Two northern Minnesota legislative leaders are behind an effort to create a multimillion-dollar windfall for the state’s mining companies by diverting tax money that goes to the state’s general fund.

The proposal, by Sen. David Tomassoni, DFL-Chisholm, and supported by Senate Taxes Chairman Rod Skoe, of Clearbrook, would send $6 million into an account controlled by the Iron Range Resources and Rehabilitation Board, a powerful state agency tasked with economic development of the Range. The IRRRB, with an annual budget of $33 million, has been around since the 1940s, but has come under increasing scrutiny and is the subject of a wide-ranging legislative audit examining its effectiveness.

The proposal was not introduced as a stand-alone bill and never received public discussion. Instead, Tomassoni slipped his provision into the Senate tax bill in the closing days of the regular legislative session. A lobbyist for the Iron Mining Association of Minnesota told the Star Tribune the association did not seek the legislation.

Disagreements between the DFL-led Senate and Republican House torpedoed the overall tax bill, although its provisions are expected to come up for fresh consideration when the Legislature reconvenes in March.

Sen. Paul Gazelka, R-Nisswa, said that when it does, he’ll be ready.

“I’m going to need more questions answered on this language,” said Gazelka, the lone Republican senator on the Senate/House tax conference committee.

Gazelka said he recalls no debate on the $6 million tax-relief provision, which he said raises accountability concerns. He’d also like to know the purpose of the provision. “I don’t think it’s clear why it would go back to the ­companies,” he said.

Tomassoni, a member of the IRRRB board, declined numerous interview requests. Skoe, a fellow Iron Ranger who also sits on the IRRRB, defended the proposed changes. He said it was a way to ensure mines were included in an overall effort to reduce taxes on ­Minnesota businesses.

“We were doing tax relief for all Minnesota businesses … and I thought it was appropriate to include the mines,” Skoe said in an interview. “We were trying to be fair to all Minnesota businesses.”

Skoe said his tax bill would reduce statewide business property taxes by $90 million. That relief would be divided among the businesses and utilities that pay the tax on more than 130,000 commercial, industrial and utility parcels across the state. Last year, the tax generated $802 million.

The Tomassoni provision is designed to provide some tax relief to mining companies, taking $6 million of the tax revenue they pay and putting it into the IRRRB, which then would disburse it as rebates among the region’s five ­mining companies, most of which are headquartered outside of ­Minnesota.

The legislative maneuvering that caught some members of the taxes committee by surprise raises questions about the insertion of controversial, late-stage changes during the legislative session. The most recent session was marked by rancor and accusations of a lack of transparency within the Senate DFL caucus, which nearly threatened to topple Senate Majority Leader Tom Bakk of Cook from his leadership post.

Bakk, who is on the Senate taxes committee and who, like Skoe and Tomassoni, is a member of the IRRRB board, declined to comment on the tax proposal. The IRRRB is made up mostly of House and Senate members from the Range delegation, who control the agency’s spending.

Under Tomassoni’s proposal, a vote of seven of the nine board members — with no criteria for awarding the funds — would direct rebates to taconite and other ore ­producers across the region.

Scrutiny of taxes, IRRRB

Under the state’s unique mineral taxation system, mining firms pay an occupation tax instead of the state’s corporate income tax. That occupation tax generated about $16 million for the state last year, making it the second most significant source of revenue of a dozen different state mining taxes. (The production tax, a levy on taconite production, is the largest. It generated nearly $110 million last year and is paid by mines instead of the business property tax.) Half the occupation tax revenue goes to the state’s general fund, 40 percent goes to E-12 public schools and the remaining 10 percent is allocated to the University of Minnesota.

Tomassani’s provision would not affect those ­disbursements, but instead would create an entirely new account within the IRRRB’s Taconite Economic Development Fund. The 23-year-old program mainly provides mining companies with money to upgrade equipment and facilities, develop their workforce and research new production technologies.

The IRRRB has used that fund to send nearly $61 million to mining companies since 2008, but amounts fluctuate greatly from year to year. That creates uncertainty for the mining companies about the reliability of the funding, according to a legislative audit.

In April, the Legislative Auditor’s Office released its audit of mineral taxation, noting the need for improved oversight, particularly for the one-time grants to Range communities that the audit found often were awarded based on local officials’ relationships with legislators.

The audit also recommended that the Legislature “clarify the intended uses” of the economic development fund. Three mining companies interviewed by auditors “described concerns about the political nature of the approval process.”

The legislative auditor is conducting a three-part audit of the IRRRB, examining its effectiveness in developing the region’s economy and whether its practice of awarding grants or financial assistance is fair and transparent. The report is expected early next year.

Legislative maneuvering

In an interview, Skoe disputed that the provision did not originate in a stand-alone bill.

He provided the bill number for the original Tomassoni measure. A review of that bill and subsequent committee actions and testimony, however, showed that the discussion during a February hearing centered on an entirely different aspect of mineral taxes: a tax incentive to encourage mines to shift into producing a different type of iron ­product. The original bill made no mention of a diversion of tax moneys to IRRRB. That language emerged only later, during the merging of bills in an omnibus bill.

Craig Pagel, lobbyist for the Iron Mining Assocation of Minnesota, testified during that February hearing on an amendment that would slightly increase the state’s occupation tax to pay for permitting staff at the Department of Natural Resources (DNR) and the Minnesota Pollution Control Agency (MPCA), two regulatory agencies with oversight of mining operations.

Pagel said he was unaware that provision was included in the final Senate tax bill, which the Senate approved, 42-25. The provision was not contained in the House tax bill.

“This was not put forth by the mining industry,” Pagel said in an interview. “We did not propose this language.”

Matt Swenson, spokesman for Gov. Mark Dayton, said the governor’s office was unaware of the provision, but noted that they were not focused on the tax bill, since it was not part of end-of-session negotiations.

Skoe said he thought it was “appropriate” to include the Tomassoni provision, saying his committee aimed to provide fair tax relief for all ­businesses.

“If you want to question the scale of the tax relief, that’s an appropriate question for you to ask,” Skoe said in response to a reporter’s question about whether the tax bill evenly distributed tax reductions for Minnesota businesses.

“Different people can have different views of whether that’s equitable,” he added.