tax, (3) the general property and gross earnings tax, (4) the general property and net earnings tax, (5) the tax on royalties, and (6) the tonnage tax. These will be taken up in the order just enumerated. 1. General Property Tax Alabama. — All the real and personal property of mines and quarries, and the machinery, engines and appliances belonging 411 p 23435 412 STATE AND LOCAL TAXATION to the same, are taxable on the basis of their full value. In addi- tion the mining corporations pay a tax on the shares of stock belonging to stockholders of residence in the State. 1 California. — The term “real estate” in the California law includes all mines, minerals and quarries in and under the land, and all rights and privileges appertaining thereto. The assess- ment is made by the assessor at the cash value of the proper- ties. 2 Michigan. — In Michigan the assessment of mining property is made on the same basis as other property. The assessor is instructed to take into consideration in fixing values the worth of mines, minerals, quarries or other valuable deposits known to be therein contained. 3 Minnesota. — No distinction under the Minnesota law is made between mining property and other real and personal property. 4 The ad valorem assessment is made at about 40 per cent of full value. Ohio. — While the Ohio law provides for the taxation of mineral properties in the same manner as other property, it nevertheless in case of difference in the ownership of the fee in the surface and of the mineral rights gives the county boards of equalization authority to value the holdings equitably accord- ing to the relative values of the holdings of the respective owners. 5 Tennessee. — Mineral lands and interests therein are assessed to the owners thereof as real estate. 6 West Virginia. — The assessment is made against the prop- erty at its actual value by the local assessor. Where there is a division of ownership each owner is assessed for the value of his property. 7 Other States. — To the States enumerated specifically as using the general property tax in securing revenue from mineral prop- erties may be added those of Georgia, Missouri, Nebraska, New 1 Alabama Revenue Code, 1908, § 2082, subitems 1 and 9, § 2112. 2 Revenue Laws of California, 1907, § 3617, subitem 2. 3 Michigan General Tax Laws, 1907, § 27. 4 Minnesota Revised Laws of 1905, Ch. 11, §§ 796 and 810. 6 Ohio Statutes, 1906, Vol. I, §§ 2730 and 2792 a. 6 Tennessee Tax Digest, 1907, p. 119. 7 West Virginia Assessment Laws, 1907, §§ 12 and 39. THE TAXATION OF MINERAL PROPERTIES 413 Hampshire, North Carolina, North and South Dakota, Texas, Virginia, Washington and the territory of New Mexico. 2. Annual Output Tax This tax is to be distinguished from the tonnage tax in that it falls upon the value of the annual output rather than upon the number of tons mined. In the instances where used the tax is levied upon some proportion of the annual value of output, though either the gross receipts or the net receipts may be used as the basis of determining the tax. The first method, while easy of application, results in inequalities almost as glaring as those of the general property tax ; the second necessitates in- spection and regulation of accounts. Arizona. — Prior to 1907 the mineral properties of this terri- tory were taxed on their general property, just as other property was taxed. The assessments were often low and out of all pro- portion to values, which at times bore heavily upon the small holder while practically relieving the large owners from taxa- tion. The territorial legislature in 1907 passed an act dividing mineral properties into two classes, (1) productive mines and mining claims, (2) non-productive mines and mining claims. The value of output in excess of $3750 placed property in the first class and subjected it to a tax on the basis of an assessment equal to one fourth of the previous annual output. The second- class properties were subjected to the general property tax as other property. Non-productive unpatented mines were wholly exempt. The tax on output did not relieve the owners of min- ing machinery from the usual personal property tax. The application of the new law to the valuations of mineral property brought the assessment to $20,904,201 as against $57,000,000 (in round numbers) for all other property in the territory. 1 Nevada. — The Nevada law provides for quarterly assess- ment upon the gross value of the returns of the preceding quarter. From these the actual cost of extracting, transport- ing, reducing and selling are deducted, and the remainder, called the net proceeds, is then assessed at the same rate as other prop- erty. Careful provision is made for accurate and available ac- 1 Report of the Governor of Arizona, 1907, pp. 30-36. 414 STATE AND LOCAL TAXATION counting. The books of the companies are open to the assessor, who is given great powers in making assessments. 