California Contemplates a Link Tax
The California state legislature is poised to consider a link tax on digital services, aimed at subsidizing news publishers who operate online. The California Journalism Preservation Act (CJPA, AB 886) was recently introduced in California, and will be considered at a hearing by the Assembly Privacy and Consumer Protection Committee on April 25.
The bill aligns ideologically with a federal bill that failed to pass in two previous Congresses, S. 1094, the Journalism Competition and Preservation Act (JCPA).1 But the CJPA is a worse notion than its federal predecessor. Having misdiagnosed local journalism’s difficulties, it aims to remedy those challenges with a straight tax-and-spend subsidy, funding handouts to news publishers by taxing the advertising revenues of a leading source of traffic to those publishers. It runs afoul of the U.S. Constitution in multiple ways, and threatens the fundamental structure of the internet by adopting a strategy that has failed in countries abroad: subjecting a central building block — the link — to taxation.
Lack of payment for hyperlinks to news sites is not the cause of local journalism’s difficulties. While there is a crisis in local journalism in many regions, this crisis has many causes, as explained by a report last year from the U.S. Copyright Office. The CJPA, however, begins from the false premise that digital services somehow “siphon” revenue away from news sites by linking to them and then sending them traffic. It then proposes to tax digital services based on traffic volume and direct those funds to subsidize news publishers.
There is little evidence that hyperlinks have caused the local journalism crisis. On the contrary, many digital news sites depend on link traffic from digital services. In fact, links from digital services currently deliver millions of eyeballs to journalism sites everyday which provides more viewers and revenue. The bill itself recognizes this considerable benefit to online publications with a “must-carry” provision to ensure the links continue:
“A covered platform shall not retaliate against an eligible digital journalism provider for asserting its rights under this title by refusing to index content or changing the ranking, identification, modification, branding, or placement of the content of the eligible digital journalism provider on the covered platform.”
For centuries economists have understood that taxing an activity tends to diminish the extent to which an activity occurs. Indeed, policymakers have embraced this effect by taxing things regarded as undesirable. The CJPA, however, characterizes this logical consequence as “retaliation.”
The CJPA is unconstitutional. Like the federal JCPA, the CJPA suffers from multiple constitutionality problems, and then some. It violates the First Amendment in at least two independent ways. First, by forcing covered digital services to link to news publishers who demand payment under the guise of prohibiting “retaliation”, the bill unlawfully limits the editorial discretion of those services. If a digital service concludes that it will only display links to content providers who do not make demands under this proposed system, California cannot constitutionally compel that service to do otherwise.
Second, the bill runs afoul of the First Amendment principle against compelling the subsidization of another’s speech. A recent Supreme Court ruling made clear that the First Amendment prohibited a public employee from subsidizing speech with which they disagreed. Yet the CJPA does exactly that by compelling payments by digital services.
In addition, the bill is preempted by federal copyright law. That is, it attempts to intervene in policy choices that the Constitution reserves for Congress, here with regard to intellectual property. As a result, it conflicts with the Constitution’s Supremacy Clause by conflicting with the Copyright Act. As the Supreme Court explained in the patent context in Bonito Boats v. Thunder Craft Boats, states may not second-guess Congress’s “careful balance between public right and private monopoly to promote certain creative activity”. By requiring payment for the display of headlines, ledes, facts, and other elements of copyrightable works that federal copyright law provides are freely accessible, the CJPA second-guesses Congress’s policy choices in Section 301(a) of the U.S. Copyright Act.
Amid the many critiques that may be made of the bad ideas embedded in the federal JCPA, one thing the federal bill has going for it is that its bad ideas are at least being raised in the right forum: the federal legislature. The CJPA cannot even claim that.
Finally, the CJPA also arguably interferes with interstate commerce, another domain reserved for federal law, by imposing a tax on linking to out-of-state content, which cannot be regulated in Sacramento. The upshot of all these constitutional infirmities is that the bill invites legal challenges.
