Minnesota\u2014too late for a Sovereign Wealth Fund?

Abstract

Ten states have created natural-resource-based Sovereign Wealth Funds (SWF) to allow a fraction of the wealth derived from the extraction of non-renewable resources to be available for future use. Minnesota does not have a SWF, even though companies have been mining in the state for over 100 years. Herein, we present backward and forward-looking scenarios to estimate the potential magnitude of a “what-if” extraction-based fund. A 1.5% of value tax is suggested as an SWF funding mechanism. Based on historical extraction, prices, and investment returns, a large SWF could already exist. In the forward-looking section, we begin by econometrically estimating the supply and demand of US iron ore production to better understand how an increase in mining taxes would likely effect mining output (i.e., the production effect). After accounting for an estimated 4% production loss, results suggest enough minerals could still be extracted to create a permanent fund with between $930 million (US) and $1.6 billion dollars (US) in direct contributions by 2050 (depending on price). Using reasonable assumptions of a 2% inflation rate and a 5% annual investment return, the fund size could range from $3 billion to $5 billion by 2050.