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i,l l,l ll! Illq~ LEGAL MEMORANDUM The Constitutional Implications of Legislation that Would Disallow Tax Deductions for Tobacco Product Advertising Expenses prepared by COVINGTON & BURLING Washington, D.C. 20004 Apri11986 The analysis presented in this memorandum would apply to federal tax legislation discriminating against advertising for any product-not just legislation discriminating against tobacco product advertising. WILION -1EPftlS PRIN7IN<i CO., INC. - 769+0096 - WABHINC77ON. D.C.. 20001 I+n , n ® ro$3 tl0 V, G

*. I 2 of Los Angeles v. Taxpayers for Vincent, 104 S. Ct. 2118, 2128 (1984). The fact that Senator Bradley and Repre- sentative Stark have chosen the tax system to achieve their goal is irrelevant under the First Amendment. Neither can their bills be saved, as both have suggested, by characterizing the disallowance of tax deductions for tobacco product advertising as the removal of a federal "subsidy." Whatever may be said of that characteriza- tion, the fact is that both bills would single out one form of speech and-because of its content-attempt to sup- press it. That is precisely what the First Amendment forbids. 1. Any Governmental Effort To Suppress Disfavored Speech Would Violate the First Amendment Perhaps the most basic tenet of the First Amendment is that "'government has no power to restrict expres- sion because of its message, its ideas, its subject matter, or its content."' Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 65 (1983) ( quoting Police Dep't v. Mosley, 408 U.S. 92 (1972) ). See also Carey v. Brown, 447 U.S. 455 (1980). So far as commercial speech is concerned, the government may act to ensure that the message is truth- ful and nondeceptive. It also may impose time, place and manner restrictions on commercial, as well as noncom- mercial, speech. But even those powers are narrowly cir- cumscribed by the First Amendment. The remedy chosen by the government for untruthful or deceptive commer- cial speech must be the "least restrictive" remedy pos- sible. E.g., Central Hudson Gas & Electric Co. v. PSC, 447 U.S. 557, 566 (1980). Further, any time, place or manner restriction must serve a substantial governmen- tal interest-again, in the least restrictive manner pos- sible. E.g., Taxpayers for Vincent, 104 S. Ct. at 2130- 32. The Supreme Court has made clear, at the same time, that the government may not suppress or restrict 3 truthful commercial speech simply because it does not like the speaker's message.' In case after case, the Supreme Court has emphasized that the government may not attempt to manipulate behavior by curtailing access to information. The pater- nalistic fear that members of the public may not use information wisely is not a legitimate basis for censor- ship. As the Court noted in Virginia State Board o f Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 770 (1976), "[i] t is precisely this kind of choice, between the dangers of suppressing information, and the dangers of its misuse if it is freely available, 1 As noted, the Stark bill would disallow deductions for all communications "informing or influencing the general public * * * with respect to tobacco and tobacco products :' That presumably would extend to pamphlets and other communications prepared by certain antismoking groups claiming that the use of tobacco products involves a health risk as well as to tobacco product advertisements. It also would cover, of course, messages sponsored by individual tobacco companies discussing the continuing controversy concerning smoking and health, including new research results relating to that issue. The fact that Representative Stark's bill seeks to suppress all paid communications concerning tobacco products, instead of only those with which he apparently would disagree, does not make the bill any less destructive of interests protected by the First Amend- ment. As the Supreme Court pointed out in FCC v. League of Women Voters,'J.04 S. Ct. 3106, 3120 (1984), "`[t]he First Amend- ment's hostility to content-based regulation extends not only to restrictions on particular viewpoints, but also to prohibition of public discussion of an entire topic"' (quoting Consolidated Edison Co. v. PSC, 447 U.S. 530 (1980) ). In fact, a portion of the speech the Stark bill seeks to suppress (for example, speech addressing freedom of choice or the treatment of smokers) is noncommercial speech entitled to the fullest First Amendment protection. E.g., Pacifse Gas & Electric Co. v. PUC, 54 U.S.L.W. 4149, 4151 (U.S. Feb. 25, 1986) (plurality opinion) ; Bolger v. Youngs Drug Prod- ucts Corp., 463 U.S. at 68; First NationaG Bank V. Bellotti, 435 U.S. 765 (1978).