1 British Columbia. — The British Columbia law states clearly — and the reason the matter is referred to here is because of the absence of such a clause from most of the legislation — that mines and minerals shall, for purposes of taxation, be regarded as a separate class of property. Mines were taxed in this Prov- ince up to 1893 on the basis of the value of the gross output less the cost of transportation and treatment of the ores. Complaint had been made against this method on the ground of inequality between mines due to great differences in the cost of mining. The view was presented that if the law were so modified as to include the cost of mining as a factor, and such cost deducted from the value of the gross output, the mining interest would regard the act with favor. 2 In 1903 the law was changed to a straight 2 per cent on the assessed value of all ore or mineral- bearing substance raised to a value of $5000 or more and which had been sold or removed from the premises. For small mines yielding less than $5000 and more than $2000 in one year, the tax was cut in two, and for properties producing less than the last-named figure the tax was remitted and the assessment made on the basis of other real estate. 3 Mexico. — Under the Mexican law no ownership of fees by individuals is permitted. All mining land is owned by the gov- ernment. The government sells the right to use the ground, for which a payment of $10 a year is made. A tax is also laid on the output and in case it is not paid the claim reverts to the government. 4 Ontario. — The province of Ontario has carried this form of tax to its logical conclusion. Under its law every mine whose annual profits are more than $10,000 shall pay on the excess over $10,000 an annual tax of 3 per cent. From the gross receipts are deducted the cost of transportation, expenses of working the mine — including wages, explosives, protection, 1 Nevada Compiled Laws, 1900, §§ 1147-1170. 2 Report of Surveyor of Taxes and Inspector of Revenues of the Province of British Columbia, 1902, p. 14. 3 Extracts from Assessment Acts of British Columbia, 1907, Revised Statutes, Ch. 179, §§ 9-11, 14, 17. 4 U. S. Industrial Com. Report, Vol. XII, 237-238. THE TAXATION OF MINERAL PROPERTIES 415 insurance, depreciation — and cost of new work in sinking shafts. The law also requires the making of full reports to the mining department of the Province . 1 3. General Property and Gross Earnings Tax Colorado. — The taxation of minerals in Colorado is carried on in two ways, one as applied to the precious minerals and the other as it relates to iron, coal and stone. The method of taxing the precious metals is a combination of the personal property tax and an assessment against the mines on a proportion of the ore output. Non-producing mines are to be assessed at their value, due regard being given to location and other conditions, but upon this provision is the restriction that they are not to be assessed at a greater sum per acre than is used against the lowest producing mine in the same locality. On the other hand the owners of producing mines are required to make a statement in January of each year which will show the name of mine, owner, number of acres owned, tonnage of ore taken out previous year, the gross value of it, cost of mining, cost of transportation and the net proceeds. The assessor is required to take one fourth of the gross proceeds as the assess- ment against the company, except in such instances as the net proceeds exceed the one fourth of the gross returns in money. In such case the net proceeds are to be used as the basis of the assessment. The surface improvements and machinery are assessed at their full value. The iron and coal mines are assessed and taxed as other prop- erty according to the value thereof . 2 South Carolina. — In cases where properties are actually mined, in lieu of all other taxes the gross proceeds from such properties are assessed and taxed. All personal property used in connection with mining, and all land not actually mined con- nected with mines and mining claims, are taxed as in the case of all other personal property and real estate . 3 1 Ch. 9, 7 Edw. VII. 2 Le Rossignol, “ Taxation in Colorado, ” Ch. VII; U. S. Industrial Com. Report, Vol. XII, pp. 540, 541 ; Colorado Annotated Statutes, 1901-1905| §§ 3882, 3884, 3886, 3890. 3 South Carolina Code, 1902, Vol. I, § 275. 416 STATE AND LOCAL TAXATION 4. General Property and Net Earnings Tax Utah. — The Utah method of valuing mineral properties is : first, to value the ground as agricultural land, if used as such, but in other instances at the price paid the United States for the land; second, to value improvements and personal property; and, third, to levy a tax upon the net earnings of the company. The State Board of Equalization 1 is called upon to make the assessment against the mines upon the return of information furnished by the companies. 2 Montana. — The Montana law is practically the same as the Utah law. The statutory definition of real estate includes “ all mines, minerals and quarries in and under the land.” Mines and mining claims are assessed at the original price paid to the United States for the land. Surface use is assessed separately, as are also the machinery and all surface improvements. In addition the annual net proceeds are taxed as other personal property. 