July 5, 2012 at 1:00 am

Michigan digs for tax gold in mining boom

Jamie Poyer and Jamie Meier operate a drilling machine about 180 feet below ground at the Kennecott Eagle Mine near Marquette. Gov. Rick Snyder’s administration has proposed a way to simplify mining taxes in the state. (Andy Manis)

When the money is right, Michigan is a hot spot for metals mining.

In recent years, market prices for nickel, copper, silver and other metals have been strong enough to entice mining and processing companies for another go at the state's underground treasures.

Those operations are expected to bring in millions of dollars in tax revenues and investments, as well as add thousands of jobs in an area of the state that is in sore need of them.

In preparation for what many see as a new era in Michigan, Gov. Rick Snyder's administration has proposed an overhaul of the state's tax system for these new mining operations. It's a plan the administration designed to streamline the tax code and make the state more appealing to outside mining interests. The overhaul would not include the state's long-operating iron mines.

But the governor's plan, even in its formative stage, touches on the discord between Michigan's Upper Peninsula and Lower Peninsula. Many northern elected officials have felt ignored by Lansing over the years, citing unfair treatment on revenue sharing, unfunded mandates and unequal representation.

For them, guarantees from Lansing that tax code changes won't reduce their revenues are tough to take at face value.

"They're saying: 'Just trust us, and we'll get it done,'" said Menominee County's James Furlong, chairman of the county Board of Commissioners. "But that's kind of falling on deaf ears right now."

Michigan already has one new operation, the Kennecott Eagle Mine in Marquette County, which is expected to begin extracting nickel and copper in 2014.

And it will soon have company. This spring, the state's Department of Environmental Quality granted final approval to Toronto-based Orvana Minerals for a copper and silver mine near Ironwood in Gogebic County that could be in production by 2014.

A third mine — a proposed zinc and gold venture — is being eyed by Toronto-based Aquila Resources in Menominee County. Other companies, such as Vancouver-based Highland Resources, also are exploring options in the northernmost regions of the Upper Peninsula.

Kennecott alone has provided jobs for 500 people during the construction of the Eagle mine and mill operation, and will employ 230 full-time workers once the mine is up and running. That will total more than $135 million in wages and benefits during the expected seven-year life of the mine.

The Eagle mine also will generate almost $90 million of infrastructure investment for roads and power lines in the area, while state and local taxes from the operation could reach $200 million.

From four taxes to one

Under current law, mining operations pay four separate levies under the Michigan taxing system: real property, personal property, corporate income, and sales and use. The Snyder administration would shift the approach for nonferrous mines to a severance tax based on the value of the materials being extracted.

Under this proposal, the tax rate paid by mining companies would rise from 2.5 percent to 3 percent. State officials say it would be simpler to calculate, and would spare mining operations from being taxed before extracting metals.

"Currently, we have to estimate the quality and quantity of the ore on site," said Keith Creagh, director of Michigan's Department of Agriculture and Rural Development, who will be taking over as head of the DEQ next week. "Then you have to predict how many days a year the company will be in the business as well as the price of the precious metal over the next seven to 10 years.

"It's a lot of speculation and estimating. And then with the property tax, companies are required to pay upfront costs, even before they begin mining."

In Marquette County, some commissioners were incensed enough by the proposed change to fire off a letter in May to the Michigan Association of Counties looking to reignite the battle over revenue sharing — in the courts, if necessary.

"With the state continuing to overlook its requirements to fund mandated services and ongoing reductions in funding in revenue sharing, Marquette County's ability to continue to provide vital services could be compromised," the letter reads. "Marquette County is requesting that the Michigan Association of Counties take legal action to ensure that counties receive their full funding."

Officials with the association declined to comment. Earlier this week, Marquette's county administrator said he had not received a response.

Assuring U.P. leaders

Creagh said he is aware of the mistrust in the Upper Peninsula toward a tax change coming out of Lansing. In May, he toured the region pitching the tax proposal to local communities. In those meetings, he was quick to point out several aspects of Snyder's proposal that he hopes will alleviate concerns, including:

Taxes would be collected locally and distributed much as they are now.

The amounts collected should allow municipalities to remain whole — receiving as much or more in tax revenues than before.

The tax, which would only affect extracted ores, would allow companies to scale back their operations during economic downturns instead of having to shut down completely.

The state's portion of the taxes, which normally go into the general fund for disbursement throughout the state, stand a much better chance of coming back to the municipalities that host the mines.

That's because Snyder has proposed creating a five-member panel to disburse Michigan's share of tax revenues generated by the mines. The panel's main target would be infrastructure improvement in Michigan's rural areas — from roads and transportation projects to establishing broadband Internet service.

That panel would be chaired by Creagh and include two representatives from the Upper Peninsula — most likely from communities that host mining operations.

"I understand that because of the history of payments coming back to these communities on taxes and revenue sharing … that there is some skepticism," Creagh said. "But what we're doing now isn't working."

Despite the board's proposed makeup, Marquette County Commissioner Gerald Corkin said he still sees the people in his area getting short shrift.

"What they're proposing is not beneficial to Marquette County," he said. "It's more of the state wanting to come in and grab 55 percent of the tax revenues and spend it how they see fit with their proposed (panel)."

State Rep. Matt Huuki, R-Atlantic Mine, has been a leading proponent of the severance tax proposal and hopes to get the process in motion before the fall election.

It's a move he feels that, if done right, will benefit the entire Upper Peninsula through a trickle down effect sparked by more companies investing there.

"Under our current tax system, it's very difficult for investors to feel secure about putting money into a mine project in the Upper Peninsula," Huuki said. "If you look at where mining is happening around the world … it's in areas that have the severance tax system."

jlynch@detnews.com

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Redpath company miner Colton Mellows surveys a space at the Kennecott ... (Andy Manis)