Reforming the 1872 Mining Law

Subcommittee on Energy and Mineral Resources
Committee on Resources
United States House of Representatives

I am pleased for the opportunity to address this subcommittee. I am professor emeritus of Mineral Economics at the Pennsylvania State University and an adjunct scholar with the Cato Institute. I am speaking subject to the usual proviso that these are personal views, not those of any organization.

Since early in my career at Penn State when I was briefly involved with the Public Land Law Review Commission, I have often worked on public land issues, primarily but not exclusively in work for the Department of Interior. This included serving as one of the five members of the Commission on Fair Market Value for Federal Coal Leases and on a National Research Council Committee on known geological structures for oil and natural gas.

An Overview of Charging for Public Land

Since the early years of the Republic, a critical aspect of the public lands debate is a largely pernicious preoccupation with payments to the Treasury. The federal government, for example, vigorously promoted the imposition of fees for grants of farmland but eventually abandoned the effort in the face of massive opposition. Even when fees are levied, complaints that actual payments are unsatisfactory are never far from the political surface. Those complaints are particularly strong in connection with the 1872 Mining Law because the extraction of valuable minerals on federal land takes place with minimal payments to the Treasury.

The debate is really about the distribution of wealth. Critics of the 1872 Mining Law contend that the profits generated by mining federal lands are huge and that they belong to the taxpayers, not the private mining industry. The evidence is largely anecdotes about how little is paid to the federal government for land that yields tremendous mineral revenue.

Even the most casual analysis, however, finds that the quest to transfer natural resource rents from mining companies to taxpayers is not worth the populist attention given the issue by the media. The mining profits generated from that land to the extent that they exist are absolutely trivial.

Beyond Charges: Speculation, Fraud, and Abuse?

Although the sale of federal mining land for $2.50 per acre is the main criticism of the 1872 Mining Law, other matters have angered would-be reformers. Critics decry private speculation that often occurs when claims are made. They worry that, to the detriment of consumers, resources are being “hoarded” and not exploited quickly enough because only $100 a year must be spent on a site for a claim to remain valid. A related criticism is that land is being claimed under the 1872 Mining Law and diverted to other uses, primarily real estate development. While both observations are accurate, nothing necessarily is wrong with current practices, and little economic reason exists to control how mineral lands are used.

Moreover, some critics have maintained that federal ownership of mineral reserves is necessary to ameliorate the negative economic and social ramifications of resource depletion. Shortages are coming, they maintain, and governments would be less likely to recklessly draw down dwindling reserves and would distribute those resources more fairly than would private markets. The 1872 Mining Law, in their view, makes more difficult government’s responsibility to manage scarce mineral resources. Not only is that argument incompatible with the criticism that resources are being hoarded; the charge that governments are better able to deal with resource shortages than are market actors is intellectually threadbare.

Speculating about Speculation

Many restrictions are imposed on the timing of mining activities on federal land. Diligence requirements limit how long a lease can be held without any development and how long it can be held after production is shut down. Moreover, regular expenditures are required. Critics, however, often complain that those restrictions are not rigorous enough to constrain speculation and counterproductive hoarding. Others think that restrictions are a good idea but that existing restrictions are more than adequate.

The issue of control of the timing of operation proves a chimera. This is another area in which markets are best. A straightforward implication of efficient markets is that you can never transfer too soon, but you can transfer too late. If mineral or any other land rights are transferred before the optimal time to extract, the recipient will wait until the right moment. The only possible danger is that legal barriers will delay a transfer until after the optimum starting date. My full analysis of this point demonstrates that no plausible inefficiency restores the argument for government control.

This criticism, moreover, applies to postgrant as well as pregrant policy. For the same reasons that grants should be unrestricted, it makes no sense for the federal government to impose any requirements on when and how leased properties are used.

Lawbreaking Reconsidered

Other incendiary critiques of the Mining Law of 1872 are centrally concerned with fraud. The most common example is the patenting of land for a mining purpose followed by a quick sale (usually accompanied by large capital gains) and transformation into a ski resort or real estate development. Those who complain about lawbreaking, however, should realize that the purpose of resource law is to encourage the efficient use of resources. Assertions about land frauds implicitly assume, contrary to the vast evidence in the literature on public land management, that the statute satisfactorily promotes the efficient use of land resources and, therefore, should be enforced.

