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October 2, 2014

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STATE REVENUE:

Over decades, mining forged close ties with regulators

Image

Steve Marcus / FILE

A cable shovel dumps gold ore into a truck in Crescent Valley in September 2001. In Nevada, mining companies get a slew of tax deductions, including for equipment depreciation.

Mining

Mining Launch slideshow »

Veteran mining lobbyist Jim Wadhams appeared before state tax regulators last week, days after a mining trade group acknowledged the industry has been receiving tax breaks that might conflict with state law.

The industry, which is reaping record profits as gold prices soar, welcomed a review of those tax breaks, Wadhams told the Nevada Tax Commission. But, he warned, don’t expect anything but “precisely the same result.”

Wadhams had good reason to be confident. Thanks to lawyers and lobbyists such as Wadhams, the mining industry has repeatedly persuaded commissioners in recent decades to expand its tax breaks, according to a review of three decades of records by the Las Vegas Sun.

In approving and modifying what mining companies are allowed to deduct from their tax bills, commissioners have frequently sided with the industry over their own staff as they ruled on what is and is not allowed under state law. In some cases, commissioners have ignored their legal counsel to mining’s benefit.

Commissioners aren’t solely to blame.

The Legislature’s lawyers signed off on the changes in deductions — including one who oversaw a major rewrite of regulations in 1984, only to leave a year later to work for the Nevada Mining Association.

State law allows mining companies to deduct from their gross proceeds the actual costs of extracting and processing ore into a salable product. This year, the industry is projected to deduct more than $4.2 billion from its gross proceeds.

Since the 1980s, the Tax Commission has undertaken three major rewrites of the regulations governing mining tax deductions. Each time the industry won expanded deductions:

• In 1984, at the industry’s urging, the commission approved regulations allowing companies to deduct state and local taxes other than the net proceeds tax and costs for out-of-state corporate offices, despite the tax director testifying that “the problem with taxes is it’s not in the statute.”

• In 2001, again at the industry’s urging, the commission approved a deduction for sales tax paid on equipment or material as a qualified expense. The industry also won deductions for employee housing.

Also in 2001, the industry succeeded on winning deductions for pension costs, despite an attorney general’s opinion stating they were not deductible. The deputy attorney general said he would simply pull that opinion so it wouldn’t conflict with the new regulation.

To be fair, the commission also specifically disallowed a number of deductions at the same time, including for health clubs, pre-employment expenses, union trust funds, day-care facilities and general liability insurance.

But even the refusals show how aggressive the industry has been in seeking tax breaks.

• In 2005, the commission adopted regulations allowing deductions for the cost of reclamation — the federally required act of returning disturbed land to its natural state. The commission disregarded pleas from counties and school districts not to allow it because it would hurt their budgets.

Again, the commission sided with the industry’s request to deduct 90 percent of the expense against staff recommendations for a 75 percent reduction.

Asked about this issue, Wadhams said: “I don’t know why it shouldn’t be 100 percent.”

The commission also ignored a county official who pointed out that reclamation costs are not included in state law and advised them to debate the issue before the Legislature.

The paper trail of commission meeting transcripts and amended regulations raises the question of whether Nevada’s mining regulators have fallen prey to what economists call “regulatory capture” — the term used to describe an agency that acts in the interest of the industry it was established to regulate. For example, critics say the 2008 financial crisis was caused by banking regulators who were captured by the financial services industry and failed to spot trouble on the horizon.

Regulatory capture is rarely the result of corruption. It is more commonly the outcome of relationship-building between regulators and industry employees.

“You get to know the people and work with them and start to become sympathetic for the people you deal with all of the time,” UNR economist Elliott Parker said. “A lot of it is simply that you’re not dealing with corporate interests in black hats, you’re dealing with regular folks who maybe have similar backgrounds, and after a while you just start to see them as reasonable.”

When that happens, regulators often start to trust information provided by the industry over that contributed by the public, Parker said.

Parker stopped short of saying three decades worth of Nevada tax regulators have fallen victim to regulatory capture, but agreed the record raises it as a concern.

Indeed, even the state law establishing the Tax Commission created conditions ripe for regulatory capture by requiring four industries to have representatives: mining, utilities, finance and agriculture.

Mining’s representative on the commission is John Marvel, an Elko lawyer who represents mining clients, is a member of the Nevada Mining Association and receives income from Marvel Minerals, according to his financial disclosure report.

Marvel did not return calls seeking comment for this story.

To understand the process, a quick primer is in order.

