The Proposed “Ad Tax” Would be Unconstitutional Under Central Hudson

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[This post originally appeared here on The Hill’s Opinion Blog on August 4, 2017.]

Fox News and CNN have something in common: they both rely on advertising to promote their journalistic messages and to help generate revenue needed to carry out their missions. Historically, the expenses associated with such advertising have not been subject to taxation. This makes sense for a number of reasons, including the reality that advertising constitutes commercial speech protected by the First Amendment.

The Constitution, however, appears to be no obstacle to one tax reform proposal under consideration by President Trump and Congressional Republicans, which would single out advertising as a taxable business expense.

As Republicans meet and discuss potential paths forward on tax reform, one major consideration is what existing deductions might be eliminated to offset the lowering of tax rates–a central component of any anticipated reform package. On this score, leaders are reportedly turning to former Rep. Dave Camp’s (R–MI) 2014 draft legislation. Camp’s legislation raises concerns over a possible “ad tax,” a provision which Ways and Means Committee Chairman Kevin Brady (R-Texas) has refused to rule out.

It is not yet clear if or how Republicans will adopt Camp’s 2014 ad tax into current reform efforts, but as with all unconstitutional proposals, this is a possibility that should be shut down early.

Per the summary of Camp’s 2014 draft tax plan, “50 percent of certain advertising expenses would be…deductible and 50 percent would be amortized ratably over a ten-year period.” Among these “certain advertising expenses” would be “any amount paid or incurred for development, production, or placement (including any form of transmission, broadcast, publication, display, or distribution) of any communication to the general public intended to promote the taxpayer’s trade or business.”

In other words, the ad tax would essentially require taxpayers to pay for exercising a constitutionally protected right.

As the Supreme Court stated in First Nat’l Bank of Boston v. Bellotti (1978), “commercial advertisement is constitutionally protected” commercial speech. The Court explained the Constitution’s protection of advertising “furthers the societal interest in the ‘free flow of commercial information.’”

Having acknowledged advertising falls within the First Amendment’s protection of commercial speech, the Court articulated in Central Hudson Gas & Elec. v. Public Svc. Comm’n (1980) a four-part test for determining the constitutionality of commercial speech regulations.

First, to receive full protection, the speech must “concern lawful activity and not be misleading.” Second, the governmental interest served by the regulation must be “substantial.” Third, the regulation must directly advance the governmental interest asserted. Fourth, the regulation must be no “more extensive than is necessary to serve that interest.”

The ad tax would apply to truthful advertisements concerning lawful activity and is therefore subject to the remaining three Central Hudson prongs. It is fair to assume both that the government’s interest in raising revenue is at least substantial and that a tax directly advances that interest.

Where the ad tax meets its constitutional fate, however, is at the fourth prong. Here, the Supreme Court requires a “reasonable fit” between the substantial interest asserted and the regulatory scheme chosen to achieve it. As the Court explained in City of Cincinnati v. Discovery Network, Inc. (1993):

“A regulation need not be ‘absolutely the least severe that will achieve the desired end,’ but if there are numerous and obvious less-burdensome alternatives to the restriction…that is certainly a relevant consideration in determining whether the ‘fit’ between ends and means is reasonable.”

It goes without saying that “there are numerous and obvious less-burdensome alternatives to the” ad tax. It is precisely this point that highlights the ad tax’s fatal flaw–among all the current tax deductible business expenses, and indeed among the entire universe of deductibles, the ad tax specifically targets protected speech for burdening.

The Supreme Court found the use tax on publication materials in Minneapolis Star v. Minnesota Comm’r (1983) unconstitutional because “an alternative means of achieving the same interest without raising concerns under the First Amendment [was] clearly available.” Likewise, the ad tax fails constitutional muster because countless alternatives exist for offsetting tax-rate reductions–options that do not burden constitutionally protected speech.

The argument is not that the government does not have an interest in raising revenue. It is not even that reducing business deductibles is an illegitimate means of serving that interest. It is simply that singling out protected speech for taxation is both dangerous and unconstitutional.

As Bruce Fein has written, the ad tax would eerily resemble the 1765 Stamp Act that “fueled the American Revolution.” That Revolution resulted in a First Amendment protecting speech from burdensome laws and regulations such as the ad tax. And decades of Supreme Court precedent make that clear.

It is one thing to reform the universe of tax deductions; it is quite another to violate the Constitution.

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