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involving financing and infrastructure necessities. Building or rebuilding a Nation's mining industry calls for decades of effort and huge expenditures. These factors and the importance of having an assured availability of raw material for industry were recognized by Congress in the Mining and Minerals Policy

Act of 1970, and subsequently reaffirmed by Congressional and

Executive actions, which declare it to be national policy to

encourage private enterprise in developing an economically sound domestic mining industry and the orderly development of U.S.

mineral resources.

There is no way to reconcile our acknowledged U.S.

minerals policy as so expressed with a tax system that does not

provide extraordinary encouragement to invest in mining activities, and it is most disconcerting that the President's proposed changes in the tax system which would further penalize the U.S. mining industry internationally are being extolled under the

misleading and erroneous label of reform.

If these proposals

are accepted at face value and enacted without challenge, the chances are slim that a reversal of tax law could occur in time

to salvage our already shrunken and jeopardized industry.

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policy and would make it increasingly difficult for the financially-pressed domestic mineral industry to produce basic minerals and to explore for and develop new domestic mineral


There is currently intense focus, as evidenced by the

enactment of the National Critical Minerals Act of 1984, on

questions of domestic minerals availability and the extent of dependence on imported materials. 1 Our Nation's past experience


The National Critical Minerals Act of 1984, Title II of P.L. 98-373, reaffirms that supplies of minerals and materials are vital to the security, economic well-being and industrial capacity of the United States. Specifically, Congressional findings, stated in Section 202(a) of that Act, include the following:

1) the availability of adequate supplies of strategic

and critical industrial minerals and materials continues to be essential for national security,

economic well-being and industrial production; 2) the United States is increasingly dependent on

foreign sources of materials and vulnerable to
supply interruption in the case of many of those
minerals and materials essential to the Nation's

defense and economic well-being;
3) together with increasing import dependence, the

Nation's industrial base, including the capacity to
process minerals and materials, is deteriorating
both in terms of facilities and in terms of a
trained labor force;

4) research, development and technological innovation,

especially related to improved materials and new processing technologies, are important factors which affect our long-term capability for economic

(footnote continued) of heavy reliance on imported oil and the consequent effects on

the standard of living and conduct of foreign affairs demon

strates the dangerous potential of a similar dependence on foreign sources for hard minerals and should be reason enough to

encourage national independence.

The availability and production of minerals, both

domestic and foreign, are measurably affected by the system of

taxation and its economic impacts on mining in the United States. 2

For example, Congress has long recognized the major

impact of federal tax laws that allow a deduction of percentage

depletion by this Nation's minerals industry.

The deductibility of percentage depletion has been

amply proven to be a sound and effective incentive for minerals

exploration and development, and it ought to be maintained.


President's tax proposals emphasize the need to preserve oil

incentives which we applaud.

The same need is also true for

(footnote continued from previous page)

competitiveness, as well as for adjustment to interruptions in supply of critical minerals and materials;

8) the importance of materials to national goals

requires an organizational means for establishing
responsibilities for materials programs and for the
coordination, within and at a suitably high level
of the Executive Office of the President, with
other existing policies within the Federal

Government. 2

See, e.g., Subcommittee of Mines and Mining of the House Committee on Interior and Insular Affairs, 96th Cong., 2d Sess., U.S. Minerals Vulnerability: National Policy Implications ( Committee Print No. 9), xii-xiii (hereinafter Committee Report).

hard minerals, especially since governments of other nations,

both developing and developed, actively encourage and support

mineral development through any number of devices from tax

incentives, risk-sharing and guarantees, through flexibility in

the application of regulations, to more liberal antitrust policies.


Case for Percentage Depletion

There are two basic reasons why the percentage depletion allowance is a proper element of a fair tax system:

(1) A mineral deposit is a unique wasting asset for

which the percentage depletion allowance is necessary in order

to provide for cost replacement.


The massive capital requirements, above-average risks and long lead times from exploration to commercial production, which are inherent in the mining industry, require the percentage depletion allowance to provide an incentive that will

generate the needed capital for expansion of mineral production.

Cost Replacement

A mineral deposit is a wasting asset that requires

investments in exploration, acquisition and development in order

to yield a flow of commodities over its productive life.

As is

true of other assets, the value of a mineral deposit deminishes

with its depletion.

In sharp contrast to a manufacturing facility, how

ever, where original cost is a reasonable indicator of replace

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ment cost (inflation effects aside), the original cost of land

and mineral deposits is an inadequate measure of the cost required to discover and develop a replacement for exhausted

reserves in a new location.

Historical evidence clearly proves

that exhausted mines are replaced with deposits that are more difficult and expensive to discover and because of lower ore grade or greater difficulty to mine and develop, or both much more expensive to operate, even after adjusting original


costs for inflation.

The percentage depletion allowance responds to the

unique nature of a mineral deposit and provides a realistic and practical method of reflecting the decreasing or wasting value

of a mine as it is depleted, and so it encourages the capital investment needed for its replacement.

Capital Needs and Risks

Capital needs for development of new minerals produc

tion are enormous. Increasingly, new mine developments are in remote or difficult terrain and usually of lower grade ore bodies so capital and operating costs escalate. Moreover, the

lead time required to bring a project into commercial production

is extensive, often seven to ten years from the time exploration

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