LIMIT ON DEDUCTIONS FOR TOBACCO ADS IS CONSTITUTIONAL, SAYS CRS.

                             Henry Cohen

Under the Internal Revenue Code, advertising is ordinarily deductible as a business expense. 26 U.S.C. section 162. It has been proposed, however, that the deductibility of the cost of advertising tobacco products be limited or eliminated. Since advertising is a form of speech, this raises the question of whether such a limitation would violate the provision of the First Amendment that "Congress shall make no law . . . abridging the freedom of speech, or of the press. . . ." We conclude that it almost certainly would not. As it apparently would be constitutional for Congress to ban tobacco advertising totally, it follows that it would apparently be constitutional for Congress to take the less drastic step of limiting its deductibility. Even if it would be unconstitutional for Congress to ban tobacco advertising totally, it would not follow that the First Amendment requires Congress to subsidize it through allowing a tax deduction. There would also appear to be no constitutional problem with Congress's limiting the deductibility of the cost of tobacco advertising and not doing the same with respect to the cost of advertising of other products, or even of other dangerous products.

COMMERCIAL SPEECH

The Federal Cigarette Labeling and Advertising Act makes it "unlawful to advertise cigarettes and little cigars on any medium of electronic communications subject to the jurisdiction of the Federal Communications Commission." 15 U.S.C. section 1335. Although the Supreme Court has upheld the constitutionality of this banning of cigarette advertising on radio and television, ¹ a prohibition that included the print media could be treated differently. However, it appears likely that a total prohibition would be found to be constitutional.

The Supreme Court has held that the First Amendment, notwithstanding its broad language ("Congress shall make no law. . . ."), is not absolute. Some speech, such as obscenity, it does not protect at all. ² Other speech, such as commercial speech, it "accords a lesser protection to . . . than to other constitutionally guaranteed expression." ³ In Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980), the Court prescribed the test to be used to determine the constitutionality of governmental restrictions on commercial speech. For such a restriction to be constitutional, it must meet a four- prong test. This test asks initially (1) whether the commercial speech at issue is protected by the First Amendment (that is, whether it concerns a lawful activity and is not misleading) and (2) whether the asserted governmental interest in restricting it is substantial. "If both inquiries yield positive answers," then to be constitutional the restriction must (3) "directly advance[ ] the governmental interest asserted," and (4) be "not more extensive than is necessary to serve that interest." Id. at 566.

In subsequent cases, the Supreme Court has indicated that, when courts apply the Central Hudson test, they should generally be deferential to legislative judgments. In Posadas de Puerto Rico Associates v. Tourism Company of Puerto Rico, 478 U.S. 328 (1986), the Court upheld a Puerto Rico statute that, as interpreted, prohibited the advertising of gambling parlors (which were legal) in Puerto Rico, unless the advertisements were addressed to tourists. Applying the Central Hudson test, the Court first noted that the advertising at issue "concerns a lawful activity and is not misleading or fraudulent." Id. at 340-341. Applying the second prong of the test, the Court had "no difficulty in concluding that the Puerto Rico Legislature's interest in the health, safety, and welfare of its citizens constitutes a 'substantial' governmental interest." Id. at 341.

As for the third prong, the Court found reasonable the Puerto Rico legislature's view that restricting advertising would directly advance the governmental interest by reducing the demand for the product advertised. The Court also cited with approval a statement from an earlier case that the third prong of Central Hudson is satisfied where the legislative judgment is "not manifestly unreasonable." Id. at 342.

As for the fourth prong, the Court thought "it clear beyond peradventure that the challenged statute and regulations satisfy the fourth and last step of the Central Hudson analysis, namely, whether the restrictions on commercial speech are no more extensive than necessary to serve the government's interest." Id. at 343. The Court left it "up to the legislature to decide" that "suppressing commercial speech that might ENCOURAGE . . . gambling" would be more effective than "promulgating additional speech designed to DISCOURAGE it." Id. at 344 (emphasis supplied by the Court).

In Board of Trustees of the State University of New York v. Fox, 492 U.S. 469 (1989), the Supreme Court made it still easier for the government to satisfy the fourth prong of the Central Hudson test. It held that the fourth prong is not to be interpreted "strictly" to require the legislature to use the least restrictive means available to accomplish its purpose. Id. at 476. Instead, the Court held, legislation regulating commercial speech is to be upheld if there is a "'fit' between the legislature's ends and the means chosen to accomplish those ends," -- "a fit that is not necessarily perfect, but reasonable. . . ." Id. at 480.