3 5. Tax on Royalties Great Britain. — The general custom of levying taxes on the basis of receipts earned by a property is extended to mines and the tax laid on the royalties received for operating the mine. 4 6. Tonnage Tax Michigan. — Up to 1891 the Michigan law taxed mines on the basis of the tonnage output regardless of differences in value, cost of mining or difficulties of transportation. The tax laid was 1 cent per ton on iron ore mined, \ cent on coal, and 75 cents per ton on copper if smelted in the State or $1 per ton if shipped outside. In the five years the law was in effect the amount collected was $234,198.14 from the iron properties and $152,791.47 from the copper mines. The payment of the ton- nage tax did not relieve physical properties, real and personal, from local taxation. 5 1 Title 67, Revised Statutes of Utah on Revenue and Taxation, Ch. 1. 2 Ibid., Ch. 3, §§ 2566-2570. 3 Montana Political Code, 1895, §§ 3672, 3680. 4 Blunden, “Taxation and Finance,” Ch. V. 6 Report of Michigan Tax Commissioners, 1900, p. 58. THE TAXATION OF MINERAL PROPERTIES 417 Minnesota. — In 1881 the legislature passed the tonnage tax of 1 cent on each ton of ore mined. This tax was in lieu of all other taxes and was to be distributed, one half to the State, and the other half to the counties in which the mines were located. It was optional with the companies. For many years the law remained in force, but in 1896 the State auditor raised the ques- tion of the constitutionality of the law and the attorney-general rendered an opinion pronouncing the law unconstitutional. In 1897 the law was repealed and the taxation of mining compa- nies was again made on the basis of the general property tax. 1 II By the repeal of the law of 1881, as stated above, Minnesota was forced to give up the taxation of iron properties upon their tonnage output and compelled to return to the general property tax as the only means the State had of getting at the values of iron ore properties. The Vermillion range was opened in 1884 and the Mesabi in 1892, but for several years after their opening the ranges manifested but little activity. In 1898 the ship- ments reached 14,024,673 tons, and the State Boards of Equaliza- tion in their annual meetings began to give some attention to the value of iron ore properties, raising the amount of the assessment in 1898 to $6,000,000, 1900 to $16,000,000, 1902 to $30,000,000, 1904 to $42,000,000, and 1906 to $70,000,000. The following year the permanent Tax Commission was created, and practically the first problem confronting them, brought to public attention by legislative resolution and public opinion in the State, was the assessment of the iron ore properties. The problem thus created was the valuation of more than a hundred thousand acres of land scattered through three counties and varying greatly in value. The presentation of the methods used to arrive at a fair valuation of these properties is set forth in some detail, not for the purpose of flaunting the doings of any commission before the public, but rather to show an original and somewhat unique method of arriving at a comparatively fair and just value of great properties by careful investigation and the application of well-established principles of economics 1 Report of Auditor of State of Minnesota, 1901-1902, p. vii. 418 STATE AND LOCAL TAXATION and taxation, and at the same time to bring some suggest tions to the States struggling under the general property tax and an assessor system in their attempts to tax mineral properties. A word of comment regarding the extent and method of operating the properties will bring out the difficulties of assess- ment more clearly. Iron ore beds in the State of Minnesota are found in St. Louis, Itasca, Lake, Cook, Otter Tail, Aitkin, Morrison and Crow Wing counties. Three distinct ranges have been opened — the Mesabi, the Vermillion, and the Cuyuna. The Mesabi range extends through the entire width of St. Louis County into Cook and Itasca counties. It is about one hundred miles in length and from two to ten miles in width. The area covered by it is about four hundred square miles. The Ver- million range extends from Ely to Tower, a distance of thirty miles. The Cuyuna range, only indefinitely ascertained, ex- tends through the counties of Aitkin, Crow Wing and Morrison. The width of this range is unknown. A fourth body of ore has been discovered in Otter Tail County. The Vermillion range was opened in 1884, the Mesabi in 1892, and the Cuyuna in 1905. The discoveries in Otter Tail County have been made during the last year. Professor Van Hise, in speaking of the Mesabi range in his letter of transmittal of the monograph on the Mesabi to the Bureau of the United States Geological Survey, said : “ Discovered only about ten years ago, in the early nineties, the Mesabi district has to-day no rival in its produc- tion or reserve of iron ore. The geological succession in the district, the unusual size, shape, and structure of the ore bodies, their manner of development and the peculiar and rapid methods of exploitation of the ore, all present features of unusual scientific and economic interest.” The ore body on the Vermillion range varies from 10 to 20 feet in thickness to 100 