IC 8874 The Depletion Allowance And Domestic Minerals Availability - A Case Study In Copper

The Bureau of Mines evaluated the impact of the depletion allowance upon the economic availability of copper from domestic deposits. The potential long-run percentage depletion deduction, cumulated over the life of the properties, was estimated at approximately $2.5 billion for producing properties and up to $11.7 billion for nonproducers. The income transfer, in the form of higher Federal income tax payments if the allowance were repealed, was estimated at $1.5 billion for producing properties and up to $8 billion for nonproducers. The percentage depletion allowance, through its role in determining Federal income tax liability, was found to be very significant in affecting profitability. Repeal of the allowance could result in major domestic copper availability reductions at all price levels, now and in the future, as a result of reduced profit margins for current producers, and postponement of development decisions for nonproducers. It was demonstrated that a 50-percent reduction in the percentage depletion rate applicable to copper would also result in a significant decrease in profitability for nonproducing properties. For producing properties, the percentage depletion rate on copper was shown to be less significant than the income limitation that is placed upon the total amount of the depletion deduction. Repeal of the minimum Federal tax provision was shown to be significant in enhancing profitability for both producing and nonproducing deposits. The report concludes that the percentage depletion allowance operates as an important method of capital recovery and production incentive.