Local news organizations are vital to a well-functioning democracy. But they struggle financially and many fail, creating local news deserts. Some lawmakers think tax breaks for local news organizations can help. 

This sounds reasonable. It might even feel righteous. But legislative efforts nationally and at the state level have yet to succeed. Why?

Some historical context.

Court cases (and protests) have established that while newspapers are not immune from ordinary forms of taxation, they cannot be subject to discriminatory taxation. 

US history is replete with challenges to taxing newspapers. Remember the Stamp Act of 1765? It allowed the British to tax all papers and official documents (including newspapers) in the American colonies but not in England. Colonists protested, helping lay the groundwork for the American Revolution. 

In 1936, the US Supreme Court struck down Louisiana’s 2 percent license tax on newspapers with a weekly circulation of more than 20,000—papers that happened to be critical of then-Governor Huey Long. 

In 1983, the High Court struck down Minnesota’s “use tax” on periodicals’ cost of paper and ink in excess of $100,000 a year. The tax would have applied only to 11 publishers, and most would have been paid by just one, The Minneapolis Star Tribune. 

And in 1987, the court overturned an Arkansas law that exempted some publications from the state’s sales tax but not others.  

Currently, no state levies a general sales tax on the purchase of newspapers, though Delaware, New Mexico, and Washington levy a gross receipts tax on the publishers. In fact, recent efforts are focusing on reducing taxes paid by newspapers. 

Two years ago: The Build Back Better effort fell flat.

President Biden’s initial Build Back Better Act would have allowed newspapers, digital news outlets, and radio and television stations—including chains that employ thousands—to claim a federal payroll tax credit of up to $25,000 in the first year and $15,000 in years two through five. It would have cost $1.67 billion over the next five years.

The measure did not survive. One complaint was reminiscent of the Huey Long era. Louisiana Republican Rep. Steve Scalise said the tax break was an effort by Democrats to help “pay the reporters’ salaries who cover for them.”

And last week in Virginia: Income tax credits failed, too.

Democratic Del. Alfonso Lopez introduced House Bill 2061 last month, which would have created a nonrefundable state income tax credit for local newspaper publishers equal to 10 percent of the wages paid to local journalists, up to $5,000. After the first year, the credit would have fallen to 5 percent of wages, up to $2,500. Total credits in the five-year program would have had an annual cap of $5 million. 

The bill also would have granted local businesses with fewer than 50 employees a tax credit for advertising in a local newspaper, radio, or television station. 

Last week, the bill failed to advance out of a House committee.  

Washington State has another idea.

Since 2009, qualifying newspaper printers and publishers in Washington State have been eligible for a reduced business and occupation (B&O) tax rate of 0.35 percent, compared to the standard 0.484 percent rate. The reduced rate expires on July 1, 2024. (Washington’s B&O tax is essentially a gross receipts tax.)

Last month, state Attorney General Bob Ferguson and Democratic lawmakers Sen. Mark Mullet and Rep. Gerry Pollet proposed replacing that rate reduction with a tax deduction. The bill would allow Washington newspapers and eligible online news outlets to deduct publishing costs from their B&O tax. 

Sponsors insist the deduction would be substantial enough to help local news organizations but not excessive. Reducing the B&O rate reduces state revenue by less than $500,000 in the current budget cycle. The revenue cost of the proposed deduction is not known. 

The bill has been referred to the legislature’s Ways & Means committee.

But these tax breaks might be too targeted… or one-sided.

Justice Thurgood Marshall said, “a power to tax differentially, as opposed to a power to tax generally, gives a government a powerful weapon against the taxpayer selected.” 

Tax breaks for struggling local newspapers may not be the type of discriminatory tax treatment rejected by the Supreme Court, but they do raise the question: Is it good for democracy and its free press if local newspapers and journalists receive financial assistance from the government they are mission-bound to cover independently? 

“Follow the money,” after all.

There are other options that focus on the demand side of the newspaper industry’s market. Could tax benefits, like exemptions or deductions, encourage more people to subscribe to local news? 

Business readers already can deduct the cost of newspaper subscriptions from their federal income tax. But should budgets accommodate more carveouts to their tax bases? They could, but if tax revenues fall too much, those carveouts could go away, or rates could go up.

Maybe there’s a better way.

Local newsrooms can pursue a different organizational structure, one that does not rely on subscribers or advertisers. They can become nonprofit, tax-exempt newsrooms, like The Texas Tribune or The Colorado Independent. 

Tax exemption is a tax benefit, too, but as a tax-exempt organization, a newsroom must disclose its financial information and other records to the public. That increases transparency and accountability. 

Tax-exempt newsrooms are not organized to serve shareholders. Unlike private newsrooms that can incorporate “for any lawful purpose,” the IRS requires an incorporated nonprofit newsroom to serve a specific charitable purpose, namely, “educational.”  

To fulfill its purpose, it must seek funding from foundations and other donors, providing a more stable revenue stream while building and maintaining community engagement. While a nonprofit newsroom may reflect the ideology of its benefactors, readers who want access to local news and reporting may determine it’s worth the risk. 

Although pursuing tax-exempt nonprofit status can take time and significant resources, the result might be local news’ best option. And it might be our best bet for a truly independent and free press.

Follow the money, indeed.

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.