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Wrong, dead wrong, just as wrong as wrong can be (opinion)


Submitted by Norm Robins

For every complex problem there is an answer that is clear, simple, and wrong.” –H.L. Mencken

Our legislature has been at it again. They need money for schools, governments, and health care. Okay, I get that. And while they are at it, why not throw some in for the voters? All they have to do is take it from mining companies. Why not? Some of them are sitting on a gold mine–literally.

Thus, the State Assembly and Senate passed three joint resolutions, AJRs (Assembly Joint Resolutions) 1 and 2 and SJR (Senate Joint Resolution) 1 this July in special session called to address COVID-19 issues.

Basically, AJR1 and SJR1 say let’s raise the tax cap on mining companies from 5% of profit to 7.75% of revenue. AJR2 says roughly the same thing, but sets the cap at 12% and the minimum to match the local property tax rate. That’s just a 55% increase, 5% to 7.75%, right?

Wrong! Dead wrong. Just as wrong as wrong can be. 

Let’s look at two of these three resolutions. On July 30, 2020 I shared an op-ed piece looking into the finances of Newmont Mining Co. Newmont’s 2019 worldwide sales were $9.7 billion. These numbers are worldwide, not just for Nevada. (Editor’s note: Mining companies don’t disaggregate numbers by state, so these numbers are for illustrative purposes only.)  Their net profit after taxes was $2.9 billion. This was a great year for Newmont. However, the net loss in the 6 years preceding 2019 was $-12.4 billion, approximately $-2 billion a year.  As I said before, mining is a tough business.

In the exceptionally good year 2019 Newmont made a little shy of $30 for every $100 of revenue. AJR 1 and SJR 1 would raise their tax cap from 5% of that $30, or $1.50, to 7.75% of $100, or $7.75.  This is a tax increase of just over 400%, outrageous in any normal person’s estimation. 

Let’s go back to 2015 through 2018 when gold prices were lower and times were tougher. In those 4 years Newmont averaged $6.8 billion revenue but had an average loss of $98 million a year. In those 4 years, under the current tax regimen Newmont would have paid no taxes. If this new regimen had been in place at the time, their taxes would have been capped at 7.75% of revenue even though Newmont had no profit with which to pay them.

And that brings us to an ironclad rule of business. You tax profits, not revenue, because profits give a company the wherewithal to pay taxes. No profits? No money. It’s that simple.

If a company must pay taxes but has no income it must take those taxes out of its capital, reducing the amount of capital left in the economy. That hurts us all. We are a capital rich country because we have husbanded our capital. Capital is hard to accumulate and easy to squander. Our entire business law superstructure is designed to preserve capital where it can. That’s why bankruptcy laws are what they are, to try to preserve capital if at all possible under difficult circumstances.

Capital is what makes labor productive. Taxing capital is the equivalent of asking a company to eat its seed corn. Tax a company with no profits, and you are telling it to take its capital and move to a place more friendly to it.

And capital is indeed mobile. I moved my capital from California to Nevada 16 years ago because California showed me they had no respect for it. They treated my capital as if it were their own. Wrong, dead wrong. Just as wrong as wrong can be.

The legality of introducing the Joint Resolutions into a special session of the Legislature, called to work on COVID-19 issues, is questionable. The resolutions have one more vote next year in the legislature to be successful. If so, in 2022 it is likely a combined version will go to the people in a referendum. And if it succeeds there it becomes constitutional law. When the price of gold goes back down—and at some time it will—our mining industry will shut its doors here.

gold stock chart
Source: StockCharts.com

There is danger in this legislation. Here is a chart of the 10-year history of the gold price and of the value of the dollar. Investors call gold the “anti-dollar” and for good reason.  When the value of the dollar goes down, as the solid black line in the adjacent graph shows, the price of gold, the dashed line, goes up. The chart shows the 10-year histories of these two. In the last two years, 2019 and 2020, the gold price has gone through the roof.  That’s because the dollar has been cheapened by the Fed printing oodles of money, much more than demanded in a stable market. 

But it wasn’t always that way. In 2011 and 2012 the gold price spiked to $1,600 to $1,800 an ounce when the dollar was weak. But then in 2013, gold plummeted to $1,100 to $1,300 an ounce and stayed there for 5 years. Why? Because the value of the U.S. dollar strengthened, something utterly beyond the control of the gold miners.

There is nothing abnormal in this chart. If history repeats itself and the Federal Reserve stops it madcap printing of U.S. dollars, if the gold price reverts to the mean and goes back down, this new tax on revenue rather than profits would be the death knell for gold mining in Nevada. Conclusion: Mencken got it right. The legislature got it dead wrong.

Norm Robins is a retired entrepreneur and ex-engineer whose first love is economics and who has lived and worked all over the world.  He has a B.S. in Civil Engineering from the University of Illinois, Champaign-Urbana, and an MBA in International Business from the University of California, Berkeley.  He and his wife and one of his three children live in Reno, Nevada.

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