The answer lies in a combination of basic features of the MRRT design, and the recent fluctuation in prices of iron ore and coal.
Until the imposition of the MRRT, the miners paid the usual taxes, including company tax in massive amounts. The MRRT is a tax on “super profits”, as was the Resource Super Profits Tax (RSPT). The MRRT taxes iron ore and coal miners on any excess of their profits over the long-term bond rate, plus 7% of allowable capital. The first design feature is that established miners will only pay significant MRRT when ore and coal prices are high in relation to market expectations. This is because established companies can use the market value of the company as the asset base on which excess profits are calculated, and established companies have high market values, reflecting market expectations of profits. No great surprise: the MRRT was negotiated between the government and the major, established companies.
The second design feature is that royalties are creditable against MRRT liabilities. Ken Henry and his review proposed the abolition of royalties and their replacement by a new Commonwealth tax — the advice fell on eager ears.
A Labor government running large deficits had an urgent need for more revenue and wanted to grab some from the states as well as from the miners.
Therefore, the Labor government did not offer a deal to the states, whereby the states abolished royalties in return for a guaranteed share of the new tax.
Instead, Ms Gillard and Mr Swan threatened not to “credit” royalties as an offset against a MRRT liability: the Commonwealth wanted to invade the fiscal fields of the States and, preferably, drive the States to abolish royalties or, at least, to keep them low.
Faced with resistance, however, the Commonwealth blinked.
Ironically, the advent of the MRRT encourages the states to increase royalties on companies with a sufficient MRRT liability — and raise them, they have. From the miners' point of view, it does not matter to whom a payment is made. But it does matter to the governments concerned.
Royalties are not taxes, but contractual prices negotiated with the miners by the states, as owners of the resources. However, royalties do have some tax-like effects. The Henry tax review wanted royalties abolished on grounds of economic efficiency, because the review was convinced — wrongly, in my judgement — that royalties are amazingly damaging to the economy.
Jonathan Pincus received funding in 2012 from the Ian Wilson Foundation at the University of Adelaide, for research on state taxation.