to 125 feet, and there are some instances where the depth of the ore is as great as 500 feet. It is not to be understood, however, that these ore bodies are of the same structure through- out and that obstructions of rock are not to be found running through them. The most remarkable example of ore depth has been found in the recent discoveries made in Otter Tail County, where some borings have indicated a thickness of 805 THE TAXATION OF MINERAL PROPERTIES 419 feet. This ore, however, is mixed with sand, and has a 40 per cent iron content. Three general methods of mining are employed in getting the ore out of the ground: 1st. The open pit, or steam shovel method of mining. The overburden is stripped from the ore with steam shovels, and while the thickness of the drift has in the past only been re- moved up to the thickness of the ore, there have been instances where even a greater depth of overburden has been removed in order to get out the ore. Tracks are built out on the ore deposits, and the steam shovels make a cut through the ore. The shovel is then set over against the bank made by the recent cut, and another slice is taken off and loaded on to cars which are run into the cut already made. As the work proceeds, the deposit has the appearance of a series of terraces, and on each of these a number of steam shovels may be worked at one time. The best examples of such mining are seen in the Mountain Iron, Mahoning and Biwabik mines. More than half of the ore now mined on the range was taken out by this process. 2d. A second method is known as milling. The drift of overburden is removed, as in the case of the open pit method. A shaft is sunk along the edge of the wall rock down to the level of the ore deposit, and cross cuts are run into the ore from the shaft. Uprises without timbers are made, and the ore received at the surface is pushed down the chutes into cars below. It is then trammed to the shaft and hoisted to the surface. About 7 per cent of the ore is mined by this method. 3d. A third method, known as the underground, includes the systems of caving, slicing and room mining. Shafts are sunk into the ore near the wall rocks and extending pretty well down to the bottom of the deposit. Cross cuts are run diagonally and at right angles into the body of the ore. Raises are sent up to the surface of the deposit and the ore drawn in from the top by drift slicing. As the levels are removed the surface is allowed to cave in until the ore has been taken out to the base of the deposit. In the instance of room mining, openings of three or more sets, called rooms, from twenty to forty feet wide, are run up from the main drift to the top of the deposit, the sides being lagged. Pillars of ore are left. The drift above is 420 STATE AND LOCAL TAXATION allowed to cave in, filling the rooms. The pillars are then taken out by slicing, either from above or below . 1 The open pit method of mining is far the cheapest, the under- ground the most expensive and the milling method inter- mediate. The open pit method saves all the ore and permits sorting without the expenses of lighting, timbering and large forces of men. The open pit method is limited, however, by the grade of the road for hauling, by the extent of the ore body and the depth of the overburden. While the annual produc- tion is large, the capital required to carry on the stripping is extensive. By the underground method there is little outlay. The mine can be worked the year round, and the operator gets a return that goes toward the expenses from the start of the enterprise. The milling method costs less than the underground, but it has some of the disadvantages of both the underground and the open pit methods. The tendency, however, is markedly toward the increased use of the steam shovel in the mining of ores on the Mesabi. The iron ore properties are held in fee and in lease. Owner- ship in fee, since the increased value of mining properties, has in a large measure ceased to be the principal method of control- ling iron properties. The investment of capital in fees creates a permanent interest charge, which mining companies are very anxious to avoid. The consequence is, that leases are made on a tonnage basis, by which the lessee agrees to pay a certain sum for every ton of ore that he takes out of the ground. The interests of the fee owner usually are guarded by the royalty on a minimum tonnage. Subleases are the rule rather than the exception, the owner of the original lease subletting it to some operating company and receiving as his part of the trans- action one, two, three, or even five cents on the tonnage put out by the operators. The method of making the assessment of properties on the ranges was the outcome of experience. The attempt of assess- ors to value iron ore properties was accompanied by complaints of inequalities among mine owners that finally created a sort of de facto board of equalization, which determined the value of 1 Leith, “Mesabi Iron-bearing District,” pp. 281-283 THE TAXATION OF MINERAL PROPERTIES 421 the different operating mines according to output. This sys- tem, while unsatisfactory from the point of view of equalization