Sethi -2 SUMMARY OF MAJOR POINTS IN THE TESTIMONY The issue of grassroots lobbying, including advocacy advertising, by large corporations is a subject of growing national concern and debate. The past decade has witnessed an upsurge in the advocacy form of advertising where corporations use mass media vehicles to publicize their viewpoints on major controversial issues of public policy where corporate management consider their vital interests to be at stake. While conclusive data on grassroots lobbying expenditures is not available, current estimates put these expenditures to be in excess of $1.0 billion per year. The United States House of Representatives Subcommittee on Commerce, Consumer and Monetary Affairs has been holding hearings on this subject. These hearings have disclosed that the Internal Revenue Service has not been adequately enforcing the tax code relating to the non-deductibility of expenditures for grassroots lobbying by businesses. Testimony has been pre sented indicating a great deal of confusion and ambivalence as to what expenditures are actually deductible. This testimony raises a number of major issues that go beyond the simplistic response of more law enforcement efforts by the IRS. A New Schema to Classify Corporation's "Representational" Activities Current IRS rules interpreting Section 162(e) (2) of the Revenue Act of 1962, and dealing with grassroots lobbying expenditures are ambigous and subject to large variance in consistency of enforcement. IRS regulations permit deductions for advertising expenditures that present views on economic, b. Funds for the NCPI could come from industry on a voluntary basis. An alternative method would be to allocate the NCPI a portion of the funds collected through user charges from broadcast license holders as proposed in current proposals for the reform of the Federal Communications Act made by Congressman Van Deerlin's Subcommittee on Communications. C. NCPI's program and group selection process would be modeled on the National Science Foundation. Public interest groups would make proposals to the NCPI for funding. NCPI's board, with the assistance of outside advisors, would select the proposals for support. Once proposals have been selected for funding, NCPI would invite advertising agencies to submit campaign ideas and budgets that would translate these proposals into reality. d. The emphasis would be on the discussion of general ideas rather than opposition to specific corporate actions or government decisions so that the public can become better informed on important social issues. The current hearings by this Committee present an opportunity to examine the rationale for permitting tax deductibility of various types of institutional/image and issue/idea corporate communications in the larger social context. A re-examination of the categories of expenditures permitted deductible treatment, development of procedures to further self-assessment and voluntary compliance by corporate management, and a greater democratization of shareholder processes thereby legitimizing grassroots lobbying, would resolve many of the problems raised in these hearings. Sethi -10 INTRODUCTION MAGNITUDE OF GRASSROOTS LOBBYING The last few years have seen a tremendous upsurge in the efforts by corporations and industry groups to inform, educate, and persuade the general public as well as special constituent groups on business' viewpoint pertaining to important social issues. Concerned about a gradual but sustained decline in public trust and credibility; an allegedly hostile press, environmental and consumer groups; and, perceiving itself threatened with extensive regulation and loss of management autonomy, business has launched extensive campaigns to reverse these trends. One of the most overt manifestations of this policy is the use of publicity campaigns called "advocacy advertising" in which sponsoring corporations use print and electronic media to publicize their viewpoints on controversial issues of public policy where corporate management feels their vital interests are at stake. Corporations are not limiting their attempts to influence the general public, or segments thereof, with respect to legislative matters, by relying solely on print or electronic media advertisements. A variety of other means of indirect grassroots lobbying are also being increasingly employed. These include employee newsletters, shareholder communications, management presentations to customers, suppliers and dealers. The objective is the propagation of ideas and elucidation of corporate policy on controversial social issues of public importance in a manner that supports the position and interests of the sponsoring corporation while expressly or indirectly denying the accuracy of facts and downgrading the viewpoint of the sponsor's opponents. Precise dollar estimates for grassroots lobbying are not available and are difficult to determine. Corporate tax returns do not provide adequate and systematic information on expenditures incurred on grassroots lobbying.1 The situation is aggravated by the Internal Revenue Service due to lack of clear-cut guidelines and inadequate enforcement on the part of the IRS in the audit of business expenses for grassroots lobbying. It is understandable that the IRS, lacking expertise in the evaluation of advertising and other communications to determine their deductibility, would tend to place a higher priority on other law enforcement activities. The result is that a large part of grassroots lobbying activity is treated inaccurately by corporations and is recorded as a tax-deductible item instead of recording it under Section 162 (e) (2) where it would be a non-deductible item. This conclusion is supported by the findings of studies by GAO, Common Cause and this Subcommittee's own investigation.2 Notwithstanding the lack of accurate data some educated guesses as to the amounts spent by business on grassroots lobbying are possible. According to surveys conducted by the Public Relations Journal, U. S. corporations and associations spent a combined total of $410.4 million on institutional advertising in six major media during 1976, an increase of 34.4 percent over 1975. Separately, corporate advertisers spent $292.7 million on institutional advertising in 1976, an increase of 39.3 percent over 1976, following a 6 percent cut in 1975. Associations expenditures increased 23.6 percent, following a 9 percent rise in 1975. Of the ten leading corporate advertisers in 1976, seven were oil companies (EXXON, Shell, Phillips Petroleum, Texaco, Standard Oil of California, Mobil, and Standard Oil of Indiana). The other three were: AT&T, General Motors, and IBM. These ten corporations spent $97.7 million on corporate advertising in 1976.3 |