work broadcasting. Then the tax is immediately placed upon net time sales. Senator JOHNSON. It is just a sales tax. It is a sales tax on advertising sales. Mr. FLY. Roughly speaking; yes, sir. So, the tax here as you have it before you, I believe, is placed directly upon the network. I do not know what plans the industry might have in mind for any distribution of it. Senator JOHNSON. The network pays the station. The network does not do any broadcasting itself, it hires the station to do its broadcasting and it pays the station for doing that broadcasting. Mr. FLY. Yes-may I say, "yes" and "no"? Of course, the studio work, as you know, Senator, is done in New York. The broadcast originates in New York, or some program, Senator, in Chicago or Los Angeles, or possibly some other point and that, of course, is likely to be a network business at that end. On the commercial programs you are right, the network pays the station for putting the program out but, if it be a sustaining program, that is one in which there is no advertising sale and no income, the payment will run for that, that is, for the commercial program. Senator JOHNSON. There is no tax on sustaining programs on that kind of broadcasting? Mr. FLY. No. Senator JOHNSON. The tax all comes on the commercial programs? Mr. FLY. I do not think there is any conclusive answer to your point. That is conceivably a way that it might be worked out under the bill, although I merely point out that in the outset, it is placed directly upon the station broadcasting on its net time sales and directly upon the network upon its net time sales, so there is the immediate impact. Now the large networks will be substantially affected here. I do not want to say what the figure would be. I suspect on the 1940 figures it would be roughly around $2,000,000 each, that is, upon N. B. C. and Columbia. That would take a very heavy proportion of their net income, of course. Based upon-well, the 1940 figures, for example, that sort of a result would not be destructive, still taking either a longer view of it backward or a further view into the uncertain future, with the income in doubt and with the burden of public service in the increase, I think it sufficient to give us some pause there. Perhaps it may be found that the more emphatic results will be upon some of the regional networks. You take the Don Lee Broadcasting System, for example, on the west coast, where there is a pretty extensive regional network, now that network is rather extensive and having a fairly heavy and important business. It is not composed predominantly of big, profitable stations, and a tax falling heavily in a situation of that kind might conceivably result in impairment, or abandonment of service at a number of the smaller stations that are reached at some expense by such a network. Gentlemen, I believe, in view of the greater competence of many of the gentlemen who appear here, I shall not give any more specific statements regarding this matter. However, I am at the service of the committee. Senator BAILEY. Are you finished? Mr. FLY. I would be glad to try to dig up anything that the committee may instruct me to. Senator BAILEY. Are there any questions? Senator VANDENBERG. You are opposed to the tax, are you, Mr. Fly? Mr. FLY. I think it is a pretty dubious tax, sir. I am awfully reluctant, when you have the burden of finding money, to say I am opposed to the tax. Senator VANDENBERG. You want to save the radio industry in many other aspects. I would be interested in how you feel about that. Mr. FLY. I think it is a dubious tax. Senator DAVIS. If you put a tax on advertising in radio, will that not set a precedent for taxing advertising in newspapers? Mr. FLY. I think it might very well do so. Senator CLARK. You cannot conceivably tax a newspaper advertising under the Supreme Court decision in the Louisiana case. Mr. FLY. We have given consideration to a tax measure in view of the notion that broadcasting companies are operating with a public franchise, in effect utilizing public property. But then, considering the heavy public service the broadcasting industry is rendering, and in view of the competition with other advertising media, I am inclined to think that in any tax measure it would be well to treat the broadcasting industry pretty much in a class with the other branches of the communications industry. We have been considering for some time a possible draft of a bill which would assess broadly upon the communications industry roughly the cost of regulation, but a tax of that kind-well, I doubt, for example, if the result of that would be more than say, around one-half of 1 percent of gross upon the broadcasting industry, and then a part of such a tax, a very important part would be thrown upon the telephone industry, and some upon the telegraph industry which, incidentally, is not in a position to pay any heavy taxes. Senator JOHNSON. From the emphasis you put on the public service rendered by the radio station, it leads me to believe that you feel that this is a tax upon the freedom of expression. Am I right in reaching my conclusion, based on your