4 that the First Amendment makes for us." 2 The Bradley and Stark bills would violate that basic principle in a particularly offensive and unambiguous manner. 2. Congress May Not Use the Tax System To Suppress Disfavored Speech The fact that the Bradley and Stark bills would use the tax system to suppress tobacco-related speech, rather than attempt to achieve that goal more directly, is irrele- vant under the First Amendment. The Supreme Court has recognized that "speech can be effectively limited by the exercise of the taxing power" (Speiser v. Randall, 357 U.S. 513, 518 (1958) ) just as it can be limited by more direct, and arguably less sophisticated, types of regulation. But the issue under the First Amendment is not the means that Congress has selected to achieve a particular goal but whether that goal is itself legitimate and whether it can be achieved by other means less inimical to First Amendment interests. Indeed, in a celebrated case decided a half-century ago, the Court identified "taxes on knowledge" as one of the 2 The Supreme Court has applied this principle in a variety of contexts-to invalidate a township ordinance forbidding the posting of "For Sale" and "Sold" signs in residential neighborhoods to stem "white flight" (Linmark Associates, Inc. v. Township of Wil- lingboro, 431 U.S. 85 (1977) ) ; to strike down a state law banning the advertising and display of contraceptives (Carey v. Population Services International, 431 U.S. 678 (1977)) and a federal law forbidding the mailing of unsolicited advertisements for contra- ceptives (Bolger v. Youngs Drug Products, supra) ; to invalidate various state-law restrictions on advertising by lawyers (Zauderer v. 0ffice of Disciplinary Counsel, 105 S. Ct. 2265. (1985) ; In re R.M.J., 455 U.S. 191 (1982) ; Bates v. State Bar, 433 U.S. 350 (1977)) ; and to disapprove a state public service commission regu- lation banning promotional advertising by electric utilities (Central Hudson Gas & Electric Co. V. PSC, supra). See also Lowe v. SEC, 105 S. Ct. 2557, 2586 (1985) (White, J., joined by Burger, C.J., and Rehnquist, J., concurring) (investment advice newsletter). 5 primary evils the First Amendment was designed to guard against. The Court was confronted in that case -Grosjean v. American Press Co., 297 U.S. 233 (1936) -with a Louisiana tax on large-circulation periodicals imposed to punish critics of Governor Huey Long. The Court invalidated the tax because, like the proposed dis- allowance of deductions for tobacco product advertising, it was "a deliberate and calculated device in the guise of tax to limit the circulation of information to which the public is entitled." Id. at 250. Like the Bradley and Stark bills, it also was aimed at the suppression of dis- favored speech. See Mirvneapolis Star & Tribune Co. v. Minnesota Comm'r o f Revenue, 460 U.S. 575, 585 (1983). The Supreme Court has twice upheld measures dis- allowing tax deductions for lobbying expenses precisely because Congress had not discriminated invidiously in such a way as to "aim at the suppression" of disfavored ideas. In Regan v. Taxation with Representation, 461 U.S. 540 (1983), the Court rej ected a challenge to provi- sions of the Internal Revenue Code making contributions to nonprofit lobbying groups nondeductible, while per- mitting deductions for contributions to veterans' lobbying groups, on the ground that there was "no indication that the statute was intended to suppress any ideas or that it has had that effect." Id. at 548:3 Similarly, in Cam- marano v. United States, 358 U.S. 498 (1959), the Court upheld a provision of the Internal Revenue Code that disallowed deductions for lobbying by business entities because the disallowance, which mirrored the treatment $ In a concurring opinion, Justice Blackznun, joined by Justice Brennan and Justice Marshall, emphasized that the statute passed muster because its discrimination between veterans and other groups "is not based on the content of their speech." 461 U.S. at 551. Like the majority, they stressed that "a statute designed to discourage the expression of particular views would present a-very different question." Ibid.

