The “Tax Cuts and Jobs Act,” introduced amid great fanfare on Nov. 2, has now been passed by the U.S. House of Representatives along an essentially party-line vote. The Senate’s version, introduced Nov. 9, is still undergoing intense scrutiny as groups from every quarter weigh the bill’s proposed cuts in tax rates versus the elimination of certain deductions, credits, and other tax breaks.
As ideas for reforming the tax code were tossed around in recent months and even years, one proposal – or some variation of it – would surface from time to time. This was the idea that the tax deduction for business advertising expenses should be eliminated.
This has always been an ill-considered idea (as we shall discuss below), and thus we were relieved that it did not find its way into the new tax bills of either the House or Senate. But since these bills are only the opening salvos in the difficult battle to revise the tax code, it would be worthwhile to examine why this ad-related provision should not be a part of the measure that finally reaches the president’s desk.
Most proponents of ad deductibility analyze the economic impact on businesses of more expensive advertising. However, there is another aspect tied to the economics but deserving of consideration in its own right: the chilling effect on the speech of both corporate advertisers and media outlets.
Impact on Advertisers. No one disputes the fact that eliminating the tax deduction for advertising would increase the cost of doing business by making advertising more expensive. And that’s no small matter. According to a 2014 study cited recently by a group of 15 U.S. senators, advertising supports 20 million U.S. jobs and $5.8 trillion in U.S. activity, contributing to 19 percent of GDP.
If the ad deduction were eliminated, one outcome might well be that companies would advertise less. The ad deduction has been a part of the tax code for so long that it is regarded as a given and factored into corporate business models and budgeting decisions. Of course companies might compensate (up to a point) in other ways such as passing along increased costs to consumers. But devoting fewer dollars to advertising could easily be one part of an overall business strategy.
Less advertising or “commercial speech” would mean a reduction in a type of speech the U.S. Supreme Court considers worthy of First Amendment protection. In Bigelow v. Virginia, 421 U.S. 809 (1975), the Court said the fact that an advertisement “had commercial aspects or reflected the advertiser’s commercial interests did not negate all First Amendment guarantees.”
In instances where the government has sought to impose restrictions on certain advertising because of its content, the Supreme Court has not hesitated to strike down those restrictions on First Amendment grounds – even when the government had asserted a substantial justification for the restriction. (See, e.g., Central Hudson Gas & Electric Co. v. PSC, 447 U.S. 557, 571 (1980)).
This point is of particular significance in the Senate right now because Sen. Claire McCaskill (D-Mo.) has introduced an amendment to the Senate tax proposal that would eliminate the tax deduction for pharmaceutical advertising. It doesn’t matter that this amendment would eliminate only the deduction but still allow the speech. Since the late 1950s the Supreme Court has held that “speech can be effectively limited by the exercise of the taxing power.” Speiser v. Randall, 357 U.S. 513, 518 (1958).
Two decades earlier in a case involving Louisiana Governor Huey Long, the Court held that the First Amendment was intended to protect against “taxes on knowledge” – in this instance a tax on periodicals meant to punish the governor’s critics. The Court struck down the tax, finding it “a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled.” Grosjean v. American Press Co., 297 U.S. 233, 250 (1936).
It is hard to imagine how the McCaskill amendment could withstand First Amendment scrutiny. This restriction on content-specific commercial speech is clearly a misuse of the taxing power. Moreover, it would certainly fail the four-part test for government regulation of commercial speech outlined in Central Hudson.
Looking beyond the McCaskill amendment, perhaps the bigger point here is that advertising is not some kind of superfluous speech. If the deduction for all advertising were eliminated, and if that led to a reduction in the amount of advertising, this would constitute a chilling effect on a type of speech the Supreme Court has repeatedly deemed important enough to wrap in First Amendment protection.
Impact on Media Outlets. A reduction in the amount of advertising could have a significant – even devastating – impact on media outlets. The newspaper industry has been undergoing a well-documented restructuring, with print editions becoming fewer in number, fewer in pages, and often being published fewer days per week. Newsroom staffs have been slashed and the amount of news published reduced accordingly. At the same time, newspaper companies have struggled in their attempts to make money from their digital news platforms.
Local television and radio stations have faced their own challenges to maintain their news operations in the face of rising costs and increasing competition from other sources, especially the digital tech giants. Broadcasters have struggled to turn a profit from their online platforms, which consumers generally can access for free. In all of these examples, the revenue stream from advertising remains the lifeblood of local media and of the vast majority of all digital news outlets as well.
Given the challenges of the current media environment where advertising is deductible, imagine a media world – and a news media world in particular – where there was less advertising because it was not deductible. In a world of reduced ad revenue, we would not be surprised to see the outright demise of a significant number of media outlets as well as a new wave of mergers and consolidations. Further reductions in news operations would yield a pronounced chilling effect on media speech with less news, investigative reporting, and political commentary reaching the public. The role of the press as a watchdog of government and pillar of our democracy could be significantly compromised. Preserving the revenue stream reaching news media outlets by preserving the deductibility of advertising thus is critical.
Impact on Consumers. Given the potential chilling effect a reduction in advertising would likely have on the speech of advertisers and media outlets, the impact on consumers could be profound. In 1976, the Supreme Court recognized in Virginia State Board of Pharmacy that the consumer has an interest in receiving price information: “If there is a right to advertise, there is a reciprocal right to receive the advertising, and it may be asserted by these appellees.” In fact, the Court spoke clearly of the importance of the economic information conveyed by advertising:
As to the particular consumer’s interest in the free flow of commercial information, that interest may be as keen, if not keener by far, than his interest in the day’s most urgent political debate. Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 763 (1976).
A reduction in advertising would stifle this free flow of commercial information reaching the consumer. There would be less information available for purchasing decisions. As important as commercial information is, however, we cannot downplay the importance of “the day’s most urgent political debate” and the need for the electorate to be as well informed as possible. Fewer news media outlets and reductions in news coverage do not serve that need to be informed – especially in today’s highly charged political climate. More news from a wider variety of sources would be beneficial both to individual citizens and to the electorate at large – but this becomes increasingly unlikely if news media outlets are further diminished by shrinking revenue streams.
Conclusion. Preserving the tax deductibility of advertising expenses is important for a host of economic reasons that have been explored elsewhere at length. What has been less noted, however, is that the likely reduction in the amount of advertising caused by eliminating ad deductibility would have a severe chilling effect on the speech reaching consumers. This would include both commercial speech (advertising itself) and non-commercial speech (news, investigative reporting, political commentary, etc.) distributed by news outlets. The authors of the current tax-reform measure passed by the House and the proposal under consideration in the Senate were wise to maintain the deductibility of advertising expenses. Nothing in the legislative debate now underway should be allowed to change that. Content-specific amendments that would limit the advertising deduction for certain products are unconstitutional in their own right and, more ominously, could trigger efforts to impose a widespread ban on this vital deduction for all advertising.
Richard T. Kaplar is Executive Director of The Media Institute.