testimony? You place great emphasis upon the fine public service that the radio industry is rendering. Mr. FLY. I think, sir, that that is really an important offsetting argument on the point that the radio operates with a public franchise. In other words, conceivably the approach to this would be that, since the business is, in effect, based upon the license, upon the use of the publicly owned frequency, a special tax should be imposed. I think the notion of the public service is rather an anticipatory reply to that point, at least in part; also, in emphasizing the amount of time, and hence the amount of money devoted to the public service, and I am pointing to the fact that, with the increase in that type of service, and with various additional burdens upon the broadcasters, coming at a time when there is apt to be a decreased income, then any substantial tax in addition to those now imposed might be very detrimental to the service. Senator BAILEY. What does the Radio Commission cost the Government? What was the appropriation? Mr. FLY. Apart from the special national-defense work, sir, it would be roughly $2,000,000 a year. Senator BAILEY. That is the appropriation to carry on your activity? Mr. FLY. Yes. Senator BAILEY. Who pays that? Mr. FLY. That is out of the appropriations, sir. It is not assessed in any way. Senator BAILEY. You do not collect any license fees? Mr. FLY. We get no license fees at this time. As I said, in considering this business of a tax to cover the industry as a whole, and merely to cover the cost of regulation, that is one possible, logical approach, to have some sort of license fees and costs for the different procedures, and that sort of thing. Senator BAILEY. A man who enjoys a Government franchise ought to be willing to pay for it, ought not he? Mr. FLY. I think that is true to that extent, sir. I think if they were readily available, a formula for assessing in terms of a franchise tax, that might well be done, but of course, when you start looking for the formula, you get into trouble. For example, you have stations of a given power who pay a certain amount of tax, we will take examples of a couple of large, powerful operations; you take WEAF in New York, you take KOB in Albuquerque, N. M., which at times is operated at 50 kilowatts also, and you will see it would be quite impossible to place upon those two stations the same amount of tax. That is the sort of problem you run into when you head into a franchise tax, based upon power. Conceivably, a more logical base would be in terms of coverage, that is, in terms of population that receive adequate primary service. At least, superficially, that would be a fairly sound approach, but even that is none too easy. The coverage is hard to determine with a great degree of precision, and it changes at various times with the seasons, the time of day, the sun-spot cycle, and a lot of other things, not to mention changes in the stations themselves. So, while that is not an impossible sort of problem, you can see it readily offers some difficulties. Senator BAILEY. The franchises heretofore granted are very valuable in some instances, are they not? Mr. FLY. Very valuable, sir. Senator VANDENBERG. As long as they last they are valuable. Senator BAILEY. What would the N. B. C. sell their franchises for today? Senator CLARK. It depends on who is trying to buy them, does it not? Senator BAILEY. Just give me a general estimate. The question of price always takes into consideration whether there is somebody ready to buy. What do you imagine the N. B. C. franchise is worth? They got it free. What do you think it is worth? Senator VANDENBERG. It is worth no more than you want it to be, is it not? Mr. FLY. That is not completely in our control, Senator. I do not know. You see, the N. B. C., for example, has several million dollars of properties, and it is an important going concern. There are various facilities that are not directly attached to a license for particular stations. You see, a network operation is something that can be done entirely apart from a license, quite apart from any station; that is, in the same ownership. What they need is the facilities; they need a sponsor; they need a program; they need talent; they need studios and a point of origin, and then from that studio programs can be piped to any number of stations by wires. So, when you come to evaluate the licenses for the particular stations that are controlled by the network, you need to draw a line between those two classes of facilities and services. Senator VANDENBERG. Don't you think they would be willing to pay something for a more exclusive sort of franchise than they now have? Mr. FLY. I suspect they would pay substantially more. Senator CLARK. On the other hand, take the Noble station, for example, the price might be lower? Mr. FLY. Might be lower. Senator CLARK. In other words, in the common gossip, the station sold for considerably less than the owner thought the station was worth? Mr. FLY. Yes; that is common gossip. And that, I think, is a pretty good description of it, Senator. I think I can give you some specific