Reforming the Rules for Mining on Federal Lands

Since 1987, Congress has been struggling to reform the long-standing law governing the exploration for and mining of hardrock minerals on federal lands. Under both the Reagan and Bush administrations, attempts to revise the General Mining Law of 1872 were unsuccessful. Under the Clinton administration, however, these attempts are being given a new push as part of broader proposed changes in public lands policy—changes aimed primarily at increasing the fees for using federal lands and at protecting the environment.

Although this effort failed in 1994, some changes in the General Mining Law seem likely in the future. The extent of such reform is unclear. Critics of the law charge that it is outdated and philosophically inconsistent with rational management of federal lands and therefore requires major changes. Defenders of the law contend that only minor updating and modification are needed.

Below I examine the provisions of the General Mining Law and how the implementation of these provisions has changed since 1872. Next I discuss the four critical issues on which debate focuses: rules governing land access for mineral exploration and mining, royalties, ownership of mineral resources, and environmental protection. Finally, I speculate about the likely outcome of the current efforts at reform.

The General Mining Law of 1872

The General Mining Law of 1872 allows explorers to search for and mine hardrock minerals—that is, metallic minerals (such as gold, silver, copper, lead, and zinc), as well as a few non-metallic minerals—on many (but not all) federal lands. The law's basic provisions have remained in effect for 122 years. Yet it would be a mistake to view today's law as the same law that nineteenth-century prospectors knew.

When enacted, the major aim of the General Mining Law was to promote mineral development and, more generally, economic development in the U.S. West. Implicit in the law at the time of passage was the belief that mining mineral deposits was always the best use of a tract of land. The provisions of the law included access to federal land on a first-come, first-served basis and established the right of explorers to stake a claim without asking permission from the federal government. Explorers then could maintain an exclusive right to that claim by performing a minimal amount of work on the claim each year. In addition, the law conferred upon claimholders the right to mine a valuable mineral deposit located on a valid claim. In a process known as patenting, claimholders had the right to purchase claims on which they had discovered valuable deposits for a fee of $2.50 or $5.00 per acre, depending on the type of claim. Patented land became private property, and owners of such land were not required to pay any mineral tax (or royalty) on production. These generous provisions, not surprisingly, stimulated much mineral exploration and development.

Two important changes have resulted from judicial review and changes in the way agencies in the executive branch implement the law. First, a significant amount of federal land has been placed off-limits to activities under the General Mining Law. In 1920, for example, Congress removed lands containing oil and gas from the jurisdiction of the law and placed them, as well as coal, under a leasing system that provided royalties to the government. In the 1950s, Congress removed most construction materials. More recently, the Wilderness Act of 1964 and the Federal Land Policy and Management Act of 1976 withdrew access for mineral production to many other federal lands in order to protect environmental values.

Second, access to those lands still open for mineral exploration and mining has been made more difficult and costly to obtain, as well as less certain. Public policies now require miners to obtain assessments of environmental impacts, a variety of environmental permits, and other preproduction approvals before proceeding from exploration to mining.

These two changes in the way the General Mining Law is administered reflect the rise of other potential uses for federal lands. Demand for recreation and preservation uses, to name but two, has eroded free and open access for mineral exploration and mining. No longer are those activities automatically believed to be the highest-value use of land containing a mineral deposit.

Despite administrative reforms, the General Mining Law remains under fire. Its critics maintain that the law allows access to land for mineral exploration and mining under terms that are too favorable for mining, making consideration of other potential uses difficult. They complain that the law does not require payment of a royalty for minerals produced on public lands and that it allows the purchase of public lands at prices far below market values. Moreover, they claim that the law does not adequately protect the environment. Below I examine each of these criticisms, as well as possible reforms.

Land access

Part of the controversy surrounding the General Mining Law concerns the rules governing access to land for mineral exploration and those governing how a miner proceeds from exploration to mining. In both cases, a critical issue is how much discretion the government should have to restrict or deny access for mineral exploration or mining. Because the General Mining Law allows free and open access for these activities, the right to mine is essentially automatic upon discovery of a valuable mineral deposit (subject to meeting other regulatory requirements), and the onus is on the federal government to close lands on which exploration and mining are deemed inappropriate.

