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This memorandum reviews the methodology and assumptions of a study, sponsored by the American Mining Congress, to analyze the effects of two bills, H.R. 918 and S. 433, that would reform the Mining Law of 1872. It was written by Rajagopalan Kannan, Richard Farmer, and Theresa Gullo. This work was done in CBO's Natural Resources and Commerce Division, under the direction of Jan Acton and Roger Hitchner.

Questions about the memorandum may be addressed to Raj Kannan or Richard Farmer or Theresa Gullo.
 

Congress is considering two bills that would reform the Mining Law of 1872. Under the current law, miners who locate certain "hardrock" minerals on federal lands can establish claims that give them the exclusive right to extract the mineral resources discovered. In these cases, the title to the land remains with the government; the claimant has the right to the mineral resources only. To maintain this right, the claimant must fulfill the so-called diligence requirements by performing at least $100 of development work annually.

Claimants can obtain title to the land through a process called patenting after meeting certain conditions and paying a relatively modest fee per acre of land acquired. No royalties or rentals are collected by the federal government for minerals taken from either patented or unpatented lands.

The House bill, H.R. 918, would impose more stringent diligence requirements than does the current law. It would replace the current $100 assessment work requirement with these diligence requirements. After the claim is five years old (or five years after passage for preexisting claims), the requirements could be replaced by a fee--paid to the federal government--that would rise with the age of the claim. Most claims that are being actively mined, referred to as project claims, would probably meet the new diligence requirements without additional expenditure. Nonproject claims--those that have not yet been developed for mining--would be subject to these higher requirements. Those claimants might pay the federal fees in lieu of meeting the diligence requirements, or might forfeit the claim.

The Senate bill, S. 433, would replace the assessment work requirement with holding fees paid to the federal government. These fees would rise over time and, like the House bill, would make holding undeveloped claims more costly compared with current law. Unlike the House bill, however, S.433 would also impose a royalty of 5 percent of the gross income from minerals production. For producing mines, the royalties would reduce the holding fees due on the claim. Both the House and Senate bills impose fees to recover part of the cost of administration of the new law.

Both bills propose many other changes that would affect firms that search for and develop hardrock minerals. New costs to the mining industry would stem mostly from the new fees and royalties and the changes in diligence requirements that the bills would impose.

The American Mining Congress (AMC) recently commissioned a study of the effects of the two bills on the mining industry, particularly in the Western parts of the country.¹ Among the study's conclusions are the following: either bill would seriously harm the hardrock mining industry, causing an economic slowdown in the states affected; the new fees H.R. 918 imposes could lead to a loss of about 11,600 jobs in the mining and related industries and could cost the states concerned about $1.5 billion per year in economic output; H.R. 918 would increase the federal deficit by about $127 million per year; and the new fees the bill imposes would be more than offset by administrative costs and the direct or indirect losses in federal tax revenue it would cause.

S.433, the AMC study estimates, would produce larger employment losses--about 30,000 workers and an aggregate drop in economic output of about $3.8 billion. The study concludes that the Senate bill would produce a net loss to the federal government of $232 million annually.

After reviewing the AMC study, the Congressional Budget Office (CBO) has reached the following conclusions:

• The sampling method used to gather the data underlying the analysis is poor, leading to a low degree of confidence in the conclusions reached.
  
  
• The analytic methods the authors use lead them to overstate the effects of the changes in the mining laws on mining firms and on the economies in which they operate.
  
  
• Other assumptions in the study also tend to overstate the effects of the fees and royalties upon the economies of Western states.
  
  
• The finding that the bills would cause an increase in the federal deficit in the long run is based on extreme assumptions about the incremental costs of diligence requirements and the administrative costs involved. In the short run, the study overstates the fees that will go to the federal government.

The remainder of the memorandum expands on those criticisms. The analysis is qualitative; that is, CBO does not present its own estimates of the economic effects of the two bills.

This document is available in its entirety in PDF.

1. Economic Impact of Mining Law Reform, by Stephen D. Alfers of Davis, Graham and Stubbs, and Richard P. Graff of Coopers and Lybrand; Second Printing (January 28, 1992).