The U.S. Supreme Court's held yesterday in the Citizens United case that it is unconstitutional to ban independent corporate campaign spending. This raises serious doubts about the constitutionality of Internal Revenue Code Section 162(e), which in its current form denies businesses a tax deduction for any spending in connection with political campaigns and lobbying. For a large profitable publicly held corporation operating exclusively in Colorado (which has a flat 4.63% income tax rate), Section 162(e) is a de facto 65% surtax on political advertising, relative to advertising related to the business or in furtherance of a charitable cause. Your mileage may vary.
The activities denied a deduction by Internal Revenue Code Section 162(e) include the very poltical speech that the U.S. Supreme Court held yesterday that corporations have a constitutional right to engage in under the First Amendment. In the wake of Citizens United, can it be constitutional to impose a 65% surtax on an expenditure for a an independently produced, funded and aired television spot urging viewers to vote for John Doe, when no tax would be imposed on an otherwise identical television spot asking people to buy widgets or give to the United Way?
Generally speaking, free speech regulations that are not content neutral are subject to strict scrutiny and may only be upheld when necessary in light of a compelling governmental interest. The court in Citizens United expressly held that equalizing the resources of political candidates was not a compelling governmental interest. A handful of cases provide precedent for the principle that taxes that make content based distinctions on constitutionally protected speech are unconstitutional under the First Amendment. A tax case arising out of the Citizens United case may be the next precedent in that line of cass.
Prior to Citizens United, the fact that Congress was believed to have the power to prohibit corporate political speech, at least in the context of partisan elections, made the related tax treatment based on content based distinctions about speech seem a fortiori also constitutional. Now, each of the limitations on business expense deductions under Section 162(e) of the Internal Revenue Code need to be examined on a case by case basis to determine if they involve corporate free speech rights that are constitutionally protected.
The corruption justification used in Citizens United to refrain at that time from rendering an opinion so sweeping that it would invalidate the ban on direct contributions to candidates by corporations and unions might very well be extended to IRC 162(e)(1)(D) (direct lobbying of public officials), but it is easy to imagine that at least some of IRC 162(e) could be invalidated on the basis of Citizens United and the First Amendment tax cases.
The issue is obviously a new one, and I merely raise the possibility here. The law is never completely clear on a constitutional issue of first impression, and there may be arguments that I have overlooked. Feel free to suggest them.
More at Wash Park Prophet.