BACKGROUND:

Percentage depletion is the capital cost recovery method recognized in the tax code for the aggregates industry and other natural resources industries. It is five percent for sand, gravel and crushed stone and varying in amounts up to 22 percent for other minerals. Percentage depletion is limited to 50 percent of net income, less exploration costs, and is a preference item for the corporate minimum tax.

Sen. Russell Feingold (D-Wisc.) introduced legislation in the 109th and 110th Congresses to repeal the percentage depletion allowance for hard rock mining activities on public lands and former public lands. The Feingold bill proposed establishing in the Treasury the Abandoned Mine Reclamation Trust Fund and would appropriate amounts equal to 25 percent of the additional revenues received to go into the fund. Further, the legislation prescribes guidelines under which the fund shall be available to the Secretary of the Interior for reclamation and restoration of lands and water resources adversely affected by mineral and mineral materials mining (excluding coal and fluid minerals).

Although the aggregates industry, which is classified under a different SIC code than metals and is rarely mined on public lands, does not appear to be the target of the most recent efforts to repeal the depletion allowance. It is a “nose-under-the-tent” threat. Repealing the percentage depletion allowance for metal mining would open the door to repealing the depletion allowance for other capital-intensive industries, like aggregates.

In an era of pay-go when all new spending must be paid for, NSSGA expects that proposals to eliminate the percentage depletion allowance again will be proposed.

TALKING POINTS:

• NSSGA opposes legislative proposals to repeal the percentage depletion allowance on hard rock minerals or other minerals.
• Sold on a competitive basis, crushed stone, sand and gravel are low-value commodities that are very sensitive to cost-production factors including percentage depletion, with a penny per ton making a significant difference. Repealing percentage depletion for aggregates would increase the cost of constructing public works and infrastructure by raising mining costs that would be passed on in higher prices to the end users of aggregates. Each dollar of tax from the repeal would add at least 6 cents to the cost of federal construction purchases and 37 cents to the cost
  of state and local construction purchases, according to a 1998 percentage depletion study. This amount is certain to have increased in the intervening years.
• Repealing percentage depletion for aggregates would disrupt the production of needed construction materials.
• Proposals to remove the percentage depletion on minerals extracted from public lands would unfairly tax western states and disrupt the mining of needed materials.

SOURCE:
“The Economic and Budgetary Impact of Repealing the Percentage
Depletion Deduction for Aggregates,”
Coopers and Lybrand, February 1998.

Updated: November 2008