Julia Gillard needs to dig deep to mine a solution to mining tax WHEN Julia Gillard took over from Kevin Rudd, she said she would solve three political problems for Labor: climate change, asylum seekers and the war with the mining industry. The carbon tax and the flow of asylum-seeker boats have dogged her term leading a minority government. But now the first of those problems that Gillard tried to solve - the mining tax - has come back to haunt her. Labor's attempts to tax the mining industry's "super profits" claimed Rudd's leadership and are now threatening Gillard's. For Rudd, the problem was that the tax sparked a revolt from a well-resourced mining industry worried about a new tax hit. For Gillard, it's the opposite. The mining tax she designed has raised barely any money and has allowed miners to store up credits for state royalties that will ensure the federal tax take remains low in the future even if profits soar. It's now feeding into the debate about economic management. How will the Government fund billions of dollars of handouts that were meant to be funded by the tax? Labor appears to have manoeuvred itself into a lose-lose position on the mining tax. If Gillard caves in to demands from the Greens, Independents and some Labor backbenchers to change the tax, she will be attacked by the Opposition for creating uncertainty and invite another campaign by the mining industry. But if she does nothing to plug the revenue hole left by the tax, she will face a Budget problem. Treasurer Wayne Swan has repeatedly crowed about how the Government is using the tax to spread the benefits of the mining boom. We are not likely to hear that refrain from Swan again anytime soon. When Gillard, Swan and Resources Minister Martin Ferguson hurriedly renegotiated a tax deal with BHP Billiton, Rio Tinto and Xstrata after Rudd was toppled in 2010, the new-look impost was meant to raise $10.5 billion over four years. That figure has since been whittled away with each Budget round, with the latest forecasts having it raising $2 billion this financial year and $9.1 billion over four years. These forecasts were based on fairly rosy projections of coal and iron ore prices. We now know the tax has raised a meagre $126 million in its first six months. As a result, Labor is approaching the September 14 election with an extra $2 billion hole in its Budget. The Government has already allocated money that was meant to be raised by the tax to pay for boosts to family tax benefits, handouts to parents, regional infrastructure and super for low-income earners. Gillard has made it clear she will not change the design of the tax. To do so would be political suicide. The Minerals Council of Australia has warned it is ready to restart its campaign against the tax that helped topple Rudd if there is any further change to the current arrangements that see its members paying next to nothing. Gillard's only remaining option is to appeal to states such as Queensland to alter planned hikes in royalties or to withhold others' funds in return. But Queensland Premier Campbell Newman and his West Australian counterpart Colin Barnett have both baulked at this, arguing the states own the rights to minerals and they are entitled to levy royalties as they see fit. The mining tax battle poses political conundrums for the Opposition too. Tony Abbott has vowed to scrap the tax and all that is associated with it, except for the costs associated with gradually increasing employer superannuation contributions from 9 to 12 per cent. But there are contradictions in the Opposition's line of attack on the tax. Abbott says it will discourage investment and harm the economy and that is why he wants to scrap it. He also attacks the Government for designing a tax so badly that it raises next to nothing. The Opposition faces some challenges in convincing voters of the merits of removing handouts that go with the mining tax. Abbott has also not been helped by Joe Hockey's gaffe of suggesting the Opposition would not go ahead with the super increase and then having to insist they would. But the biggest challenge over the mining tax comes back to Gillard. The Prime Minister has to convince not just voters but the members of her own caucus of the merits of her approach. As with the other two political problems she said she would solve, Gillard has work cut out for her. Email Steven Scott