of values, was accepted by the mining men as more satisfactory than the valuation made under the assessing machinery of the local governments. Every two years the mining representatives met at Duluth and distributed the real property assessment over the operating mines according to their output. The small mines were the losers, and the larger and more valuable mines the gainers by this method of valuation. There was no criterion by which to determine the values. Prior to 1897 the tonnage tax, after that date the valuations, continually shifted with the growth of the properties, and the distribution to mines accord- ing to output prevented the establishment of any principle of local assessment. Many opinions existed among mining men, State officers, members of the legislature, and the public generally, as to the value of ore in the ground. The values were stated to be for ore in the ground from five cents to one dollar per ton. Even mining men themselves placed the values for taxing purposes at amounts varying from two cents to thirty cents per ton. There was, therefore, little in the form of definite information to be had regarding the basis of taxation of iron ore properties. The first step in the work of valuation was to secure informa- tion. Consultation with State officers, the collection of books, pamphlets, maps and newspaper clippings upon the iron proper- ties, the securing of state documents and the reports of com- mittees, were the first steps toward getting information. After careful consideration of the situation and the problems involved, the commission sent, under date of June 18, 1907, a list of ques- tions to the various companies engaged in the business of iron mining in the State of Minnesota. These questions were so framed as to cover every important phase of the mining indus- try, and the hope and expectation was to secure a large amount of information regarding the cost of operating, output, nature and character of ores, method of mining, and nature of owner- ship. The request for information was as follows: The Tax Commission has under consideration the question of valuing for taxation purposes the iron mines and ore-bearing properties located in the State. To this end and in order that 422 STATE AND LOCAL TAXATION there may be no injustice or discrimination, all owners of iron ore and mine operators are requested to cooperate with the Tax Commission and furnish the following data, as of May 1, 1907: A. Shipping Mines. 1. List and description of properties owned. 2. List, description and terms of properties leased and con- trolled. 3. Estimated tonnage in mine or property. 4. Classification of ore bodies. 5. Physical characteristics of ores. 6. Mining and other operating cost. 7. Value of structures and equipment. 8. Yearly shipment records since opening of mine. 9. Annual receipts from sale of ores. 10. Amount of ore in stock pile. B. Non-shipping Mines. 1. List and description of properties owned. 2. List, description and terms of properties leased and con- trolled. 3. Estimated tonnage in mine or property. 4. Classification of ore bodies. 5. Physical characteristics of ores. 6. Mining and other operating cost. 7. Value of structures and equipment. C. Mine Prospects. 1. List and description of properties owned. 2. List, description and terms of properties leased and controlled. 3. Estimated tonnage in property. 4. Classification of ore bodies. The Commission will appreciate any other information that will assist in determining the value of the property. It is the purpose of the Commission to have such prop- erty assessed and taxed on an equal basis with other property throughout the State. After a great deal of correspondence, the Commission received, late in August, returns from practically every mining company engaged in operation and from individuals owning iron proper- ties. This data was supplemented by information gathered by the Commission during its visit to the range in the first half of August. Through this visit the Commission became familiar THE TAXATION OF MINERAL PROPERTIES 423 with types and locations of mines, character of ore and general conditions existing in the mining business. Meantime the questions of classification, analysis and value of these properties were being considered carefully. The dif- ferences existing between mines in their geological conditions, difficulty of mining, character of ore and the nature of mining rights made it impossible to consider all mineral properties as belonging to the same group. For the purpose of making some distinction between the different mines and prospects, five grades of operating mines were created and four grades of prospects. These grades were determined by facts secured through the data furnished by mining companies and the ob- servations of the Commission. The first grade of operating mines included those that were operated at a low cost per ton and were putting out good grades of ore. A distinction was made between the mines in the first grade in that practically no mines approached the Mahoning and Hull-Rust in ease of operation and character of ore. Somewhat more expensively operated mines, though distinctly