Minnesota's taconite industry is seeking a 95-cent reduction in the state's taconite production tax, a proposal that would probably end funding for the Iron Range Resources and Rehabilitation Agency and eliminate property tax relief to thousands of Iron Range homeowners.

The proposal would reduce the net tax to 80 cents per ton, the lowest it has been since 1976.

Minnesota taconite producers are now charged a gross taconite production tax of $2.10 for each ton of pellets produced. Up to 35.1 cents of the tax can be refunded to taconite producers under two rebate programs, making for a net tax of $1.75 per ton.

The plan is controversial because tax proceeds are used to pay for Iron Range schools, cities, townships, counties and economic development and it provides property tax relief to 57,745 homesteads within the Taconite Tax Relief Area.

Taconite industry officials say a tax cut is necessary to remain competitive regionally and globally.

"We have to make a decision in Northeastern Minnesota," said Frank Ongaro Jr., president of the Iron Mining Association of Minnesota. "Do we want to do everything possible to keep these high-paying jobs so our communities can survive long-term, or do we want to overtax the industry until we can no longer produce taconite?"

Iron Range lawmakers, who for decades have played a major role in setting the tax rate, say the mining association's proposal goes overboard.

"The idea of the production tax going to 80 cents a ton is a nonstarter in the Senate," said Sen. Tom Bakk, DFL-Cook. "What they're saying is that we should let property taxes go up on the Range by $300 per house."

Under the taconite industry proposal:

• Funding to the IRRRA, which in 2002 was about 32 cents per ton of the gross tax, would probably end.

• Payments to the Taconite Homestead Credit, which uses about 30 cents per ton of the tax to provide property tax relief, would probably be eliminated.

• Aid to local units of government would be set at 80 cents per ton, and the Taconite Tax Relief Area might be shrunk to include only communities where mining still exists. Recipients now receive about $1.24 per ton of the tax.

Eliminating IRRRA funding would severely cut the agency's annual budget and damage opportunities to bring new jobs to the region, said Sen. Dave Tomassoni, DFL-Chisholm.

"I haven't seen one business come to the Range who hasn't come to the IRRRA for help," he said. "Under this proposal, property taxes would skyrocket."

Without taconite tax money, the interest earned on the $77.3 million Douglas J. Johnson Economic Protection Fund and interest earned on IRRRA business loans would be the only sources of revenue for the agency.

That would leave the agency with a $6.3 million budget, according to Don Dicklich, IRRRA chief financial officer. That compares with $25 million in 2003, a year in which the agency dipped into reserves.

Taconite producers say the tax is four to six times higher than those assessed at taconite mines in Michigan and eastern Canada. The equivalent property tax would equal $15,041 per employee compared with a state average of $1,378 per employee for light manufacturing businesses. They contend the taconite industry is the highest-taxed business in Minnesota and that taconite producers can no longer afford to pay for the IRRRA.

"Our first priority is to have a tax level that allows us to compete," Ongaro said. "This is one way to get there. If someone else has a better idea on how to get there, we would look at it."

The tax rate prevents Minnesota taconite companies from competing with other domestic and foreign producers, said John S. Brinzo,Cleveland-Cliffs Inc. chairman and chief executive officer.

"The current tax burden has the effect of confiscating the industry's margins and investment capital, which jeopardizes long-term viability," he said.

Iron Range lawmakers argue that Iron Range taconite producers aren't being bankrupted by the tax.

"If Frank Ongaro wants to be cute, he isn't going to get anything," Rep. Tom Rukavina, DFL-Virginia, said. "Here's the reality: There's not going to be any support from the Senate, and there will be no support from the House when the conference committees meet because they don't care any more about taconite taxes than the man in the moon."

Since the early 1980s, taconite producers have dramatically reduced costs by using fewer workers, cutting supply costs and improving energy efficiency.

But within the past 17 years, two of the original eight Iron Range taconite plants, Butler Taconite and LTV Steel Mining Co., have closed. The industry, which in the 1970s employed more than 16,000 workers, now employs about 4,000.

For the remaining six to stay alive and compete with other iron ore producers, taconite plant managers say the Minnesota companies need to further reduce costs, notably the tax.

If steel companies can get cheaper pellets from other suppliers, "they will evaluate whether they should continue getting pellets here or go somewhere else," said Jonathan Holmes, general manager of Ispat Inland Mining Co. near Virginia.

Michigan taconite producers in 2002 paid a specific iron ore tax of 27 cents per ton, according to Cleveland-Cliffs statistics. That compares with 44 cents per ton in eastern Canada and Minnesota's net tax of $1.75.

Five of Minnesota's six taconite producers belong to the Iron Mining Association. U.S. Steel's Minntac Mine in Mountain Iron is not a member.