Posted on Mon, Mar. 03, 2003 story:PUB_DESC
Point of View by JONATHAN HOLMES
Excessive production taxes cripple taconite industry's ability to compete

There's been a lot of discussion lately about changes in the taconite industry and the potential for new mining ventures in Minnesota. The controversy surrounding the 21st Century Mineral Fund and its importance to the future of Northeastern Minnesota is front-page news.

What seems to be missing from the debate is any discussion of the current impact of the taconite industry to this region's economy, and the importance of retaining the existing jobs. The taconite industry employs more than 4,000 people in the mines and plants. For every job in the industry, more than $300,000 per year flows through the regional economy and provides additional employment opportunities in the railroads, power plants, ports and other businesses that support the production of taconite pellets.

Removing the $1.2 billion plus per year that steel companies pay for pellets produced in Minnesota would be devastating to our economy.

Bankruptcies and consolidations in the steel industry are changing the relationship between the taconite mines and the steel mills. Steel companies are shedding their ownership of the mines. The mines are transitioning from captive operations to merchants of iron ore pellets. Pellets are a commodity that can be purchased from Michigan, Canada or Brazil. The taconite mines in Minnesota have to be cost-competitive to remain in business.

All of the mines have made strides in reducing costs. It's the only way they're going to stay in business. Labor productivity has improved. Suppliers have been squeezed. Energy consumption has been reduced. One area of significant cost requiring attention is the level of the current production tax.

Production taxes on Minnesota taconite companies are paid in lieu of property taxes. The current tax rate, net of re-investment credits, is $1.75 per ton. This rate is four times higher than Canada's and six times higher than Michigan's, our prime competitors. The production taxes paid by the taconite industry are several times higher than the property taxes they would pay if they were treated like other businesses and industries in Minnesota.

Last year those taxes amounted to an astounding $15,000 per industry employee, compared to a state average of about $1,400 per employee in light manufacturing!

Why is the tax so high? It's because the taconite industry pays for things no other business or industry in the state is expected to pay for. No other industry pays for the entire operation of a state agency and for all of the economic development funds for a region. No other industry is required to contribute money to a fund because they might go out of business someday. No other industry or business directly subsidizes individual property taxes with a tax credit.

Businesses and industries need to pay their fair share of taxes, to support schools and local units of government. When an excessively high tax rate threatens the long term survival of a business, something needs to change to retain the jobs. If a company cannot make a profit, it will not remain in business. New mining ventures will not locate here just because we promise them investment dollars.

The hundreds of millions of dollars in expenditures required for copper nickel development or value-added iron production will only be made if there's a realistic expectation that a company can be profitable over a long period of time. Do we think those investments will be made here if we plan to tax those companies at a rate that is four to six times that of competing jurisdictions? Will companies invest here if they believe their taxes will be quadrupled once their plants are built? How existing businesses are treated will directly impact whether those investments are ever made.

The taconite industry is fighting for survival. Reducing the production tax to a reasonable level will help the industry be competitive and survive for the long term. The jobs that this industry provides, both directly and indirectly, are not easily replaced. We have a choice. We can have excessively high taxes, or we can have jobs for the long term. We cannot have both.

JONATHAN HOLMES is manager of the Minorca Mine near Virginia