Applying the Central Hudson test to hypothetical legislation that totally banned cigarette advertising, one would first assume that the sale of cigarettes whose advertising was banned was legal and was not misleading. (If it were otherwise, then the advertising could be banned without regard to the Central Hudson test.) Next, one would ask whether the government had a substantial interest in the advertising prohibition. This question could be answered in the affirmative by citing the Supreme Court's finding in Posadas that the government's "interest in the health, safety, and welfare of its citizens constitutes a 'substantial' governmental interest." 478 U.S. at 341.

As for the third prong of the test -- that the advertising prohibition must directly advance the governmental interest -- as noted above, the Supreme Court in Posadas cited with approval a statement from an earlier case that it is satisfied where the legislative judgment is "not manifestly unreasonable." 478 U.S. at 342. In both Central Hudson and Posadas, the Court found it reasonable to believe that restricting advertising would reduce the demand for the product advertised in those cases. 447 U.S. at 568; 478 U.S. at 342. There seems no chance that it would find differently in the case of cigarettes.

In addition, in Posadas, when the Court applied the third prong of the Central Hudson test, it found that it did not matter "that the challenged advertising restrictions are under inclusive because other kinds of gambling such as horse racing, cockfighting, and the lottery may be advertised to residents of Puerto Rico. . . . [T]he legislature's interest . . . is not necessarily to reduce demand for all games of chance, but to reduce demand for casino gambling." 478 U.S. at 342. Therefore, it appears that if cigarette advertisements were banned, cigarette companies could not successfully argue that Congress had not banned advertisements for other dangerous products.

Finally, the fourth prong of the test -- that the prohibition not be more extensive than necessary to serve the government's interest -- would also seem unlikely to present a problem for a ban on tobacco advertising. Prior to Fox, a cigarette company challenging such a ban might have succeeded -- although it is by no means certain -- by arguing that alternatives to a total ban, such as stronger health warnings or more anti-smoking advertisements, would be as effective in advancing the government's interest. After Fox, it seems very unlikely that a cigarette company could successfully argue that an advertising prohibition did not represent a reasonable "'fit' between the legislature's ends and the means chosen to accomplish those ends."

In conclusion, it seems likely that a total ban on cigarette advertising would be upheld by the Supreme Court as constitutional. It follows that it is at least as likely that the Court would uphold a limitation or elimination of the tax deduction for the costs of tobacco advertising.

TAX DEDUCTIONS

Even if it would be unconstitutional for Congress to ban tobacco advertising totally, it would not follow that the First Amendment requires Congress to subsidize it through allowing a tax deduction. In Regan v. Taxation With Representation, 461 U.S. 540 (1983), the Supreme Court upheld Congress's denial of tax exempt status to nonprofit organizations that engage in lobbying, even though lobbying is a form of speech fully protected by the First Amendment. The Court cited

Cammarano v. United States, 358 U.S. 498 (1959), in which we upheld a Treasury Regulation that denied business expense deductions for lobbying activities. We held that Congress is not required by the First Amendment to subsidize lobbying. Id., at 513. In these cases, as in Cammarano, Congress has not infringed any First Amendment rights or regulated any First Amendment activity. Congress has simply chosen not to pay for TWR's lobbying. We again reject the "notion that First Amendment rights are somehow not fully realized unless they are subsidized by the State."

461 U.S. at 546. If Congress is not required through tax deductions to subsidize lobbying, which is fully protected speech, then it seems clear that it is not required through tax deductions to subsidize tobacco advertising, which apparently could be banned without infringing the First Amendment.

TWO RECENT CASES

Recent Supreme Court cases contain language that, taken out of context, could be used to argue that limiting the deductibility of the cost of tobacco advertising would be unconstitutional. For example, in Simon & Shuster v. New York State Crime Victims Board (the "Son of Sam" case), the Court struck down a law that required that the profits of a criminal's writings about his crimes be held in escrow for the victims of his crimes. 502 U.S. ___, 116 L.Ed.2d 476 (1991). In its opinion, the Court said that "[a] statute is presumptively inconsistent with the First Amendment if it imposes a financial burden on speakers because of the content of their speech." 116 L.Ed.2d at 485-486.

