Congress to Propose Tax on Advertising
The economic consulting firm IHS Global Insight estimates this could place 1.7 million U.S. jobs at risk. Today, advertising sales help support 20 million jobs, or 15% of all jobs in the country.
IAB members have no doubt been exposed to the congressional turmoil of late over budget policy in Washington. From one debt ceiling crisis to the next, to sequestration, and a complete shutdown of the government, U.S. budget deficits are driving policy down the same road as a kicked can.
It is widely understood that a reform of our taxation system is the first step forward to finding a long term solution for deficit reduction and economic growth. Early last year, House Ways and Means Chairman Dave Camp (R-MI) and Senate Finance Chairman Max Baucus (D-MT) established a process to begin review of the U.S. tax code, last overhauled in 1986.
IAB has learned Chairman Camp is prepared to formally release the Committee’s draft tax reform bill in the coming days; and, Chairman Baucus will begin briefing Committee members next week to prepare introduction shortly thereafter.
Why does this matter to you?
Many U.S. companies have, for decades, declared advertising as an, “ordinary and necessary cost of doing business.” Similar to employee payroll, office rent and other business expenditures, advertising is considered a standard deduction under applicable U.S. Internal Revenue Service (IRS) tax rules. It is the unified goal of Chairmen Camp and Baucus, and many U.S. industries, to see a lowered corporate tax rate (from 35% to as low as 28%). However, in order to accomplish a lowered overall rate, many deductions find themselves on the chopping block as “pay for’s” to offset the reduced revenue.
Specifically, the House Ways and Means Committee has developed draft tax reform legislation that would be funded by imposing a tax on advertising.
Today, businesses may deduct 100% of the cost of their advertising. The proposal in the Committee’s draft tax reform legislation would allow a business to deduct only 50% of its advertising costs in the year the ad runs but to delay the deduction for the remaining 50% over 10 years - thus deducting an additional 5% each of those years. The Senate Finance Committee draft is widely rumored to mirror this “Cost Recovery” bill language.
While Leadership in both the House and Senate is not prepared to hold a vote on tax reform this year; once introduced, the draft bills will become THE base line for all future debates.
What are the consequences?
The very real consequence of having advertising re-classified (in whole or in part) as a taxable business activity is that client advertisers will do less of it. Any tax percentage assessed will incline companies to reduce advertising and media spending in order to mitigate or off-set any tax. This impacts ad agencies directly -and can adversely affect entire local economies and job bases where agencies and advertising-related businesses play such an important role.
The proposal also does not consider that companies buy new advertising each year and would feel the brunt of this tax annually. Not only would they have less money to spend on advertising year after year, but media companies would also be impacted as advertisers would be forced to reduce their ad buys.
Consider the impact this proposal would have on the economy:
- Employment in the ad-supported internet ecosystem doubled over the past four years to 5.1 million, making it one of the most dynamic sectors in the recessionary American economy, according to a study by researchers at the Harvard University Business School, commissioned by the Interactive Advertising Bureau (IAB).
- The ecosystem contributed $741 billion to the U.S. economy in 2011, close to double 2007 figures, and accounted for 5.1 percent of the U.S. gross domestic product (GDP), an uptick from 3.5 percent four years ago.
What can I do?
Begin thinking about what this change in tax code would mean to your company’s bottom line and ability to keep hiring. Stay plugged into IAB Public Policy news and alerts; and, be prepared for a call to action.
About the Author
Mike Zaneis is SVP & General Counsel at the IAB.