above the second grade, were placed in the 1 ( b ) class. These were mines like the Biwabik, Mountain Iron, Burt-Pool and Morris. The remaining grades of operating mines were determined by the cost of operation, returns and grades of ore. The prospect group was divided into four classes, depending upon the stage of their advance- ment toward an operating mine; thus, the first class of pros- pects were properties on the verge of mining operations. Good examples of this class are to be found in the instances of the Gilbert, Canestoo, Frantz, Iroquois and certain parts of the Hull-Rust and Mahoning properties. The second-class pros- pects were those properties that had not been advanced so far on the road to operating mines, but upon which drilling and testing had demonstrated the presence of ore in paying quanti- ties. The third class consisted of forties in the neighborhood of good tonnage properties. In the fourth class the ore land acreage was placed, since it had a more or less speculative value. These distinctions having been made, a general scheme for assessing the value of iron properties was drawn up, as shown in the schedule given below: 424 STATE AND LOCAL TAXATION 1. Factors taken into consideration in the valuation of mining properties. a. Geological conditions, b. Difficulty of mining. c. Character of the ore. d. Character of mining rights. 2. Classification of mining properties. a . Operating mines. Class 1 . (a) Properties where mining is comparatively in- expensive and the ore high grade. (i b ) Properties where mining is comparatively in- expensive and the ore of lower grade. Class 2. Properties where mining is somewhat more diffi- cult and mining cost greater than in the case of Class 1, and the ore of mixed grade. Class 3. Underground properties where the expense of mining is comparatively low for that kind of mining and the ore of high grade. Class 4. Underground or milling pit properties of dis- tinctly second grade, determined by a higher cost of mining and lower grade of ore than in the case of Class 3. Class 5. Mines of inferior character where expenses of operation are high. b. Prospects. Class 1. Lands that have been drilled and test-pitted, and where stripping of the overburden has been carried on. In other words, where the property is about to become a mine. Class 2. Lands that have been drilled and test-pitted, and ore found in some abundance. Class 3. Unexplored lands near good mining properties. Class 4. Lands that have not been explored, but are in the well-known ore belt. 3. Rates of valuation — per ton in the ground. Class 1 Class 2 Class 3 Class 4 Class 5 Operating Mines ( a ) 33 c ( b ) 30 c 27 c 23 c 19 c 14 c Prospects 15 c 10 c 8 c $3 to $50 per acre THE TAXATION OF MINERAL PROPERTIES 425 In the determination of rates, the principal problem was how to get a taxable valuation of iron properties that would be fair to the State and to the owners of the properties. The rates for the varying types of properties were arrived at in the main by taking into consideration several factors: 1st. The difference between the cost of mining and the average price of ore during the last three years. 2d. By the present worth of the difference for a period of twenty years on a basis of a 4 per cent rate of interest. 3d. By the percentage of the assessed valuation of real property in the State to the full value of such property. The fact that the differences in mining cost vary greatly with the different properties, due to management, condition of the mine, presence of water, depth of ore, character of equipment, grades and location of ores, required the creating of more than one class of mining properties. The classes referred to in the memorandum above were created, and the rates established for them were determined as far as possible by the differences between mines in cost of operation, difficulty of mining and grade of ore. This method of valuation left much to be desired, but no better one was suggested at the hearing of mine owners, and it was the best that the commission could do under the ad valorem requirements of the law. The report submitted by the mining companies and the owners of iron properties in the northern part of the State indicated 1,192,509,757 tons of ore. This ore is owned and controlled as shown in the table given below: All Companies Oliver Mining Co. Proportion Class No. Tonnage Rate Valuation No. Tonnage Valuation 1 2 43,185,685 33 $14,251,276 1 18,185,685 $6,001,276 1(b) 4 66,442,923 30 19,932,876 3 61,442,923 18,432,876 2 4 25,176,067 27 6,797,538 4 22,676,067 6,122,538 3 27 138,845,839 23 32,134,497 15 83,013,290 22,262,255 4 28 91,494,762 19 17,653,975 5 34,492,748 6,553,640 5 28 105,821,134 14 14,561,749 5 60,666,159 8,493,283 P-1 25 271,863,523 15 40,779,516 16 212,522,123 31,878,316 P-2 41 204,635,249 10 20,483,518 34 182,765,260 18,296,519 P-3 99 244,504,575 8 19,490,345 93 237,004,57 5 18,960,345 P 1 4 540,000 118,712 262 1,192,509,757 $186,204,002 176 912,768,830 $137,562,048 Unclassed prospects. 