The Obscure 141-Year-Old Law That Explains the Deficit.

The Obscure 141-Year-Old Law That Explains the Deficit.

Cutting the U.S. budget deficit has always been a question of politics, not math. The seemingly simple approach — spend less, raise more or some combination of the two — has long eluded Congress.

A mining law that dates to 1872 helps explains why it’s so difficult to disrupt the dysfunctional status quo. The General Mining Act, conceived during the Ulysses S. Grant administration to encourage development of the frontier, allowed prospectors to remove gold and other minerals from U.S. public lands without paying royalties. The law has long permitted highly profitable mining companies to extract minerals for free — resources that are the property of every American.

It’s just one of many outrageous giveaways — the subsidies, tax preferences and exclusions enjoyed largely by energy and natural-resource companies — which Congress has been loath to eliminate, despite longtime efforts by fiscal hawks and environmentalists.

Ending any one of these outdated incentives wouldn’t close the U.S. budget deficit, which the Congressional Budget Office this week estimates will total $845 billion in 2013. Combine them, though, and the savings would add up to tens of billions over a decade — money that could go a long way toward winnowing the deficit and preventing more drastic cuts to safety net programs.

Consider a 1977 law intended to finance the cleanup of abandoned U.S. coal mines. Coal producers are levied annual fees to help pay for the work, and this money, which amounted to $485 million in 2011, is distributed to 14 states, with states keeping 50 percent of the money collected within their borders. Yet four states that have finished their mine reclamation work continue to receive money. In 2011, for example, the Interior Department paid $140 million to Wyoming, and the state has claimed $10 million of it to finance a basketball arena at the University of Wyoming.

The Obama administration’s 2012 budget proposal recommended cutting off funds to states that have completed reclamation and setting up a competitive grant program to direct funds to the nation’s most hazardous sites. That would save the U.S. $1.2 billion over a decade, the Office of Management and Budget estimates. Rather than adopt this approach, however, lawmakers last year simply capped at $15 million the amount a state can get if it has completed reclamation. Funds will continue to flow to states that no longer need the money for mine cleanup.

Meanwhile, the 1872 mining law dictates that taxpayers continue to foot the entire bill for cleaning abandoned gold, silver and other mineral mines across the U.S., which has cost them more than $2.6 billion since 1998, according to the Government Accountability Office. The tab could swell to as much as $54 billion, according to the Environmental Protection Agency, yet a provision in the 1872 law keeps the mining industry from paying anything at all. The White House estimates a fee could increase annual revenue by $1.8 billion over the next decade.

The U.S. could also gain by charging royalties on the roughly $1 billion worth of hard rock minerals extracted each year from public lands, much as it does on oil, gas and coal. Royalties from those industries generated about $10 billion in 2011.

Powerful mining-industry allies in the Senate, including Majority Leader Harry Reid, have resisted attempts to change the 1872 mining law, however. Reid, the son of a gold miner, represents Nevada, home to several mining companies such as Newmont Mining Corp. (NEM), which has contributed almost $100,000 to the senator over his career. And Democrats broadly have been reluctant to change the law over fears of losing congressional seats in Western states. Even Obama opposed charging hard rock royalties while running for president in 2008, a position that his advisers say has “evolved.”

This is one reason that Democratic Senator Dianne Feinstein of California failed in a 2008 legislative attempt to charge royalties and a reclamation fee, as have efforts by others. Now, Senator Ron Wyden, an Oregon Democrat who has just become chairman of the Energy and Natural Resources Committee, has indicated he may bring it up again as part of a broader royalty- related bill.

One way to finally gain approval of such a change could be to allow states — such as Nevada — to share in any revenue generated by a fee, which Reid has indicated is a condition to changing the law. It’s an imperfect solution because the federal government would presumably still have to shoulder some of the tab, but it’s a far better outcome than continuing to forgo any royalties at all. At a time of severe fiscal straits, the U.S. should look to tease out revenue any way it can — and make sure that Americans get fair compensation for their precious natural resources.

Source: Bloomberg