CHAPTER 13 STATE MINERAL TAXATION: THE ARIZONA EXPERIENCE

• Jurisdiction: United States

Mineral Taxation
(Mar-Apr 1977)
CHAPTER 13
STATE MINERAL TAXATION: THE ARIZONA EXPERIENCE
Desmond P. Kearns Attorney
Verity, Smith, Lacy, Allen & Kearns, P.C.
Tucson, Arizona

April 1, 1977

I. INTRODUCTION

Arizona is an excellent state to select for a study of state mineral taxation, not because its system of mineral taxation is excellent—it is not—but because it has a well developed minerals industry, because it uses a broad spectrum of mineral taxation methods, and because the level of taxation is high. In order to provide a perspective for examining Arizona's mineral taxes in detail, it will be helpful to review briefly the nature and magnitude of the minerals industry in Arizona, and the revenue generated by the various schemes of mineral taxation.

Mining has been important in Arizona since the 1870's.¹ For a number of years after 1880, when it first became a major copper producer, most of Arizona's copper production was mined from high-grade ore bodies, but the grade of ore has gradually diminished since that time.² Despite the reduction in grade, the copper industry has steadily expanded owing to improvements in techniques, technology, equipment and metallurgy. In 1976, according to preliminary figures released by the United States Bureau of Mines, Arizona was the leading producer of copper in the United States, as it has been every year since 1910, accounting for 63 percent of the United States' total.³ In addition, Arizona ranked second in silver and molybdenum production, and fourth in gold output. All of the molybdenum and most of the gold and silver were produced as byproducts of the copper mining operations.

Mineral production in Arizona in 1976 totaled almost $1.7 billion. Of this, copper accounted for more than $1.4 billion or 83.7 percent, and molybdenum, gold and silver together amounted to another $126 million or 7.4 percent of the total. Thus the copper mines were responsible for almost 91.1 percent of the state's mineral production.⁴ Most of

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Table 1.—Mineral production in Arizona¹

1975	197611
Mineral	Quantity	Value (thousands)	Quantity	Value (thousands)
Asbestos---------------------short tons-----	1,676	W	2,000	W
Clays-------------thousand short tons-----	129	$483	100	$507
Coal (bituminous)----------------do-------	6,986	W	9,900	W
Copper (recoverable content of ores, etc); short tons-------	813,211	1,044,162	1,012,660	1,417,724
Gem stones-------------------------------	NA	5,000	NA	5,000
Gold (recoverable content of ores, etc); troy ounces-------	85,790	13,854	92,790	11,413
Gypsum-----------thousand short tons-----	117	419	135	527
Lead (recoverable content of ores, etc); short tons-----	420	181	310	143
Lime-------------thousand short tons-----	512	12,444	509	12,970
Mica, scrap---------------------do-------	2	65	2	85
Molybdenum (content of concentrate); thousand pounds------	25,030	61,411	28,316	82,869
Natural gas---------million cubic feet---	208	58	36	14
Petroleum (crude) thousand 42-gallon; barrels-------	635	3,332	551	2,904
Pumice-----------thousand short tons-----	856	1,294	808	1,338
Sand and gravel------------------do-------	17,222	36,490	16,0162	33,954
Silver (recoverable content of ores, etc) thousand troy ounces-----	6,286	27,783	7,297	31,889
Stone------------thousand short tons-----	3,404	11,030	4,084	14,220
Zinc (recoverable content of ores, etc); short tons-----	8,655	6,751	8,650	6,401
Value of items that cannot be disclosed: Cement, feldspar, fluorspar (1976), helium, iron ore, perlite, pyrites, salt (1975), tungsten, and values indicated by symbol W---------------	XX	60,283	XX	72,034
Total------------------------------	XX	1,285,040	XX	1,693,992

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Table 2. — Taxes Paid by Copper Mining Industry in Arizona¹

