Want a tax deduction or tax exemption? The Solicitor General of the United States, the federal government’s top litigator at the Supreme Court, says the price of that “governmental subsidy” or “voluntary tax-benefit program” is giving up your First Amendment rights. A “bargain” or “waiver” of your rights. But the claim is a hidden trap, removing an important free speech limit on government power.
The federal government has been pushing that argument for sixty years; sometimes it won (Regan v. Taxation With Representation (1983), limit on charities’ lobbying did not violate the First Amendment). But in recent years, the Supreme Court usually rejects the argument, as it did in 2013 (Agency for International Development v. Alliance for Open Society Int’l) (AOSI I), in 2017 (Matal v. Tam), and in 2020 (AID v. AOSI II). As Justice Alito pointed out in Matal v. Tam, a case asking if the First Amendment protects “offensive” trademarks, the Department of Justice has been trying to expand their theory into an all-encompassing governmental power to limit the First Amendment rights of anyone who gets a governmental benefit or participates in a governmental program: “a new doctrine that would apply to ‘government-program’ cases. For the most part, this argument simply merges our government-speech cases and the previously discussed subsidy cases in an attempt to construct a broader doctrine.”
In other words, if you take a tax deduction or a governmental benefit or participate in a government program that involves an outlay of tax dollars (even an “indirect” one, such as not having to pay as much tax), you lose some of your First Amendment rights. This would be a massive problem: almost all Americans take tax deductions, receive governmental benefits, or participate in governmental programs.
Congress’s power to decide what is tax-exempt or tax-deductible is not unlimited: The First Amendment supplies “a limit on Congress’ ability to place conditions on the receipt of funds.” Rumsfeld v. Forum for Academic and Institutional Rights (2006). If every exemption, benefit, or deduction becomes a “voluntary” waiver that negates the First Amendment, then there is effectively no First Amendment limit on Congress’s ability to fashion a creative governmental “benefit.” And the problem would be worse if Congress, as it often does, leaves the details to agency regulation, which could expand the “voluntary” waiver far beyond what Congress intended. So, if the Supreme Court ever accepts the Solicitor General’s “broader theory,” it would be an enormous expansion of governmental power under the Constitution’s Sixteenth Amendment (income tax) and Spending Clause (if government pays for it, it can control it).
Yet this long, existential battle has mostly flown under the radar. They’re trying again in the “Schedule B” cases consolidated for Supreme Court oral argument on April 26: Americans for Prosperity Foundation v. Becerra, No. 19-251, and Thomas More Legal Center v. Becerra, No. 19-255. This freedom of association case involves a demand from the California Attorney General that charities wanting to operate or fundraise in California must surrender their major donor lists to him as the price, even though California does not use the strict donor privacy protections required under federal law (enacted following the Nixon-era “enemies list” scandals).
Even though the parties and lower courts in these cases didn’t raise this “subsidy” or “waiver” theory, the Solicitor General, sometimes known as the “Tenth Justice,” promoted the theory in the official briefs of the United States. For example, last November, President Trump’s Solicitor General told the Supreme Court that “the disclosure of a group’s donors, when imposed as a condition of administering a voluntary governmental benefit program or similar administrative scheme, is not a compelled disclosure … That is particularly so when the disclosure relates to a voluntary tax-benefit program – in effect, a governmental subsidy. An organization seeking the subsidy is not, strictly speaking, compelled to disclose its donors, because it always can forgo the governmental benefit.” Brief of the United States, Nov. 24, 2020, p. 12.
Then on March 1, 2021, President Biden’s Acting Solicitor General told the Court that: “a disclosure requirement imposed as a condition on a governmental subsidy does not raise the same First Amendment concerns as a requirement that compels disclosure as a regulatory measure.” Brief of the United States, March 1, 2021, pp. 24-25. The Acting Solicitor General has requested the Court allow her time during the April 26 oral argument to discuss her assertion.
Even though it might seem like this fight against the First Amendment should be a loser for the federal government, this is a really deep and complicated legal question. Almost every time the Justices face the “subsidy” or “public benefit” argument, we get cries of pain from the Court. For example, Justice Alito wrote in Matal v. Tam: “These cases implicate a notoriously tricky question of constitutional law. We have held that the Government may not deny a benefit to a person on a basis that infringes his constitutionally protected … freedom of speech even if he has no entitlement to that benefit. But at the same time, government is not required to subsidize activities that it does not wish to promote. Determining which of these principles applies in a particular case is not always self-evident.” (internal citations and quotation marks omitted).
The question originally wasn’t so difficult, but quickly the specific question of whether the Treasury was required to “subsidize” lobbying arose. Ever since the passage of the Sixteenth Amendment, Congress has exempted at least some organizations from taxes. But in the Revenue Act of 1934, otherwise charitable organizations were barred from tax-exemption and deductibility if they engaged in lobbying, and that deductibility prohibition for lobbying was extended to for-profit entities in 1935. In Cammarano v. United States (1959), the Court said that the federal government didn’t have to subsidize lobbying by a family-owned beer distributor because Congress had said so directly and clearly.
Then, in 1970, the Court decided Walz v. Tax Commission of the City of New York, which distinguished direct governmental support (subsidies, employment, grants, or contracts) from tax exemption: “No one has ever suggested that tax exemption has converted libraries, art galleries, or hospitals into arms of the state or put employees ‘on the public payroll.’” Justice Brennan, concurring in Walz, was more descriptive:
“Tax exemptions and general subsidies, however, are qualitatively different. Though both provide economic assistance, they do so in fundamentally different ways. A subsidy involves the direct transfer of public monies to the subsidized enterprise, and uses resources exacted from taxpayers as a whole. An exemption, on the other hand, involves no such transfer. It assists the exempted enterprise only passively, by relieving a privately funded venture of the burden of paying taxes. … The exemption simply leaves untouched that which adherents of the organization bring into being and maintain.”
