In political circles, they sometimes describe it as "policy on the run". It occurs when an executive cobbles together a quick and dirty policy compromise in the heat of the moment.
Perhaps the original policy was a good one, but beyond the political ability of a government to sell. Perhaps the new fix is in response to an unfolding disaster, fanned by the flames of media attention. Or perhaps an aggrieved industry has taken up arms against a government, determined to safeguard its vested interests.
Whatever the reasons, a quick fix is needed. The controversial aspects of the policy need to be watered down; the bitter pill sugared; the raised hackles of the powerful and the vocal gently assuaged.
At this stage of the process, governments don’t worry too much about the long term consequences of the deal they’ve stitched up. So what if the original intent of the policy has largely been abandoned? Politics is a short term game. Crisis management takes over: a deal is brokered, with all the major players coerced to turn up to a media conference. The government declares victory and moves on.
Welcome to the Minerals Resource Rent Tax, July 2010 edition. Also known colloquially as the "mining tax", the MRRT is the Labor’s government’s second attempt to tax the outsize profits of the mining industry. It was hastily drafted in the weeks after Kevin Rudd was deposed by Labor caucus in the run up to the 2010 election.
The MRRT replaced the original mining proposal, the Resource Super Profits Tax. The RSPT was a much wider and deeper tax than its replacement. It would have taxed mining companies at a higher rate, and across more minerals commodities. But the RSPT ran head on into a massive industry backlash. Support for the tax disintegrated in the heady days of May and June 2010, as the mining industry spent an estimated $22 million on a campaign attacking it.
When she came to the Prime Ministership, Julia Gillard made doing a deal with the big mining companies the first item of business. The result was a tax that was shallower, narrower and smaller than the one originally mooted.
Just how much smaller is now becoming apparent. The Treasury had estimated that the MRRT, which came into effect on 1 July last year, would raise several billion dollars in revenue. As it turns out, it has raised only $126 million, barely more than pocket change in a $375 billion federal budget.
The terrible performance of the MRRT is causing big political headaches for the government. Ironically, the compromise worked out in 2010 in order to make the mining tax campaign go away has now returned to haunt the government as it seeks re-election. It’s also blown a big hole in the federal budget, helping to wreck Labor’s (now abandoned) promise to return the budget to surplus.
Why is the mining tax not collecting any revenue? The reason appears to be pretty straightforward: the Government stuffed up the design of the tax. That’s what happens when you make policy on the run.
Let’s pick over the gory details. Perhaps the biggest flaw in the mining tax was already known when the MRRT was negotiated. This is the carve-out for state mining royalties.
The original RSPT proposal would have seen the Commonwealth take over state mining royalties in their entirety, paying the states compensation in return for controlling mining tax revenues. The idea was to replace inefficient state royalties, which are a simple levy on the amount of ore pulled out of the ground, with a profits based tax that would have effectively made the federal government a kind of business partner with the big mining companies.
In bad times, mining companies would pay no tax and might even be able to extract payments from the Treasury to help them through troughs in commodity prices. In good times, Canberra would be able to collect 40 per cent of their profits on the extraction of non-renewable resources.
The MRRT abandoned this model (although independent MP Rob Oakeshott says he wasn’t told this). Instead of taking over state royalties — a constitutionally difficult move — the MRRT gives mining companies an offset on whatever state royalties they have already paid. This effectively left the federal government at the mercy of state governments. If Colin Barnett or Campbell Newman wanted to raise the state royalties for coal or iron ore, the feds would have had to give the mining companies a bigger offset on their MRRT. Despite being vocal critics of the federal mining tax, that’s exactly what Barnett and Newman did.
Another problem for the MRRT was that it allows mining companies to book big tax deductions in return for their investment expenditure. While this is normal practice in tax law, the sheer scale of the mining investment boom means it may be years before mining companies start to pay taxes — even if they are making profits now. Mining companies can also depreciate their assets like mining trucks and drilling rigs, which also enables them to offset their potential tax liability. The result of all these favourable tax rules is that BHP and Rio have actually booked tax "assets" in the billions of dollars for coming years — effectively, a future tax offset held by the ATO that they can use to write off future tax liabilities.
A final flaw is that the MRRT can also be offset against company tax. This means that mining companies that boost profitability by measures outside minerals production — such as cutting costs — can use those savings to offset their MRRT bill. In effect, the government is saying that mining companies can pay less tax by getting more efficient. That’s great for the businesses concerned. It’s terrible for the federal Treasury.
As Stephen Bartholomeusz noted in January, the effect of all these concessions and offsets means that the MRRT will likely not raise very much money in the near future. "The MRRT, of course, was designed as a ‘super profits’ tax," he points out. "Given the resource sector is shifting from price-driven profitability to volume and cost-driven profitability, the mining sector is unlikely to be generating super profits any time soon."
Julia Gillard and Wayne Swan worked hard and spent much political capital to implement the MRRT. Perhaps they are now regretting that they even bothered. Nervous backbenchers must be thinking that Labor should simply have abandoned the tax back in 2010.
In fact, the tax is still a good idea. It has just been implemented poorly. Successive governments will no doubt tweak the regulations to make sure more money flows in during the normal operations of mining companies.
How are the big mining companies faring, by the way? Pretty well, since you asked. BHP Billiton recorded full-year earnings of $US 27 billion in the 12 months to June 2012, on revenues of $US 72 billion. Even after paying $11 billion in taxes, the global mining giant still booked "attributable profits" of $15 billion. It’s nice work if you can get it. Rio Tinto booked half-year earnings of $5.9 billion. Xtrata — currently being taken over by shadowy commodities giant Glencore — recorded (pdf) half-year earnings of $4 billion.
Back in March last year, when the legislation passed Parliament, I praised the mining tax as "modest, technically proficient reform." It looks like I was wrong. The MRRT is modest, all right. But its flaws mean that it will raise far less money that it should.
Once again, big mining companies have used their deep pockets and armies of lobbyists to twist the political economy of their business environment in favour of their shareholders. Sovereign risk, I hear you saying? Perhaps the better term should be "sovereign reward".