Time To Revive Minority Tax Certificates

In the 17 years that the FCC's minority tax certificate policy was in effect -- from 1978 to 1995 -- the scant minority ownership of broadcast properties multiplied. The policy produced 364 tax certificates and 200 media transactions totaling more than $1 billion in value. That represented about two-thirds of all minority-owned stations. When the policy began, minorities owned about 40 of 8,500 broadcast stations. Over its lifetime, the policy helped raise that number to 333 -- 290 radio stations and 43 TV stations. It also yielded 31 cable systems.

The policy encouraged the sale of broadcast and cable properties to minority-owned buyers by deferring sellers' capital gains taxes. Providers of capital to new minority companies also received tax incentives.

But in 1995 Congress repealed the policy. A main reason given by repeal proponents was far afield from broadcasting: to pay for restoration of a health care tax deduction for farmers and the self-employed. Perceived abuses of the tax policy were another reason. One unusually large transaction -- the proposed $2.3 billion sale of Viacom cable systems and deferral of about $400 million in federal and $200 million in state taxes -- was also a factor. Then-Sen. Robert Dole called it "a tax break for millionaires." How many "abusive" deals there were, and how serious, are still debated.

Other concerns included administration of the program; vague and inadequate standards for determining eligibility of transactions (the test, for example, focused on minority stock ownership and not whether it also involved active minority control); "flipping" of certificated stations too soon to provide significant minority participation in the industries; and unfair racial preference.

Since the repeal and passage the following year of the Telecommunications Act of 1996, which paved the way for further consolidation of station ownership and narrowed opportunities for new entrants to the broadcast business, minority ownership has decreased by about 14%. That is despite the rapid growth in the percentage of minorities in the population. According to a Free Press study, in 2006 minorities composed a third of the population and owned less than 4% of TV stations and 7% of commercial radio stations.

 As a result of these developments, right now in Congress, the FCC and the broadcast and cable industries there is new movement toward creating an updated tax incentive policy. This builds on efforts over the past few years. Recent examples of that activity are:

• Late last month at the annual conference of the Minority Media and Telecommunications Council (MMTC), Sen. Robert Menendez (D-N.J.) announced his intent to introduce new tax incentive legislation that addresses and remedies concerns about the earlier policy. Full disclosure: I am a member of MMTC and an advisory group to it.
• Key leaders have expressed bipartisan support for restorative legislation. Among them is Republican FCC Commissioner Robert McDowell, who told the MMTC Conference: "I do not understand why the 111th Congress has not passed legislation to reinstate a new and improved tax certificate program. That one program alone could make a world of difference." Republican Commissioner Meredith Atwell Baker noted that minorities now own only 8% of radio stations. Democratic FCC Commissioner Michael Copps also reiterated his longstanding support, and Commissioner Mignon Clyburn also favors the initiative.
• Both NAB and NCTA support restoration. NAB President Gordon Smith supported an earlier tax incentive bill when he was a Republican Senator from Oregon.

Restoration now requires new congressional authorizing legislation. Achieving that requires more than reforms that will yield the needed votes. The new law must also navigate court constitutionality rulings such as Adarand Constructors, Inc. v. Peña. In it, the Supreme Court in 1995, the same year Congress repealed the FCC tax policy, required the highest level of court scrutiny for federal incentives tied to racial classifications. This led the FCC to end its broadcast auction bidding credits for minorities and women. Applying Adarand three years later, another court struck down parts of the FCC's EEO broadcast rules, causing modifications. Innovations now must reflect these and other court cases, and should also make the new tax incentive policy as effective as possible in achieving its goals.

To do that, several reforms are either under consideration now, or could be. Among them are:

• Cap the size of eligible deals in dollar value of the transaction, in amount of deferrable tax and/or number of stations or cable systems.
• Limit the total amount of tax liability that can be deferred under the program in a given year.
• Expand the test of minority and other eligible participation beyond stock ownership by the buyers to include their continuous involvement in station management. This would promote a major goal of the legislation: diversity of programming.
• Extend the policy to women, who are more than 50% of the population but own only 5% of commercial television broadcast stations and 6% of radio stations.
• Adopt a minimum holding period for stations/systems bought under the program. There is precedent for this. Current FCC rule section 73.7005 limits, for the first four years of on-air operation, the assignment or transfer of noncommercial stations awarded by use of a comparative point system involving public interest factors. This rule helps assure that the public benefits of the selection process are significant, and addresses the problem of "flipping" of stations.
• Extend the tax incentive policy to noncommercial TV and radio stations. The old policy was for commercial stations only.
• Limit the number of tax incentive transactions, or the total value of transactions, that any one company can participate in. This would enhance the diversity of buyers under the program.
• Define the class of eligible parties to include, but go beyond, minorities and women. For example, small businesses are disadvantaged in obtaining capital to buy broadcast and cable properties, and small businesses often are owned by minorities and/or women. The eligible category could also be one of socially or economically disadvantaged buyers. Courts held that federal incentive programs cannot be based on race alone.
• Extend the policy to telecommunications -- wireless, wireline -- where there is significant potential for entrance by those with low participation in broadcasting and cable.