There’s another reason the Court considers this a tricky area of constitutional law; it’s a self-inflicted wound, implicating questions about preserving prior precedents. In 1983, the Court returned to the lobbying prohibition on charities, but stumbled with some inartful language. In Regan v. Taxation With Representation, the Court said: “Both tax exemptions and tax deductibility are a form of subsidy that is administered through the tax system. A tax exemption has much the same effect as a cash grant to the organization of the amount of tax it would have to pay on its income. Deductible contributions are similar to cash grants of the amount of a portion of the individual’s contributions.”
The language of the Regan opinions reflects that stumble and the resulting confusion. In Footnote 5, Chief Justice Rehnquist, for the Court, tried to clarify that it was not disagreeing with Justice Brennan’s concurrence in Walz: “In stating that exemptions and deductions, on the one hand, are like cash subsidies, on the other, we of course do not mean to assert that they are in all respects identical.” But many, including the Solicitor General, overlook the correction. They think exemptions = subsidies = unlimited waiver of rights; not “similar to,” but equal to.
In addition, through Footnote 6 in the Court’s Regan opinion and a Justice Blackmun concurrence that has, over time, become the general rule, the Court added a new “not unduly burdensome” restriction on Congressional power to limit speech through the subsidy theory: no speech restriction could be so burdensome that the organization could not function using “private” money. In 1984, in FCC v. League of Women Voters of California, just one year after Regan, the Court said that a public radio station that received less than 1% of its funding from federal appropriations could not be barred from using private funds “to make known its views on matters of public importance.” Free speech, despite the government’s 1% “subsidy.”
Still, several seemingly-conflicting decisions came down, with some arguing that “Every tax exemption constitutes a subsidy that affects nonqualifying taxpayers, forcing them to” bear its cost, Texas Monthly, Inc. v. Bullock (1989), and others saying that, “Although tax exemptions and subsidies serve similar ends, they differ in important and relevant respects, and our cases have recognized these distinctions.” Camps Newfound/Owatonna, Inc. v. Town of Harrison (1997). Gradually, however, the Court began to pull together a clearer explanation of the limits on Congress of the “subsidy” or “benefits” approach. In 2011, in Arizona Christian School Tuition Organization v. Winn, the Court rejected the assertion that indirect assistance through money that the government never collected should be considered equivalent to cash grants: “Respondents’ contrary position assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands. … Private bank accounts cannot be equated with the Arizona State Treasury.”
Since Agency for International Development v. Alliance for Open Society International (ASOI I) came down in 2013, the modern Court has focused on Congressional power, as it had in the original cases on tax-exemption. “In the present context, the relevant distinction that has emerged from our cases is between conditions that define the limits of the government spending program – those that specify the activities Congress wants to subsidize – and conditions that seek to leverage funding to regulate speech outside the contours of the program itself. The line is hardly clear, in part because the definition of a particular program can always be manipulated to subsume the challenged condition.”
The AOSI I Court returned to a 1991 analysis from Rust v. Sullivan to see whether the challenged condition applied to the funded or subsidized “project” under review (likely appropriate) or to the “recipient” (likely inappropriate because the subject is outside the contours of the program intended to be restricted). “We explained that Congress can, without offending the Constitution, selectively fund certain programs to address an issue of public concern, without funding alternative ways of addressing the same problem. … The challenged regulations were simply ‘designed to ensure that the limits of the federal program are observed,’ and ‘that public funds [are] spent for the purposes for which they were authorized.’” In short, a grantee can continue to engage in protected conduct using private funding.
As Justice Kavanaugh’s 2020 opinion for the Court in AOSI II pointed out, the Regan option to speak through an affiliate was “rejected” in AOSI I because it “in essence would have compelled the American organizations to affiliate with other organizations.” Justice Breyer, in dissent in AOSI II, reinforced this rejection of part of Regan’s formula for constitutionality: “We further explained in AOSI I – and this is critical – why we could not accept the Government’s suggestion that the case was just a redux of Regan. In AOSI I, the Government suggested a similar ‘dual-structure’ solution to the First Amendment problem. Like the nonprofit in Regan, the Government noted, respondents could act (and speak) through two corporate entities. … True enough. But we rejected the Government’s argument all the same.”
Add into the mix Justice Alito’s 2017 analysis in Matal v. Tam that “just about every government service requires the expenditure of government funds. This is true of services that benefit everyone, like police and fire protection, as well as services that are utilized by only some, e.g., the adjudication of private lawsuits and the use of public parks and highways.” In other words, the Supreme Court noticed how far the Solicitor General’s theory could stretch to swallow First Amendment rights.
In that light, the Solicitor Generals’ straight-faced assertions that there is some powerful governmental power to strip away First Amendment rights as a “bargain” or “waiver” in exchange for tax-exemption or deductions seem thin. Even California, which had several opportunities to plead the subsidy theory to support its desire to vacuum up the donor lists of every charity that wanted to do business in California, didn’t argue that in the end.
It seems the days are over in which a government could simply utter “Regan” and hope to gain unlimited leverage over speech using tax exemption or deductions. Now, both California and Congress still have to justify these decisions under the First Amendment as within their power and as tailored to the circumstances. And that is a win for the First Amendment’s inherent limits on government.
But this quiet battle for the heart of the First Amendment, waged at least three times in the last decade, may yet continue. We will have to see what the Supreme Court says in response to the Solicitor Generals’ theory in the Schedule B cases this Term for the latest installment.
Barnaby Zall is a constitutional lawyer and U.S. Supreme Court practitioner from Friday Harbor, Washington.