Fraudulent uses of patented land are simply the result of unwise restrictions on uses of land that are more profitable than mining. Why should the government “decide” that land should be used for mining rather than for hotels or ski resorts? Seeking to prevent subterfuge without determining its cause is never good policy. Every example presented of the “misuse” of the mining laws (most are real estate examples) involves diversion of the land to uses that would be considered desirable if undertaken in other contexts. Restrictions on the disposal of public land should be dismantled. Until they are, laws allowing some disposal are preferable to further restrictions on access.

Do Shortages Justify Government Ownership of Resources?

A frequent objection to the transfer of mineral lands to the private sector is that mineral reserves are scarce, dwindling, and imminently depletable. Private owners, critics sometimes argue, will inadequately provide for future generations that might demand those resources. This is based on the incredible notion that entities as transitory and fickle as politicians in office are more foresighted than private investors. The global financial community is more imaginative and flexible than any government. Nothing about natural resources justifies a different conclusion about who is more farsighted.

Prescriptions for Reform: A Second Opinion

The change proposals introduced in Congress involve significant changes in how mining companies would gain access to minerals on public lands and how much they would pay for that access. Any discussion of charges associated with the transfer and use of publicly owned assets must recognize that landowners have different ways of charging. Three basic legal systems are available:

  • charges associated with grant of ownership,

  • charges associated with ceding a lease, and

  • conventional taxation.

In principle, all possible methods of charging could be employed under any of the legal systems. Charges associated with the grant of ownership or lease are the only efficient method of transferring wealth from buyers to sellers. All three legal systems could be limited to such charges at the time of transfer (and all could impose undesirable obligations for post-transfer charges). However, ownership grants are less likely to impose future levies.

Curiously, none of the proposed reforms of the Mining Law of 1872 advocates the use of one-time charges at the time of transfer of lease or ownership. But one-time charges collected at the time of transfer from public to private ownership are the most efficient method of collecting any natural resource rents for the taxpayers.

Do Not Worry about Past Giveaways

The most important advice to those who would reform the mining law is not to enact any reforms that affect current claim holders or those who have already privatized their claims under the 1872 law. A maxim in public finance is that an old tax or law is a good tax or law. Once markets recognize the existence of the burden created by a new tax or law, the market prices of land, labor, and capital change to reflect the change. Once that occurs, wealth effects do not occur again as long as the tax or law remain stable. New taxes or laws may and usually do create ongoing efficiency effects, but changes in wealth occur only once.

That central insight of public finance is important because it provides lessons about any policy reform. Just as the initial enactment of policies or taxes causes changes in the distribution of wealth, so do reforms of existing taxes or policies. Those wealth effects are usually the basis for organized support of and opposition to the policy changes. As a result, the efficiency gains from policy reform, for which no one is organized, get lost in the political controversy.

Since the 1872 Mining Law is so old, it is extremely unlikely that any subsidies continue. In the ongoing secondary market in which people trade claims made under the law, all the advantages and disadvantages of those property rights are embedded in the prices that people pay for them, in the same way land prices contain all the advantages and disadvantages created by arbitrary property taxes.

The mischief created by the 1872 Mining Law involves efficiency, not equity. The existence of a below-market price for mining claims (if in fact the current price is below the market price) sets up nonmarket processes by which the benefits are dissipated much as are those associated with finding an apartment in New York City. The resources used in such nonmarket activities are pure waste from society’s view.

Unlike the distortions created by the property tax on new investment, however, the “free access” claim system under the 1872 Mining Law has no additional efficiency effects on decisions about the timing or level of extraction from a claim. Moreover, the era of massive claiming is long past. The main wastes have already occurred.

Any changes to the 1872 law should affect only future and not current mining claims. Because the law is so old, all actors in mining markets have operated for some time with expectations based on the property rights regime created by the 1872 law. To rearrange those expectations now for the 300,000 current mining claim owners would cause arbitrary wealth transfers that would activate political opposition and doom any possibility of reform and the efficiency gains that might go with it.

Public Ownership with Leasing

One possible reform would alter the policy governing metal mining on public lands to be like the policy that governs offshore oil and gas drilling: public ownership with a leasing system. In theory, public ownership with an auction leasing system is economically similar to transfer of ownership to the private sector at auction. If the market value of the land remains constant, a series of periodic leases will have the same (risk-adjusted) present value as a one-time sale bid. In reality, however, public ownership is a menace to the purported goal of ensuring that lessees contribute to the Treasury.

First, Congress often undertakes public works to assist those using the public lands. Second, government usually cannot resist the imposition of post-transfer charges. Such charges reduce the value of the output from the land and, thus, reduce contributions to the Treasury.