Year 1969	Year 1970	Year 1971	Year 1972	Year 1973	Year 1974	Year 1975 2
Property taxes paid	$ 21,391,646	$ 25,866,035	$ 29,389,427	$ 36,877,818	$ 34,934,775	$ 38,398,768	$ 49,575,143
Tax on metal value (severance tax) accrued	14,087,996	17,605,922	15,467,946	18,085,744	21,785,431	26,597,782	24,268,847
Sales and use tax on purchases — paid	3,578,942	4,288,335	3,912,971	5,825,246	7,372,875	11,227,829	12,565,442
Vehicle taxes paid	128,118	140,966	140,458	151,327	174,989	184,514	337,914
State income taxes accrued	4,417,077; ————	6,002,844; ————	3,749,136; ————	2,735,001; ————	4,782,706; ————	9,401,170; ————	2,338,013; ————
Total taxes paid or accrued to governmental units	$ 43,603,779; —————	$ 53,904,102; —————	$ 52,659,938; —————	$ 63,675,136; —————	$ 69,050,776; —————	$ 85,810,063; —————	$ 89,085,359; —————
Salaries and wages earned by employees who are Arizona residents	$171,144,271	$195,213,766	$205,254,069	$245,293,586	$287,269,569	$332,490,622	$348,599,447
"Fringe" benefits for these Arizona residents (includes group insurance, retirement plan contributions, profit sharing, supplemental unemployment benefits, but does not include any payroll insurance or taxes)	26,145,917; —————	30,952,271; —————	33,999,268; —————	35,898,428; —————	44,020,043; —————	51,367,607; —————	64,674,990; —————
Total salaries, wages, and fringe benefits	$197,290,188; —————	$226,166,037; —————	$239,253,337; —————	$281,192,014; —————	$331,289,612; —————	$383,858,229; —————	$413,274,437; —————
Net cost of operating hospitals and recreation facilities for the benefit of employees of the companies and others	$ 6,053,995; —————	$ 6,987,012; —————	$ 7,432,102; —————	$ 7,969,064; —————	$ 8,366,746; —————	$ 10,241,099; —————	$ 11,824,104; —————
Purchases within Arizona	$137,678,700; —————	$186,557,689; —————	$201,713,899; —————	$242,843,266; —————	$305,480,202; —————	$371,641,240; —————	$383,762,936; —————
Total expenditures to date for environmental control facilities3	$229,325,093; —————	$313,458,912; —————	$352,782,656; —————
Total budgeted future expenditures for environmental control facilities3	$141,278,766; —————	$ 51,210,163; —————	$ 37,535,025; —————
Acreage used by mines and related facilities3	164,336; —————	Acres	195,210; —————	Acres	200,490; —————	Acres
Total number of employees within Arizona3	28,912; —————	24,985; —————

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the copper is produced from approximately 25 large mines operated by 11 companies.⁵ The only non-copper mines in Arizona of any major significance are two coal mines operated by Peabody Coal Company on the Navajo Indian Reservation, which, under current Arizona law, are not subject to property taxation.⁶ Moreover, oil and gas production is relatively small. Table 1⁷ shows production and value figures for all minerals produced in Arizona in 1976.

The real focus of mine taxation in Arizona, therefore, is taxation of the copper mining industry which can be further categorized as the taxation of approximately 25 large, low-grade copper mines.

Arizona imposes three major taxes on the minerals industry: (1) excise taxes for the privilege of engaging in the minerals business;⁸ (2) a net income tax;⁹ and (3) an ad valorem property tax.¹⁰ All three forms of taxation are permitted by the State Constitution.¹¹

Table 2¹² lists the state and local taxes paid or accrued in Arizona for the years 1969 through 1975 by members of the Arizona Mining Association which includes all of the major copper producers. Property taxes are by far the largest item, amounting to more than $49 million in 1975, followed by excise taxes (shown in Table 2 as "tax on metal value"), amounting to $24 million in 1975, sales and use taxes on purchases, amounting to $12 million in 1975, and income taxes, amounting to $2 million in 1975, down from $9 million in 1974. The growth of the industry can be observed from the increase in state and local taxes paid or accrued by the mining industry from $43 million in 1969 to $89 million in 1975, and by the increase in payroll and fringe benefits from less than $200 million in 1969 to more than $400 million in 1975.

This paper will examine and evaluate the three schemes of taxation imposed by Arizona on the minerals industry. Although much of Arizona is covered by Indian reservations, no consideration will be given in this paper to taxation of minerals on Indian reservations since that topic will be addressed by another speaker at this Institute.¹³

II. EXCISE TAXES

Direct Excise Taxes

There are three direct excise taxes imposed on the minerals industry in Arizona for the privilege of engaging within Arizona in the businesses of mining, quarrying, smelting, or producing for sale, profit or commercial use, any oil, natural gas, limestone, sand, gravel, copper, gold, silver or other mineral product, compound or combination of

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mineral products.¹⁴ The transaction privilege tax is levied at a rate of one percent of the tax base,¹⁵ the education excise tax is levied at a rate of one-half of one percent of the tax base,¹⁶ and the special excise tax for education is levied at a rate of one percent of the tax base.¹⁷ Thus the minerals industry is subject to direct excise taxes at the combined rate of 2 1/2 percent of the tax base. The tax rates are applied against one of three bases: gross proceeds of sales;¹⁸ gross income from the business;¹⁹ or value of products transported out of state.²⁰ Neither the taxpayer nor the State Department of Revenue can select the tax base indiscriminately, but must select the base that is applicable or suitable to the taxpayer's operations.²¹ All of these taxes are administered in the same manner by the Arizona Department of Revenue.²²

The tax rate is applied to the value of the entire product mined, quarried, or produced, or prepared for sale, profit or commercial use in Arizona, regardless of the place of sale of the product or that deliveries may be made to points...