426 STATE AND LOCAL TAXATION SUMMARY OF TONNAGE VALUATION No. Tonnage Valuation Average PER TON All Companies Shipping mines 93 470,966,410 $105,331,911 $.224 Prospects 169 721,543,347 80,872,091 .112 Totals 262 1,192,509,757 $186,204,002 $.156 Oliver Iron Mining Co. proportion Shipping mines 33 280,476,872 $67,865,868 $.242 Prospects 143 632,291,958 69,135,180 .109 Totals 176 912,768,830 $137,001,048 $.150 When the task was completed, the figures showed a valuation of $189,459,702, distributed among the different classes of properties as follows: No. Class Tonnage Valuation Acres Mines 2 1 43,185,685 $14,251,276 200 Mines 4 1 (b) 66,442,923 19,932,876 800 Mines 4 2 25,176,067 6,797,538 1,280 Mines 27 3 138,845,839 32,134,497 3,329 Mines 28 4 91,469,762 17,653,975 2,940 Mines 28 5 105,821,134 14,561,749 1,995 Tonnage Prospects 25 1 271,863,523 40,779,516 3,565 Tonnage Prospects 41 2 204,635,249 20,483,518 3,950 Tonnage Prospects 99 3 231,504,575 19,490,345 9,640 Acreage Prospects 44 998,000 2,675 Unclassed Prospects 4 540,000 118,712 953 Miscellaneous iron lands 1,810 2,257,700 71,654 Totals 2,116 1,192,509,757 $189,459,702 102,911 To the amounts shown in the table above have been added the values of properties whose reports were delayed, amount- ing to $634,736, and the personal property assessments of $4,334,490. These additions make a grand total for the assess- ment of all iron properties of $194,428,928. The value of iron ore properties in the different counties appears in the table below: St. Louis County $176,413,846 Lake County 87,500 Itasca County 12,927,144 Crow Wing County 31,212 $189,459,702 THE TAXATION OF MINERAL PROPERTIES 427 III The result of the work thus undertaken gave to the State of Minnesota what she had never had, and what is essential to any scheme of taxation of minerals, full knowledge of the ton- nage of ores, their location and value. The failure of the general property tax so far as the assessment of minerals is concerned is almost wholly due to lack of information. In the States where it is impossible to make a careful study and ex- amination of mineral lands through some department of the State government, it will not be possible to secure an assess- ment of mineral properties that is either equitable or fair. There is, however, no reason why the geological survey might not furnish even to State boards of equalization detailed in- formation regarding the location and value of ore lands, and in the States where permanent Tax Commissions exist there is no reason why they should not undertake to collect the infor- mation necessary to the making of a proper assessment of mineral lands. It is, however, well to recognize that the value of ores varies greatly, and that some mines are worth a great deal more than others. This condition is in itself seemingly opposed to the constitutional requirements of the States where the general property tax is in vogue. Thus the Minnesota constitution did require that all property should be assessed uniformly and equally at its full cash value. Whether the courts would declare the method followed in Minnesota to be in compliance with the provisions of the constitution, is a debatable question ; but in the economic sense the recognition of differences is the only means of arriving at a fair valuation. If the classification has been carefully made so as to include all of the essential differences in mines due to location, character of ore and difficulty of mining, then equality will be practically established between the properties. There then remain the rates to be applied to the tonnage developed in the mines of each class. This feature of the problem is the most difficult, requiring examination of cost statements, transportation charges and general expenses of mining a ton of ore. These facts are ob- tainable, and the results can be worked out as they were in 428 STATE AND LOCAL TAXATION the Minnesota experience in what may be termed a scientific manner. The criticism of this method of making an assessment is negative and is fully stated in this question : Is the information obtainable? It may be that the taxing authorities of Minne- sota were unusually fortunate in two respects: first, in the fact that a large corporation owned the larger part of the property and that it early evidenced a willingness to give the fullest information possible of its properties; second, in the develop- ment of the exploration business which has been carried to a high degree of efficiency on the iron ranges. To put it in other words, the information existed in the form of blueprints, esti- mates and chemical analyses, and the companies were willing to give the authorities the information. It may be that these conditions cannot be duplicated elsewhere; but the system of making assessments developed there under the provisions of the general property tax is worth, the writer believes, a good deal of careful study, especially in view of the inadequacy of many of the schemes evolved in different States and countries. Not only does the system developed in Minnesota make a fair assessment as between properties and companies, but it tends to protect the reserves of ore by placing them at a lower value than the ores in an operating mine. The inclination to hurry ores to markets is therefore checked in some measure by the