Click to enlarge photo

Michael Ginsburg, left, a member of the Progressive Leadership Alliance of Nevada, and Andrew Davey, web director for Stonewall Democratic Club of Southern Nevada, picket in front of the main post office on Sunset Road Thursday, April 15, 2010. About a dozen protesters came out to support the services that taxes provide and to demand greater "tax fairness," such as an increase in mining taxes and a implementation of a broad-based business tax.

Statutes are written and adopted by legislators. The new laws often instruct state regulators to draft and adopt regulations, which in turn help state agencies administer the statutes. Regulations must comply with statutes to be valid. Essentially, the statute sets the guidelines and the regulations fill in the details.

In the case of the mining industry tax deductions, legislators have written a statute that allows 11 categories of deductions that relate directly to the actual costs of extracting and processing minerals.

The Tax Commission has written regulations that detail what costs mining companies can specifically deduct within those categories. The Tax Department then uses those regulations to guide it through the audit process of accepting and rejecting deductions.

In each case, regulations adopted by commissioners were reviewed for compliance with statute by legislative lawyers.

Commissioner George Kelesis expressed frustration last week that regulations allowing generous tax breaks didn’t seem to comport with the statute.

“Apparently some of these errors in broad interpretation occurred in 1984. That was over 20 years ago,” he said. “My question is where was the Legislature over the last 20 years if the Tax Commission was misinterpreting a statute?”

Industry lobbyists and lawyers are present at each step of the regulatory and legislative process.

Often, the regulations were taken up because of audit disagreements. The record reflects repeated disagreements between the industry and department auditors over what was an acceptable deduction dating from the 1970s. In some cases, deductions were approved for one company, but not another. Or the same deduction was approved one year and not the next.

“It’s fair to call upon the commission to review the deductions for clarity,” Wadhams said. “It’s a public process. Clarity is critical. The taxpayers want to pay what they owe.”

Each time the regulations were revamped, the industry succeeded in winning expansions of their deductions. In addition to arguing the proposed deductions reflected appropriate costs related to extraction and processing, the industry’s arguments were threefold:

• We’ve always done it this way, the department has been approving it, so let’s make it official.

• Just because it’s not in the statute doesn’t mean it’s not a qualified deduction. Wadhams uses the example of the gasoline used to power the trucks that move ore. Just because it isn’t named in statute, doesn’t mean it isn’t a legitimate deduction.

• If you don’t let us deduct this, we’ll deduct something else. A Newmont Mining Corp. staffer used this argument to win the employee housing deduction, saying employee housing cut travel costs.

Wadhams denied the Tax Commission has been “captured” by the industry and pledged to continue lobbying for what the industry believes are legal tax deductions.

“I’m prepared to have that discussion at every level — the department level, the commission level and the legislative level,” he said.

Steven Horsford

Steven Horsford

The history has some lawmakers less than confident that the industry’s influence won’t control the review process requested by Senate Majority Leader Steven Horsford, D-North Las Vegas.

Horsford said he supports a bill by Sen. Sheila Leslie, D-Reno, to create a commission, similar to the Nevada Gaming Commission, to regulate the mining industry separately from the Tax Commission.

“You need to listen to all sides and not just the position of the industry,” Horsford said.

Leslie, however, said the political environment has created ideal conditions for reform: Mining companies are thriving thanks to gold reaching $1,500 an ounce, while the rest of the Nevada economy founders and state government grapples with a $2.3 billion deficit.

That has both the public and lawmakers demanding the industry contribute more to help close the budget gap.

“The increased attention to this issue this session will make it much more difficult to quietly slip through regulations and decisions that benefit the mining industry,” Leslie said. “They know we’re all watching carefully.”

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  1. "Capture" my @ss! Start the process to remove their protection from the state constitution and in the meantime go over those deductions with a fine tooth comb for the past 20 years.

    Tax them the same as anyone else, period.

  2. Corporations, not just mining, expect the same rights and privileges as "individuals", but DEMAND superior privileges, to deduct all or most of their gross income from taxation.

    The electorate should have the same tax deductions as corporations - particularly "income averaging". People should be able to carry their losses and low income years forward just like corporations (this used to be law & was eliminated by Congress). They should also be able to deduct all expenses for commuting to and from work, maintenance, depreciation on the car, clothes, just like
    "S-Corporations".

    These legal gimmicks can be set up by people who file as 'independent contractors'. This allows deduction of many expenses, such as commuting at 50 cents/mile. Employees of a company cannot deduct their commuting expenses - a true rip off.