answer to that. The price that was paid for that station was around, I think, $850,000, and I also understand there was under consideration at the same time and for the period of a couple of weeks during the negotiations another proposition involving $875,000, but that the second proposition involved a restraining clause that would restrain the owner from going into the broadcasting business for a period of 5 years, or some such time. So there was adequate ground there for the choice of the slightly lesser amount without the restraint. Senator CLARK. Do you happen to know who represented Mr. Noble in that transaction? Mr. FLY. Yes; I do. Mr. Dempsey and Mr. Koplovitz. Senator CLARK. Was Mr. Corcoran of counsel? Mr. FLY. Pardon me? Senator CLARK. Was Mr. Corcoran of counsel? Mr. FLY. I do not think So, sir. Senator DAVIS. Can you give me the cost of the telephone charges, so to speak? Can you give me what the connection of the wiring-up of these different stations is? Can you give me what the radio pays to the telephone company? Mr. FLY. No, sir: I cannot, offhand. I can get some useful figures. Of course, they would vary, depending upon the location of the studio and the amount of distance that is to be covered, and the difficulties encountered. Senator DAVIS. Will you put them in the record? Mr. FLY. I shall be happy to do that, sir. (The following memorandum was submitted at the request of Senator Davis during the course of Chairman Fly's testimony :) NETWORK TELEPHONE-CIRCUIT EXPENSE Reports filed by the three major networks indicate that $6,398,772 in the aggregate was spent by them during calendar year 1940 for network line service and to provide studio-transmitter service and local loop service for their owned and oper ated stations in the cities of New York, Chicago, San Francisco, and Los Angeles. This amount is distributed as follows: Columbia Broadcasting System, Inc.. Total $2,181, 623 621, 931 3,995, 218 6, 398, 772 Figures showing expenses for network line service exclusively are not available, since the two larger networks lump in their reports both expenses for network line service and for local station purposes. However, officials of these networks estimate that 10 percent would closely approximate the amount included in the above over-all figure which is actually expended for station as distinguished from network purposes. Assuming the correctness of this estimate, the total charge incurred by the three major networks for the maintenance of permanent network service would be approximately $5,800,000 for the year 1940. In addition to the three major networks, a number of regional networks maintained permanent program-transmission circuits. The aggregate amount spent by all regional networks for this purpose would not have exceeded $500,000 for the year 1940. The accuracy of these figures is confirmed by the report of the American Telephone & Telegraph Co., in which it is stated that for the year 1940 the company had 16 customers employing 17 program-transmission circuits with 417 users over a total distance of 49,979 miles. The revenues derived by the company for this total service for the year was $6,664,248, according to its report. The slight increase between the amount reported by the telephone company and the amounts reported above results from receipts by the telephone company for temporary hook-ups as distingushed from the maintenance of permanent network connections. The total expense to the broadcasting industry for program-transmission circuits in 1940 was approximately $9,000,000. This sum includes, in addition to amounts for permanent network service given above, the costs incurred for studio-transmitter circuits and local loop circuits. Senator BAILEY. If there are no further questions, the next witness is Mr. Maurice Lynch, of Chicago, the financial secretary of the Chicago Federation of Labor. You have 10 minutes, Mr. Lynch. Mr. LYNCH. I will not take that long. Senator BAILEY. All right. STATEMENT OF MAURICE LYNCH, CHICAGO, ILL., FINANCIAL SECRETARY, CHICAGO FEDERATION OF LABOR Mr. LYNCH. My name is Maurice Lynch. I am financial secretary of the Chicago Federation of Labor and have been for the past 14 years. The Chicago Federation of Labor is the licensee, owner, and operator of Radio Station WCFL, the "Voice of Labor." The Chicago Federation of Labor believes it against the public interest to have this proposed tax bill passed as it is now written. Our objections are simple and fundamental: First, the measure places an unequal or discriminatory burden on radio broadcastingand I believe billboards-and fails to include other advertising media. Second, this bill departs from the well-established precedent of not taxing income of "not for profit" organizations and labor unions. We do not believe this body has any intention to discriminate against certain selected advertising media or to favor any others. Yet, this bill as now written does just that. We do not believe this committee intends to depart from the carefully considered past policy of exempting "not for profit" organizations and labor unions-yet this bill does that. |