fact that a prospect does not carry as heavy a tax charge as a mine that is sending ore to the smelters. The failure of the general property tax to develop a satis- factory system of taxing minerals has led to a number of different plans presented in the first part of this paper. The annual output tax, which is one of the methods used by the territory of Arizona, the Provinces of British Columbia and Ontario, and the Mexican government, lays the tax upon the value of the product. The objection to this method is that no distinction is made as to costs or expense of producing the ore. The same objection applies where the assessment of the prop- erty value is determined by the output, or an attempt made to capitalize the value of the output by some percentage deter- mined in practice or legalized by the statutes. The province of Ontario has met these objections by providing for the deduc- THE TAXATION OF MINERAL PROPERTIES 429 tion of expense items from the gross receipts of the operating company. In the instance of Mexico, the State does not permit the ownership of land, so that the question of assessment is one of determining the value of the output, a comparatively simple method of securing revenue. In other States, the general prop- erty tax had been modified by the addition of a gross earnings tax, the two being combined together. Such is the case in the States of Colorado and South Carolina. Here, again, a certain return in the form of gross receipts is used as the basis of the assessment, and to this are added the assessed value of the im- provements, machinery and the like. While avoiding the real question of the value of the properties, the method followed in these States does not distinguish between the costs of mining, but goes on the supposition that they are comparatively equal. This criticism has been recognized in the Utah and Montana laws, where the general property tax has been supplemented by a tax on the assessment of net earnings. Two fundamen- tally different principles are coupled together in these laws : one on the value of the surface and the other on net proceeds. The bookkeeping difficulties of the latter and the definition of what constitutes legitimate mining costs are sufficient in themselves to make the law unsatisfactory in its actual workings. . The authorities of Great Britain have attempted to extend the taxing of the physical properties by placing a tax upon royalties. This is to be commended, but in the mining districts of the United States the contracts between fee owners and lessee compel the latter to pay all taxes falling upon the properties or incomes from the properties. An additional tax upon royalties would under present conditions not fall upon fee holders, but upon the operating companies. • A sixth form of taxing mining properties is the tonnage tax, which has much to commend it. Where it has been proposed, as in Minnesota, the objection has been made that the placing of a tonnage tax upon output left the local governments that are compelled to rely upon the mines for their support in an uncertain condition. One year they might have more revenue than they needed, and in another year a great deal less. Last year the tonnage shipped from Minnesota mines reached 430 STATE AND LOCAL TAXATION 26,000,000 tons; this year the amount will probably be not much more than half of what it was last year. This statement illustrates the contention of the opponents of the tonnage tax. It is, however, possible to combine the tonnage tax with a tax on land surface at a nominal assessment so as to provide for the uncertainties of the tax on tonnage. The contention, how- ever, is based upon a really fundamental principle in public finance, that of a close relation between budget and income, which should not be uncertain but reasonably sure. The Minnesota system of taxing mineral properties is the general property tax modified so far as it applies to the determi- nation of values by the method of ascertaining costs of pro- duction as now seen in the Ontario law. The plan developed in Minnesota does not exempt reserves, as in the case of the Ontario law, but attempts to aggregate the values that are arrived at by the product of a rate and the known tonnage. The rate is derived by reducing the costs called for in the Ontario law to a tonnage basis, and deducting the same from the receipts per ton. One exception should be noted, — the plan included in the calculations of the rates on the present worth of the difference between receipts and costs for a period of twenty years at 4 per cent interest. In both instances the idea of distinguishing different kinds of property and placing them on a just basis as compared with their values or earning power is clearly a part of the scheme of taxation. The Ontario law is simpler and more effective as a piece of taxing machinery; but the Minnesota plan of assessing mineral properties avoids the uncertainties and inaccuracies of the methods usually ap- plied in the case of the general property tax and fills a tem- porary but fairly satisfactory place until something better adapted to the industry and simpler for the State to work can be created. y ■