Third, governments tend to deny leaseholders the flexibility inherent in private property. Land leased under one law can be used only for the use specified in that law rather than the use that would be most profitable. Currently, the federal government offers grazing, mineral extraction, and similar single-use rights on the land it owns. Opponents of leasing auctions are often successful in requiring the search for nonexistent data. Federal valuation guidelines are manipulated to require unattainable certainty. For example, the coal-leasing fiasco of the early 1980s graphically illustrated the difficulties with such a leasing arrangement. The problems of evaluating whether payments were adequate and all other difficulties arose because of the intrinsic defects of the leasing process imposed by legislation. Too much fuss was then made about the awkward way in which DOI tried to maneuver with the rules.

The political complications involved in public leasing arrangements are reflected in federal guidelines for valuing property acquired or sold. There are three possible accounting methods:

  • comparable worth (obtaining market price data on similar properties),

  • present value (generating estimates of the profitability of using the property), and

  • reproduction cost (inapplicable, of course, to a natural resource).

The guidelines correctly contend that comparable worth is the preferable method since it relies on market data that epitomize informed judgment of values (i.e., the classic case for reliance on market prices is tacitly adopted). Present value is considered inferior because it relies on governmental second-guessing of market valuation.

Neither method, however, can work well for public land unless sales are frequent. Not enough private land is traded to establish comparable worth. Lost in the coal-leasing fiasco, for example, was the fact that the Bureau of Land Management had established comparable worth by establishing rules for adjusting the only sale value report it could obtain. Critics of the BLM generated extensive (and inconsistent) criticisms of the adjustment rules but ignored the more critical point that a single market transaction is no basis for estimation.

Thus, not only is the case against accepting market values invalid, but the evidence shows that the government cannot produce satisfactory counterestimates. The sensible conclusion is that independent government estimates of value are an exercise in futility that should be abandoned.

Moreover, if the policy of free exploration access under the mining law is ended, government-funded exploration is a possible but unlikely unattractive alternative. In a similar situation, an exploration for coal did not emerge.

Severe problems also arise in devising appropriate incentives for private exploration. That is illustrated by changes made in federal on-shore oil and gas leasing. The right to secure uncontested leases depended on the absence of evidence that oil or gas reserves were “known” to exist beneath the tract of land in question. Unfortunately, the BLM proved incapable of making that determination.

The Case against Royalties

If land rents exist, the most efficient way to identify and transfer them is to auction the land and transfer ownership in return for a one-time payment. Private land transactions are conducted in that manner every day. For reasons that are inexplicable, legislators and bureaucrats believe that the federal government will be short-changed if land auctions are used to transfer mining lands to the private sector. Instead, they prefer to require payments to the government set as a fixed percentage of sales.

Royalties are economically counterproductive because they vary with the production and sales decisions of the firm. Funds that consumers were willing to give producers are diverted to whoever imposes the tax. That revenue transfer discourages production and consumption and violates the central economic principle that every expansion of output should occur as long as the expansion costs less than its value to consumers.

Royalties are an indirect attempt by the federal government to use a populist distrust of accepting bids for privatization to capture profits. Ironically, the regular tax system probably is at least as effective in capturing profits as are use charges by federal land agencies. A special tax system could be and often is devised specifically to collect profits. The belief that special monitoring agencies are better collection agencies than are regular tax collection organizations is as dubious as often-made proposals that land managers act to complement the actions of specialized environmental agencies in controlling environmental impacts of federal land use.

A further disadvantage of royalties of all types is increased administrative cost. First, any attempt by public officials to evaluate the value of land (for bonus bid evaluation) becomes more difficult. One must calculate a residual (rents minus royalties) of a residual (incomes minus cost). Moreover, requiring more payment means more compliance efforts by government and land users. Output levels must be monitored. In many cases, the appropriate price is hard to measure.

The economic theories that support competitive bidding imply that monitoring is unnecessary because competition ensures maximum possible payments. However, policymakers suspect that the conditions needed to produce competition do not prevail. The imposition of output-related charges is then justified by claiming that the defects of tying the payments to the activity are outweighed by the income gains. Such blind faith ignores all the drawbacks we have noted. Ownership (even with charges) probably produces losses to the federal government and thus its taxpayers.