Taxing links fundamentally challenges the operation of the internet. Setting aside the bill’s serious legal deficiencies, this CJPA would be the start of a slippery slope, impeding a fundamental function of the open internet: the ability to link. The internet depends on linking, and if one state taxes links to subsidize a favored constituency, it is likely that other states will follow California’s lead, funding subsidies for other favored industries with taxes on relevant links. If financially unsustainable subsidies become the norm, digital services may exit the market, making access to information more difficult.
International analogues to the CJPA have not been successful. In jurisdictions abroad, ranging from the European Union to Australia to Canada, policymakers have considered or experimented unsuccessfully with link taxes and internet-funded subsidies for favored domestic news publishers. Instead of being the models for success and the longevity of journalism that some make these efforts out to be, they have proven uniformly unsuccessful. In Australia, the law has never been explicitly leveraged to force companies to negotiate, but its presence has still distorted the market by providing larger news businesses—that successfully lobbied for the law in the first place—with additional resources while smaller news businesses continue to face challenges. In fact, the Australian Treasury concluded that smaller news outlets would likely face these challenges in negotiations regardless of whether a “digital platform” is designated and forced to negotiate under the law or not.
In Canada, small news publishers have pushed back on the proposed Online News Act—still pending in the Senate—as the Canadian government’s estimates show that three-fourths of the estimated C$329 million brought in yearly from U.S. companies would go towards broadcasters in the country, which are dominated by a few large players, while only 25% of that revenue would go to newspapers. Meanwhile, the two American firms clearly targeted by the bill have signaled they could potentially cease the sharing of Canadian news in the country to mitigate the expected harms to business operations, an action which would leave Canadian news publishers without the estimated annual C$480 million of value derived from the two digital services bringing those publishers referral traffic, leaving publishers worse off and creating unnecessary obstacles to U.S. firms enabling Canadians’ access to information.
This is the precise scenario that EU regulators acknowledged when they unsuccessfully tried to suppress a study they had requested on press publishers’ rights because it found that “[t]he available empirical evidence shows that newspapers actually benefit from news aggregation platforms in terms of increased traffic to newspaper websites and more advertising revenue.” An economic report from Spanish publishers showed that a previous effort in Spain “that was passed in the name of helping news publications, ended up doing tremendous harm to many online publications — especially smaller sites that frequently (and happily) relied on Google News and other aggregators for a significant amount of traffic.”
The CJPA won’t actually help local journalism or journalists. Like the JCPA, the CJPA also would provide little help to local newspapers or reporters. Outside of unenforceable declarations in Section 2, the term “local” does not appear by itself in the bill — always “local, regional, national, or international matters.” Unlike the JCPA, which at least attempts to avoid revenues all flowing to the largest news publishers by imposing a ceiling on eligibility for subsidies, the CJPA does not. Instead of a ceiling, the CJPA imposes a revenue floor of $100,000, ensuring the smallest publishers are ineligible for subsidies. It further prohibits payments to any new entrants that later enter the market.
As a result, most of the “journalism usage fee payments” would go to large and out-of-state or even international publishers, including those increasingly owned by hedge funds or broadcasting conglomerates. The result of increased subsidies to these entities would be to entrench incumbent publishers, likely causing greater media concentration. While a concentrated journalism industry might be more economically viable for efficiency reasons, a more national media landscape is the polar opposite of the localism that the bill’s proponents aim to boost.
At the same time, as the bill contains a formula-driven transfer of revenues, it would provide financial incentives for ‘clickbait’ rather than quality journalism, and it would require the subsidization of all kinds of potentially problematic or even extremist outlets that could fit under the bill’s broad definitions. These proposals will not fix the problems with local journalism — and will likely even exacerbate them.
1 The federal JCPA was first introduced in 2018, and then again in 2021 as S. 673. It was most recently reintroduced in the U.S. Senate, without addressing any of the concerns raised by many in civil society and industry in previous Congresses. These concerns, from constitutionality to competition to content moderation to copyright, are outlined in detail here.