Critics of the General Mining Law argue that free and open access is fundamentally inconsistent with the philosophy of federal retention and management of public lands that in the twentieth century has grown to undergird public-land policy. More specifically, these critics maintain that such access implicitly assumes that mining will always be the highest-value use of lands containing valuable mineral deposits.

Defenders of the General Mining Law argue that other federal policies already allow for (some would say, require) consideration of other possible uses of mineralized lands, including preservation. Moreover, they contend that the most environmentally sensitive lands have already been closed to mining and that assessments of the environmental effects of mining on the remaining open lands usually are required under the National Environmental Policy Act of 1969.

For those who fear that free and open access will not ensure that lands are put to their highest-value uses, three alternatives exist. One approach would be to lessen the involvement of the federal government in the administration of access. This would mean selling large portions of the federal estate to the private sector or transferring them to states. To be sure, national parks and wilderness areas with large environmental or preservation values could remain under federal control.

Because the federal government is likely to retain and manage most of the existing federal estate for the foreseeable future, a second and more realistic way to provide access to minerals would be through a discretionary leasing system similar to that existing for oil, gas, and coal on federal lands. Under such a system, lands would be closed to mineral activities unless specifically opened by the government, and explorers would need permission to initiate exploration and then to mine. Although a leasing system had considerable appeal when mining law reform was discussed in the 1970s, it has not figured in more recent debate. Among other problems, difficulties that have arisen in coal leasing have soured many people on this alternative.

The General Mining Law requires no royalty payments (or taxes) on mineral production on federal lands, although mining companies are subject to the same income-tax obligations as other businesses. Critics of the General Mining Law argue that nearly all other owners of mineral properties demand royalty payments as compensation for the privilege of mineral extraction. The federal government does so for production of oil, gas, and coal, while states and private landowners do so for most minerals. Defenders of the law grant this point but counter that mining of hardrock minerals deserves to be treated differently from mining of other minerals. They argue that metal producers are less able than coal producers to pass along cost increases and that hardrock mining is only marginally profitable even in the absence of royalties, the imposition of which would cause many mines to shut down and many miners to lose their jobs.

Even most defenders of the General Mining Law acknowledge that some form of royalty payment is inevitable. Debate over royalties now centers on the exact nature of the tax base, as well as on the tax rate. Congress is considering one tax based on gross revenues and another one based on net income.

Royalties for coal, oil, and natural gas generally are based on gross revenues or production. Such taxes are relatively simple and inexpensive to administer because the only data needed to calculate tax liability are mine or well production and a sales price. They also tend to generate a more stable stream of revenues for landowners than taxes based on net income—mine production tends to vary less from year to year than mineral prices. However, taxes based on gross revenues have the serious disadvantage of not being based on ability to pay. Consider two gold mines with the same level of annual production but different costs and levels of profitability. With a royalty based on gross revenues, the mine that has high costs and is only marginally profitable would pay the same as the mine that has low costs and is highly profitable.

A tax based on net income has the advantage of taking into account ability to pay. Under such a tax, marginally profitable mines would have little or no tax liability. Therefore, a net-income tax would not cause such mines to close, at least in the short term. However, this tax has the disadvantage of being more difficult and costly to administer than a gross-revenue tax. For instance, it requires accounting rules defining allowable costs, as well as intensive monitoring and enforcement. In addition, it is more open to creative accounting than a gross-revenue tax.

How a royalty payment would affect the U.S. mining industry depends, of course, on its precise nature. A payment based on gross revenues will cause greater reductions in mineral production and more unemployment than one based on net income. Perhaps more significantly, the effects of any royalty on mine output and employment will be greater in the long run than in the short run. As long as mineral prices are sufficient to cover out-of-pocket operating costs, most existing mines will continue to operate in the short term, although some mines may reduce employment or close. Over time, however, a royalty will discourage investment in exploration, development of new mines, and refurbishment and expansion of existing operations.

The General Mining Law makes it possible for claimholders to purchase (or patent) claims containing valuable mineral deposits for a minimal price, after which the land becomes private property. In the debate over the law, the wisdom of allowing miners to patent federal lands with such deposits, as well as the surrounding land necessary for mineral production, has been questioned. Two possible alternatives have been put forward: doing away with patenting altogether and requiring that claims be purchased at market prices.