    The Nevada Regulators have forgotten about Nevada Citizens - they get paid to look after the top incomes. Little bags of gems cannot be traced and a small bag can easily hold $500,000. Shopping bags of cash on the back steps cannot be traced either.

  3. The Transcontinental Railroad Act (which gave railroads hundreds of thousands of free acres) also facilitated Nevada mining as spurs were built off the mainline. This is why NPRI and other tea baggage are nuts because the whole country (including the mining industry) was built on government tax and spend. Also, the Tahoe and other areas of the Eastern Sierra was used for free lumber for the mines and railroad ties.

    The mining industry owes Nevadans trillions of dollars for free timber, land and minerals they stole.

  4. As metals prices are higher the state is making much more money as they share in the net profits mining companies are making. I think Nevada should start its' own mining companies, it would put people back to work and keep all the profits. Surely with the price levels now there are old mines that would be profitable to go back into. The state could go so far to teach prospecting and mining at schools so children learn early.

  5. There is illegal behavior and there is unethical behavior.

    EVEN if nothing illegal is found from these mining corporations - they are definitely UNETHICAL. If someone outside the industry who does not benefit financially from mining donations looks even briefly at the numbers - the books are cooked. It is not right to take BILLIONS of gold from Nevada's dirt - and then flip everyone left here the bird on the way out the door.

    It's not right and it's not OK. It won't be right and it won't be OK unless mining pays their fair share.

    In the year when we are struggling with the bills and the state is bankrupt, can mining still cart off the gold which is already at $1500 per ounce and headed to $1600 by the end of the year? Their profits are going through the roof. It's Nevada's gold they are selling.

    We are going to decimate education in this state? Something is wrong when the money means more than humans to our Governor and the Republicans who are voting in a block with his mining protection plan (aka the budget). Where is their soul?

    Nevada's gold belongs to the people of Nevada. We need it to pay our bills.

  6. "miners and gamblers wrote the state constitution..."

    dipstick -- your basis for that statement is what exactly? The 5% cap on the mining industry's net proceeds is found in the state Constiution's Article X, Section 5, which carries this handy explanation: "Added in 1989. Proposed and passed by the 1987 legislature; agreed to and passed by the 1989 legislature; and approved and ratified by the people at a special election held on May 2, 1989. See: Statutes of Nevada 1987, p. 2443; Statutes of Nevada 1989, p. 2229."

    Contrary to your usual ignorant rant, everybody agreed to it.

    "It is not right to take BILLIONS of gold from Nevada's dirt - and then flip everyone left here the bird on the way out the door."

    first_grade -- see the above response to dipstick. And I didn't hear your offer to go find Nevada's gold, go through the hassle of staking your claim, dig it up then process and ship it, with all the risk involved.

    As Ms. Damon's very good article shows the industry worked within the regulatory system the state set up. Just because the regulators aren't getting every buck they can out of them isn't the industry's fault.

    So what if the state spent a few months trying to get a new tax scheme in reaction to the current high gold prices, what would happen if the bottom fell out of the market tomorrow? Some of these rants didn't exactly think this through.

    What I get from this article is the depressing news common to government -- too many lawyers.

    "In the general course of human nature, a power over a man's subsistence amounts to a power over his will." -- Alexander Hamilton, Federalist Paper 79, 1787-88

  7. Tax regulators are not the only regulators corrupted by mining big profits. Federal Mine Safety Health Administrative(MSHA) and Nevada Mine Safety Training Section(NV MSATS) also work to protect big mining profits. Timely reported formal valid complaints on record for Safety, Health and Harassment violations have never been investigated. Kinross Gold Corp and Barrick Gold Corp(Round Mountain Gold Corp)continue to hide unlawfully manufactured false records aided by MSHA and NV MSATS. A public record recorded in Nye County Recorders Office-Tonopah, Nevada is active, filed by/for Paul Rupp-copy of false information withheld by Round Mountain Gold Corp employees and protected By Tim Fisher of MSHA, Edward Tomany C.A.O. NV MSATS and Jeff Bixler Safety manager II-NV MSATS. When will A miner in Nevada who filed timely formal valid complaints be supported by Mining Oversight Regulators?
    Paul Rupp B125 SP NV 89047

  8. Corruption,the meaning of, From Wikipedia
    to abuse or destroy: "utterly broken"

    # Forms of corruption
    # Collusion, an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage

  9. "The deputy attorney general said he would simply pull that opinion so it wouldn't conflict with the new regulation".

    This was not a mistake, this was deliberate and it cost Nevada taxpayers how much?