6 of nonprofit groups, was viewpoint-neutral. It expressed a uniform determination by Congress that "everyone in the community should stand on the same footing * * * so far as the Treasury of the United States is concerned." Id. at 513. The Bradley and Stark bills obviously would not leave tobacco product manufacturers "on the same footing" as other advertisers. Both bills single out tobacco product advertising for special treatment, while leaving intact the deductibility of advertising expenditures for other prod- ucts-a form of "favoritism" that the First Amendment forbids. See Pacific Gas & Electric Co. v. PUC, 54 U.S.L.W. 4149, 4153 (U.S. Feb. 25, 1986) (plurality opinion). Both bills are "frankly aimed" at suppressing the speech of tobacco product manufacturers because of its content (see American Communications Ass'n v. Douds, 339 U.S. 382, 402 (1950 ))-a result that is not permitted by the First Amendment regardless of the means chosen to achieve it.4 3. The Bradley/Stark Bills Cannot Be Rationalized as a Mere Refusal To "Subsidize" Speech Even if the stated aim of the Bradley and Stark bills were not to "decrease or end tobacco advertising" but simply to assure that the government no longer "subsi- dize" a message with which it disagrees-as Senator Bradley has suggested (131 Cong. Itec. S17,696 (daily ed. Dec. 16, 1985 )) the bills would violate the First Amendment. 4In Pacific Gas & Electric, decided this February, the Court invalidated a California law requiring electric utilities to include in their billing envelopes a newsletter prepared by their adver- saries. Noting that the regulation "does not equally constrain both sides of the debate about utility regulation," Justice Powell wrote that the "favoritism" of the regulation in this respect went "far beyond the fundamentally content-neutral subsidies" the Court had been willing to sustain in other cases. 54 U.S.L.W. at 4153. f 0 I 7 The "subsidy" justification offered by Senator Bradley is misconceived for two reasons. First, it incorrectly por- trays the deduction for advertising expenses as a means by which the government subsidizes speech. In fact, our tax system is based on the premise that only net income should be taxed, with deductions being permitted for costs reasonably incurred in producing that income. The deduction for -advertising expenses-like deductions for other ordinary business expenses-simply implements the net income concept. It no more provides a "subsidy" for advertising than the deduction for payroll expenses pro- vides a "subsidy" for the hiring of workers. Indeed, expense deductions can be viewed as a "subsidy" only if one also is prepared to label every decision not to impose a particular type of tax as a "subsidy." Second, even if the advertising expense deduction could legitimately be viewed as a government subsidy, that would not free the government to dole it out to speakers with government-approved messages while denying it to speakers with messages that the government does not like. It is settled, for example, that the government may not restrict expression in public places-for example, public streets and parks, or public libraries and uni- versities-in a discriminatory manner. Each of those "public forums" exists because of a government subsidy. Yet the Supreme Court has held repeatedly that the government cannot grant or withhold access to such forums-which may be said to constitute a "subsidy in kind" (M. Yudof, When Government Speaks 234 (1983) )-on the basis of the speaker's message. E.g., Cornelius v. NAACP Legal De f ense & Educational Fund, 105 S. Ct. 3439, 3449-50, 3454-55 (1985) ; Perry Educa- tion Ass'n v. Perry Local Educators' Ass'n, 460 U.S. 37, 45-46 (1983). See also Board o f Education v. Pico, 457 U.S. 853, 869-72 (1982) (plurality opinion) ° a The nation's airwaves are another example of a public re- source that plainly cannot be allocated on the basis of a speaker's

0 8 Similarly, it is clear that the government may not limit use of the mail system to only those messages that the government favors-even though the public mail service constitutes a direct public subsidy for private communication. See U.S. Postal Service v. Council of Greenburgh Civic Ass'ns, 453 U.S. 114, 141 (1981) (White, J., concurring) ; Bolger, 463 U.S. at 80 (Rehn- quist, J., concurring) ; United States v. Van Leeuwen, 397 U.S. 249, 251-52 (1970). In fact, the Supreme Court has ruled specifically that the government, having made second-class postal rates generally applicable to periodical publications, cannot withhold that subsidy from a dis- favored magazine. Hannegan v. Esquire, Inc., 327 U.S. 146, 156 (1946). If the government must make these 1%ubsidies" avail- able on a content-neutral basis, it plainly also must make the advertising expense deduction available on a content- neutral basis. The government may not have been re- quired to provide the "subsidy" in the first place. But once it has done so, the prohibition against content-based exclusions comes into play. See, e.g., Perry, 460 U.S. at 45-46. Congress may no more deny particular adver- tisers the advertising expense deduction on the basis of their message than it may deny them the use of the mails or require them to pay uniquely high mailing rates.6 viewpoint. See generally FCC v. League of Women Voters, 104 S.Ct. at 3116-18; CBS v. Democratic Nat'l Committee, 412 U.S. 94, 162-63 (1973) (Douglas, J., concurring) ; Red Lion Broad- casting Co. v. FCC, 395 U.S. 367, 390-91, 396 (1969) ; NBC V. United States, 319 U.S. 190, 226-27 (1943). 