News: COLUMN-New iron ore tax on Rio, BHP unlikely, but issue is back: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

Here we go again! Another political attempt rooted more in populism than economics to grab more tax revenue from Australia's top iron ore miners, Rio Tinto and BHP Billiton.

There are two likely outcomes from the moves by a minor, but potentially king-making, party in Western Australia state to about double the amount the world's second- and third-ranked iron ore miners pay in royalties.

The first is that the tax hike is extremely unlikely to succeed in the form proposed by Brendon Grylls, the newly-installed leader of the National Party in Western Australia (WA).

The second is that raising taxes on Rio (RIO) and BHP (BHP) is now firmly back on the agenda, and this boosts the likelihood that some form of tax increase will be legislated.

However, before that point, expect a political bunfight that will rival the last time an Australian government tried to impose higher taxes on the mining industry.

That attempt in 2010 contributed to the axing by his own party of former prime minister Kevin Rudd.

Although his successor Julia Gillard did manage to pass a watered down version called the Minerals Resource Rent Tax (MRRT), this was scrapped when her Labor Party lost power to the Liberal Party in 2013 as part of a campaign promise.

The MRRT was ultimately unsuccessful, as it was designed as a tax for good times, and its was introduced just as commodity prices started their downward spiral after the 2011 peaks.

What the WA Nationals have proposed is levying A$5 ($3.85) a tonne on iron ore, but only for the two major producers and not for Australia's third-biggest Fortescue Metals Group (FMG), or the new 56-million tonne a year Roy Hill mine owned by billionaire Gina Rinehart.

The proposed tax would raise the production rental levied under a little-known clause in the agreements between Western Australia and Rio and BHP that applies to iron ore exported after the first 15 years of a mine's operation.

This would exclude the newer operations like Fortescue and Roy Hill, but as the West Australian newspaper reported on Wednesday, changing the agreements would likely result in court challenges from the miners.

While this makes it unlikely that the National Party's proposal will succeed in its current form, there is likely to be mounting pressure for some form of additional taxation on the miners in Western Australia, which has gone from leader to laggard within Australia as the mining boom has ended.

POLITICAL MACHINATIONS The Nationals, whose power base is in the rural areas, are currently in coalition with the Liberal Party in WA, a traditional arrangement that is mirrored in other states and at the federal government level.

WA will hold a state election in March next year, and there is a real possibility that the Liberal-National coalition will lose to the Labor opposition, or be returned with a substantially reduced majority, if a recent opinion poll is correct.

The Liberals currently hold 30 seats in WA's lower house of parliament, where government is formed, while the Nationals hold seven, Labour 21 and there is one independent member.

That means the Liberals can currently rule without their Nationals partners, if they chose to do so.

But it also means that if the Liberals do lose seats at the March election, they may be reliant on the Nationals to hold onto government, assuming the two parties can jointly command a majority.

This would put Grylls in a prime position to demand a tax hike on the miners, even the if the Liberals led by current state Premier Colin Barnett are opposed to such a step.

If Labor win the state election, they will confront the same budget issues as the current government, which is battling to reign in spending as revenue for the resource-dependent state has slowed.

This might make Labor, which is traditionally less supportive of the mining industry than the Liberals, more inclined to see if a royalty hike can be justified, especially if they know they can get the support of the Nationals.

The important thing to note behind all these political machinations is that raising taxes on the miners may well become a major campaign issue for the upcoming state election.

This alone raises the chances of some form of higher taxation, since politicians are becoming increasingly aware that voters seem to prefer populist rhetoric and measures, even if they make little economic sense.

The British vote to leave the European Union and the rise of Donald Trump to Republican presidential candidate in the United States, as well as the near defeat of Australia's federal Liberals at the hands of Labor's populist health care campaign in the July election, will have spooked politicians on all sides in WA.

Rio and BHP have predictably attacked the proposed higher levy, both releasing statements questioning both the logic and necessity for higher taxes.

The current royalty rate of 7.5 percent levied in WA is well above the 2 percent charged by Brazil, home to top iron ore exporter Vale , and roughly in line with what is charged by South Africa, the third-biggest supplier to China behind Australia and Brazil.

At the current spot price <.IO62-CNI=SI> of $60.70 a tonne, Rio and BHP will be paying in the region of $4.55 in royalties.

With their cost of mining and delivering to an export port around $13 a tonne, adding in freight, insurance and royalties gives an all-in delivered cost of perhaps around $25 in China.

This means that at the current price they are making about $35 a tonne, a figure that will no doubt be used by politicians to claim that they can afford to pay more to the state government.

But proposing a new tax and getting it implemented are two entirely different things, and this latest attempt would appear to have a slim chance at best.

The real risk for Rio and BHP is that tax increases stay on the political agenda in Australia, and some politicians succeed in riding a populist wave to their implementation.