It would not seem reasonable, however, to apply this statement to a statute that regulated commercial speech on the basis of its content, as all such statutes could impose a financial burden on the speaker. Rather, it appears that the Court was saying that, to the extent the government may not ban particular speech, it also may not impose a financial burden on it. Simon & Shuster concerned fully protected speech that the government may not ban and therefore could not financially burden; it did not concern commercial speech such as tobacco advertising. Commercial speech is speech that "propose[s] a commercial transaction." ⁴ That a criminal's writings are published and sold for profit does not make them commercial speech; i.e., it does not "prevent them from being a form of expression whose liberty is safeguarded [to the maximum extent] by the First Amendment." ⁵

Another case cited to support the argument that it would be unconstitutional to limit the deductibility of the costs of tobacco advertising is R.A.V.: v. City of St. Paul, 505 U.S. ___, 120 L.Ed.2d 305 (1992), which struck down a statute that prohibited cross burning. This case considered a municipal ordinance that, as interpreted, prohibited cross burning only to the extent that it constituted fighting words, which are words "which by their very utterance inflict injury or tend to incite an immediate breach of the peace." ⁶ Fighting words are not protected by the First Amendment. However, in R.A.V.:, the Supreme Court held that, although the government may proscribe fighting words "BECAUSE OF THEIR CONSTITUTIONALLY PROSCRIBABLE CONTENT," they may not "be made the vehicles for content discrimination unrelated to their distinctively proscribable content." 120 L.Ed.2d at 318 (emphasis in original). That is, the government may proscribe fighting words, but it may not make the further content discrimination of proscribing particular fighting words on the basis of hostility "towards the underlying message expressed." Id. at 320. In this case, the ordinance banned fighting words that insult "on the basis of race, color, creed, religion or gender," but not "for example, on the basis of political affiliation, union membership, or homosexuality. . . . The First Amendment does not permit St. Paul to impose special prohibitions on those speakers who express views on disfavored subjects." Id. at 323.

It has been suggested that the holding in R.A.V.: would apply to other types of speech besides fighting words, especially to types of speech, including commercial speech, which, unlike fighting words, are entitled to at least some First Amendment protection. This suggestion would appear to have merit to the extent that a governmental restriction of commercial speech discriminated in a manner comparable to the manner in which the cross burning statute in R.A.V.: did. For example, dictum in R.A.V. states that "a State may not prohibit only that commercial advertising that depicts men in a demeaning fashion. . . ." Id. at 321. However, R.A.V. would not seem to prevent the government from prohibiting (or limiting the tax deductibility of) advertisements for one product but not for another, where the government's motivation was to promote health rather than "political correctness." To apply R.A.V.: to all advertisements would apparently mean that the government could not regulate any advertisement unless it regulated all advertisements the same way. It does not seem possible that the Supreme Court could have intended this result.

This result would implicitly have overruled the Central Hudson test, which the Court has expressed no interest in doing. It would mean, to consider only the second prong of the test, that the government would not be permitted to draw distinctions between substantial interests, such as public health, and insubstantial interests in determining what limits to place on advertising. It would not seem reasonable to conclude that the Court intended its decision in R.A.V. to deprive the government of the power to make such distinctions.

DISCRIMINATION AGAINST TOBACCO ADVERTISING

There would appear to be no constitutional problem with Congress's singling out tobacco products with respect to limiting the deductibility of the their advertising. The Supreme Court has held that the language of the Fifth Amendment prohibiting the government from depriving any person of "life, liberty, or property, without due process of law," guarantees the equal protection of the laws. ⁷ However, in New Orleans v. Dukes, 427 U.S. 297, 303 (1976), the Court indicated that the general rule to determine whether statutory discrimination is unconstitutional is that --

Unless a classification trammels fundamental personal rights or is drawn upon inherently suspect distinctions such as race, religion, or alienage, our decisions presume the constitutionality of the statutory discriminations and require only that the classification challenged be rationally related to a legitimate state interest. . . .

Although free speech is a fundamental personal right, the Court, as quoted above, has indicated that there is no right to have one's speech subsidized through tax deductions. In determining the legitimacy of the governmental interest in limiting the deductibility of the costs of tobacco advertising, New Orleans v. Dukes, 427 U.S. at 305, suggests that the Court would be

guided by the familiar principles that a 'statute is not invalid under the Constitution because it might have gone farther than it did,' that a legislature need not 'strike all evils at the same time,' and that 'reform may take one step at a time, addressing itself to the phase of the problem that which seems most acute to the legislative mind,' [citations omitted]."

This language is consistent with the Court's statement in Posadas, quoted above, that the legislature may choose to reduce the demand for casino gambling without attempting to reduce the demand for all games of chance. Therefore, it appears that if the deductibility of the costs of tobacco advertising were limited or eliminated, tobacco companies could not successfully argue that Congress had not done the same with respect to other products, or even with respect to other dangerous products.

² Miller v. California, 413 U.S. 15 (1973).

³ Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557, 563 (1980).

⁴ Board of Trustees of the State University of New York v. Fox, 492 U.S. 469, 473 (1989).

⁵ Joseph Burstyn, Inc. v. Wilson, 343 U.S. 495, 501-502 (1952).

⁶ Chaplinsky v. New Hampshire, 315 U.S. 568, 572 (1942).

⁷ Buckley v. Valeo, 424 U.S. 1, 93 (1976).