6 The Supreme Court's decision in Buckley v. Valeo, 424 U,S. 1 (1976) (per curiam), confirms this conclusion. The Court sustained in that case Congress's decision to provide more generous funding to major party candidates than to minor party or independent candidates. But the public financing scheme reviewed by the Court in Buckley did not discriminate among parties or candidates on the basis of their views-as the plurality recently stressed in I 9 4. The Government's Purported Interest in "Speaking With One Voice" Cannot Justify the Bradley/Stark Bills Senator Bradley also has suggested that deductions for tobacco product advertising expenses should be disallowed because, when it comes to those products, "the Govern- ment should speak with one voice"-a voice that, accord- ing to Senator Bradley, "should unequivocally say, 'smok- ing will harm you."' 131 Cong. Rec. 517,696 (daily ed. Dec. 16, 1985). But Senator Bradley overlooks the criti- cal distinction "between governmental promotion of the system of freedom of expression and governmental par- ticipation in the system." Emerson, The A fj"irmative Side of the First Amendment, 15 Ga. L. Rev. 795, 799 (1981). In allowing deductions for advertising expenses, the government may be facilitating expression by private groups but it has not stamped that expression with its own imprimatur. It misses the mark to suggest, as Senator Bradley has, -that allowing such deductions sig- nals governmental support. See Widmar v. Vincent, 454 U.S. 263,274 (1981). Under Senator Bradley's rationale, the federal govern- ment, having chosen to pursue any policy, say, farm price supports or school lunch subsidies-could disallow Pacific Gas & Electric Co. v. PUC, 54 U.S.L.W. at 4153. Instead, it discriminated on the basis of "obvious differences in kind be- tween the needs and potentials of a political party with historically established broad support, on the one hand, and a new or small political organization on the other." 424 U.S. at 97. And the Court upheld the differential treatment of major and minor parties and independent candidates on the ground that major party candidates were required to accept expenditure limitations in return, the dis- parate treatment served "sufficiently important governmental in- terests," and such treatment "has not unfairly or unnecessarily burdened the political opportunity of any party or candidate." Id. at 95. No comparable justifications could be asserted for disallowing advertising expense deductions by tobacco product manufacturers while allowing them for everyone else.

10 advertising expense deductions for those opposing that policy. Having chosen to encourage childbirth over abor- tion through Medicaid reimbursement and other policies, it could disallow advertising expense deductions for pro- choice groups. Having decided to oppose busing as a remedy for school segregation, it could deny advertising expense deductions for organizations promoting the use of that remedy. Each of those results is implicit in Sena- tor Bradley's innocuous-sounding defense of his bill. The Bradley and Stark bills are, in that connection, altogether different from the legislation upheld by the Supreme Court in Harris V. McRae, 448 U.S. 297 (1980). There the Court upheld Congress's decision to offer re- imbursement through Medicaid for childbirth but not abortion expenses. But there was no evidence in McRae that Congress was attempting to frustrate the right of women to terminate a pregnancy by abortion. See id. at 317 n.19. In addition, whatever limits the Fifth Amend- ment's equal protection guarantee may or may not place on the government's power to manipulate the exercise of other protected rights, the requirement that it not regu- late speech in ways that favor some viewpoints or ideas over others is independently grounded in the First Amend- ment. The Court's suggestion in Regan v. Taxation with Representation, 461 U.S. at 548, that it would invalidate a tax discriminating among groups .on the basis of their views confirms that its approach in McRae is inapplicable where First Amendment rights are at issue.' 'rThree of the dissenters in McRae foreshadowed this when they observed: "Surely the Government could not provide free transportation to the polling booths only for those citizens who vote for Demo- cratic candidates, even though the failure to provide the same benefit to Republicans 'represents simply a refusal to subsi- dize certain protected condixct "' 448 U.S, at 336 n.6 (Brennan, J., joined by Marshall & Blackmun, JJ., dissenting). I 11 In sum, the Bradley and Stark bills violate the First Amendment because their goal-to suppress disfavored speech-is "plainly illegitimate." The means chosen in the bills to accomplish that goal, manipulation of the tax system, does not affect the bills' status under the First Amendment. The protections of the First Amendment do not and cannot be made to depend upon the sophistication of the means chosen to accomplish an impermissible result. Nor can First Amendment protections be over- ridden by characterizing the discriminatory burden the bills would impose as simply the removal of a federal "subsidy." The essential fact, which both bills ignore, is that the First Amendment forbids discriminatory ef- forts by government to favor some viewpoints at the expense of others or to suppress public discussion of any issue. COVINGTON & BURLING Apri11986