The resources tax: back to the future?

Offshore gas producers have faced a similar resources tax. AAP

Even as debate rages on how the Federal Government will legislate the Minerals Resource Rent Tax, it seems that as so often happens in politics, what is old is new again.

Almost 23 years ago, off-shore oil and gas producers were presented with a similar indignity that a vocal and powerful group of resources producers are facing at present; the threat of increased taxation based on their profits, not on the quantity of resource extracted.

The Petroleum Resource Rent Tax was introduced to parliament in 1987 and it applied to off-shore production, excluding the North West Shelf and East Timor.

Both the resources industry and the opposition criticised the new tax. The affected producers, including BHP, offered predictions of dour consequences for the country.

Of greater interest perhaps is the reaction of John Howard, Shadow Treasurer at the time, who argued the tax would destroy incentives for offshore exploration.

The specific exclusion of the North West Shelf and East Timor does seem to suggest that some consensus was reached in the final tax package but, nevertheless, this tax provided a useful source of the finance from inception.

It is always interesting to watch how differently the opposition and the government regard taxes, regardless of the party in government and particularly when the tax generates some political heat.

While Howard criticised the Petroleum Resource Rent Tax when it was introduced, he chose to maintain the tax, albeit with some cosmetic changes once in government, even after trenchant public criticism of the impact of the tax on the cost of petrol.

Perhaps the annual average of around $1B in tax revenue through the 1990s, increasing to $1.9B in 2007-2008 and $1.6B in 2008-2009 had something to do with the Liberal Party’s change of mind. It would be an unusual government that rushes to dismantle such a money spinner.

The power of government to introduce new taxes is essentially limited to what people are prepared to pay. Yet this does not stop governments from levying unpopular taxes. The introduction of the GST by the Liberal government is a classic example of a government introducing a tax regardless of complaints and concerns raised in the past.

Regardless, it is strange that Labor, which is less beholden to big business funding for their election campaigns than most, should react so meekly to the criticism voiced by the miners on introduction of its Minerals Resources Rent Tax.

These mining corporations are some of most profitable organisations listed on the Australian Securities Exchange and it might be argued that if any group could contribute more to the government coffers it would be this group.

The miners clearly see this as a tax on efficiency. They are undoubtedly some of the best run resource companies in the world and their success has been hard earned.

Yet, there is an element of luck in the miners’ recent success in terms of the timing of the economic boom in China and India. The economic and political stability that Australia provides to its miners is also an important consideration in assessing the success of these companies.

The political activism of miners is rather unexpected, particularly given reports that Kevin Rudd was replaced by Julia Gillard as a result of the introduction of this tax, among other things. While this may or may not be true, it is a long time since mining company management have run such an organised and open attack on an elected government.

The changes in the scope and nature of the tax that have arisen from negotiations with the miners have led to a considerable reduction in expected tax collections and this has implications for planned tax concessions and Government infrastructure spending.

Was the tax poorly thought out and rushed through without careful consultation with all affected parties? Undoubtedly so! It would seem that few in the Labor party were aware of the possibility of this new tax, though it was recommended in the report from the Henry Review.

The latest version of the tax applies only to coal and iron ore and thus excludes commodities like uranium, gold, nickel and copper. This asymmetry in application of the tax could well bias the allocation of mining expenditure in the future towards the excluded commodities and away from coal and iron ore.

The asymmetric impact of the tax does not appear to align with specific government policy though it may have a long-term impact on the way that miners view the development of new coal and iron ore resources.

The question could be raised as to whether the Gillard government’s tenuous hold on power might help to explain the quick revision of the tax that occurred once it was clear that the miners were not about to meekly surrender their profits to the government without a fight. What are the implications for the future? It probably does not matter to the government at present.

The Australian economy is relatively buoyant, mainly due to the profits created by the mining companies, but the impact on future government funding could matter if infrastructure funding is wound back resulting in an economy that is less well able to deal with more turbulent times when our resources are no longer in such great demand. There are other ways of raising tax revenue but would these be as efficient as the Minerals Resources Rent Tax?

The Henry Review proposed the tax on the basis of efficiency with a view to removing royalties and taxing profits generated from individual projects rather than taxing on the basis of extraction, which is essentially how royalties work.

Perhaps this smacks of naivety on the part of Henry and the Labor government as the presumption that state governments would drop royalties is a little far-fetched.

In the end, we live in a political world though it is important to note the impact that the miners have had on the Labor government. There is no doubt that the mining corporations are driving growth in Australia today.

Further, it is important to note that mining company management are responsible to their shareholders and their response to the Resources Super Profit Tax was entirely consistent with protecting shareholder returns.

The final version of the tax is considerably more restricted both in terms of the range of miners affected and the nature of the tax imposed. The tax will provide a new source of revenue but it will also generate costs, one of which is the asymmetry in the taxation of coal and oil extraction industries relative to the other mining industries.

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