Sharing the Wealth: What to Do with Mining Revenues

The populist criticism of “giveaways” created by the Mining Law of 1872 ignores an issue critical to Congress, how recaptured mining income should be distributed among the people. The rhetoric seems to imply that every citizen will share in the revenue generated by royalties and fair-market sales. However, mining fees are presently distributed primarily to residents of sparsely populated western states because Congress allocates half of gross mining receipts to the state in which the activity occurs. It is not clear whether those public beneficiaries of present mining payments are a larger or more needy group than the mining company stockholders who are surrendering the wealth. Moreover, the habit of surrendering half the gross receipts to the states means losses to the rest of the United States whenever the administrative costs exceed half the gross receipts.

The Road Less Traveled: Robust Privatization

Governments in the United States do not own supermarkets, gas stations, or car manufacturers, and most citizens would object if governments did own such assets. Governments do own land, however, and not only do most people not object, many favor it. They do so because they believe that the federal government owns particularly precious land that cannot be trusted to private ownership. That belief implies that land markets and the extractive activities that take place on land, like mining, do not operate well unless they are publicly owned and subject to scrutiny very different from that received by supermarkets.

Land markets may not be perfect, but neither are most other markets, and we would never accept public ownership as a solution to whatever market failures existed in the manufacture of automobiles. We also should not accept public ownership in land markets. However, as part of the general tendency of the supposed center of the market economy to avoid privatization, land policy stresses continued ownership.

The Mining Law of 1872 reflects the disposal orientation of the late 19th century, the belief that the government should not own land. We agree with such an orientation and find the 1872 Mining Law one of the better federal resource statutes on the books. It is not, however, ideal.

Its first flaw is that it presumes that, if minerals are found on otherwise nonrestricted federal land, mining is preferable to alternative development options. That single-use concept reflected in the 1872 law, under which federal land can be privatized for mining but not for ranching, is unwise. It undermines the ability of those who value vacant land to compete against other possible users in the market. While alternative uses of land privatized under the mining law are not unheard of (indeed, they are the source of much concern as we noted earlier), those who wish to use “mining” land for other purposes are confronted with unnecessarily burdensome transactions costs that impede their efforts.

The second flaw in the 1872 law is the fixed fee charged those who wish to lay claim to mining land. As noted earlier, the $2.50 per acre charge is probably only marginally below the market price (at least, below the market price if the only bidders are mining interests), but still, market prices are preferable to political prices. However, that flaw is relatively minor. First, it is not altogether obvious that maximizing federal revenues should be the paramount concern of sensible public policy. Second, the efficiency gains stemming from privatization more than offset any theoretical revenue shortfall caused by suboptimal sale prices. The ideal means of privatizing public assets is probably the process that generates the fewest transactions costs.

Our response to current policies is to call for adoption of competitive bidding for federal land rights with payments only at the time of transfer. Any party with an interest in ownership would be welcome to purchase land at auction and then use it in any way the new owner desired. Any failure of that process to recover the full value of the land is better corrected by the general U.S. tax system than by a complicated lease and royalty scheme (which, as we noted above, clearly promotes market inefficiency, political gamesmanship, and political unmanageability).

Ideally, future mining claims should be allocated by auction, but that is secondary to ensuring that existing claims remain unaltered and new claims are free from royalties and unrealistic purchase prices. The new auction system would eliminate the need for potential claimants to engage in wasteful activities that give them an “edge” in the game to get “free” mining claims, but no existing claims would be altered to avoid creating wealth rearrangements that would doom the reform.

In the case of the transfer of public land to private ownership, the auction prices that undeveloped public land would command in a competitive bidding process for the right of private ownership would be an efficient tax like a head tax or pure land tax. The maximum, anyone would bid in such an auction is the (present discounted) value of the expected rents. Vigorous competition among bidders would force payments to be the maximum.

The theoretic case for market-oriented reforms of the 1872 Mining Act, however, must be conditioned by concern that if a change is made, it might well make the system worse. For instance, it is unclear whether a competitive bidding system would be free of the unrealism that marred federal coal leasing. Thus, we cannot be certain that a shift to competitive bidding BLM style would be a net improvement. We might offset the gains from lesser rent seeking by slowing down land sales.

For that reason, it is probably best to leave the 1872 Mining Law alone and press for public land privatization outside the context of this debate. If a consensus is ever reached that the federal government should divest itself of its vast western land holdings, there will be more than enough time to then repeal the 1872 Mining Law as an inferior and obsolete tool of land disposal. Any reform aimed specifically at the law, no matter how well intentioned or theoretically sound, would probably be corrupted in its execution and prove to be a cure worse than the disease.