Critics of the General Mining Law cite two specific problems associated with patenting. First, some people abuse mining patents—for example, by using them for vacation cabins and real estate speculation. Second, the purchase price of $2.50 or $5.00 per acre, depending on the type of claim, is well below the price that would be paid in a competitive market for the lands in question. In addition and more generally, patenting conflicts with the current philosophy of government retention and management of federal lands.

Defenders of the General Mining Law say that abuses of patenting have not been as widespread as critics claim. More importantly, they argue, patenting is a form of privatization, which is thought to achieve more efficient use of public lands in general, not just for mining.

Given that patenting has never been necessary for mining to take place, one possible alternative is simply to end the practice. Relatively little patenting has occurred since the first decade of the 1900s, mainly because it costs money to file patent claims; patent requirements have become stricter as the philosophy of federal land management changed from disposal to federal retention and management; and many mining companies have preferred federal rules to the state and local rules that would have applied to private lands. In the last several years, however, companies hoping to avoid the anticipated royalty on mineral production on federal lands have filed an increasing number of patent applications.

The second alternative is to continue the practice of patenting but require that purchasers pay market values for claims—a requirement that would allow the government to be compensated up front for forgone royalty payments. One obstacle to this alternative is the difficulty of determining values in the absence of a market. Competitive bidding might be one way to overcome this difficulty, but it would have to occur prior to exploration or else the incentive to explore would be destroyed. If the number of potential bidders were small, negotiation would be another way to determine market value.

Environmental protection

In the debate over mining law reform, provisions for environmental protection are another source of controversy. The critical issue is the adequacy of existing federal and state environmental rules. Critics of the General Mining Law contend that existing rules are inadequate, while defenders counter that they generally are adequate or that environmental protection is better handled through environmental legislation than through mining law.

Mining operations currently encounter four types of environmental checks: preproduction rules (assessments of environmental impact, permits, and other environmental approvals that must be obtained prior to mining), rules that apply to ongoing mine and mill operations, postclosure reclamation requirements, and policies for dealing with the problems of abandoned mines. In general, the issues are the same as with other environmental policies: What should be the standards for environmental quality and how should they be determined? What policy tools—such as direct regulation or economic incentives—are best suited to meeting these standards? How should rules be enforced?

The prospect of environmental rules in a new mining law raises other issues. First, would the rules be flexible enough to accommodate site-specific differences in environmental damage from mining? The nature and extent of damage varies enormously from case to case depending on the type of mineral being mined (an oxide or a sulfide), climate (arid or humid), mining method (surface or underground), and the population density in the area surrounding mining operations. Second, how would new environmental rules relate to the large body of existing environmental regulations at both the federal and state levels? Will they complement or supersede existing federal and state rules? Or will they conflict with and complicate the implementation of existing federal and state rules?

Prospects for reform

When considering the prospects for mining law reform, it is worth remembering that once every decade or two since 1872, Congress has considered and ultimately rejected major reform or repeal of the General Mining Law. The possibility that the law will survive current reform efforts therefore exists. Yet reform seems likely.

The Senate and House of Representatives both passed reform legislation in 1993. The House bill (H.R. 322), drafted by Nick Joe Rahall II (D-W.Va.), called for a royalty of 8 percent of the gross value of mineral production, an end to patenting, and the establishment of extensive new environmental regulations. The very different Senate bill (S. 775), drafted by Larry E. Craig (R-Idaho), required a royalty of 2 percent of the net value of mineral production, allowed patenting of surface lands but required payment of fair market value, and largely relied on existing state rules to ensure environmental protection. Both bills would have continued the practice of open access to federal lands for exploration. Efforts to pass a compromise bill collapsed in the dying moments of the 103rd Congress.

While predicting the outcome of the reform debate is risky, some changes in the General Mining Law should be expected in the next Congress. Open access to federal lands for exploration will probably continue, but the government is likely to have significant discretion in approving mine plans. Another likelihood is a royalty, probably on the gross value of mineral production and at a rate of 2–5 percent. Patenting is likely to be either eliminated or modified to require payment of fair market value; this issue is not a deal breaker. Disputes over environmental rules, however, could derail the entire reform effort. The Rahall and Craig bills differed entirely on this point, and positions are strongly held. If reform is to occur, the eventual bill may be limited to outlining general principles for environmental protection, leaving the details to be worked out later.