If you're reading this you are likely in the business of advertising. That means you will be impacted if any tax provision or bill is passed by Congress that changes the long-held deduction of advertising costs. This is a possible outcome of the current battle over tax reform in Washington, D.C.
For decades, U.S. businesses have been allowed to deduct 100% of advertising costs as an ordinary and necessary expense. But the approach being considered by the House Ways and Means Committee, under Chairman David Camp (R-Mich.), seeks to have businesses deduct only 50% of costs in the year the advertising runs and amortize the deduction of the remaining 50% over 10 years.
The proposed curtailment of the ad-tax deduction is part of a larger movement toward overall corporate tax reform. Some members of Congress seek to bring the current 35T corporate rate down to 25%. Changing the advertising deduction is one of several means being considered to fund this rate reduction.
The Senate is devising its own program for corporate tax reform under Chairman Max Baucus' Senate Finance Committee. Thus far, this has not included anything on the status of advertising. However, the lingering concern is that the Senate bill may incorporate certain themes (such as the ad deduction) if this gathers steam in the House. It's worth noting that both Baucus (D-Mon.) and Camp, despite being from different parties and chambers, toured the country over the summer together in advocating for tax reform. So we can expect further coordination.
Eliminating the tax deduction may benefit some corporations, but ultimately it is the equivalent of an advertising tax. Every company buying advertising would feel the burden each year. Agencies, broadcasters, newspapers and other businesses that rely on advertising will be directly impacted by any resulting reduction in ad spending. The research firm IHS Global Insight estimates that ad sales in the United States could be reduced by as much as $446 billion, with 1.7 million U.S. jobs placed at risk.
Two equally compelling arguments make the case against this change. One is economic and involves a fundamental right of every business; the other is emotional and involves a fundamental right of every person.
Let's start with economics. Advertising promotes product visibility and differentiation that better informs the buying public. Advertising spending stimulates a broad spectrum of business activity. Every dollar of ad spend equates to $20 of economic output. Advertising supports 20 million U.S. jobs: That's 15% of all jobs in the country. These numbers come from a 2011 IHS Global Insight study.
Changing or removing the advertising deduction is also contrary to more than 100 years of business history. The U.S. tax code permits businesses to deduct the full cost of advertising, just as it permits the deduction of other ordinary business costs such as salaries, office rent, utilities and other expenses. Advertising tax deductions enable the advertising industry to grow and thrive and remain such a vital component of our national economy.
The other argument cuts to the core of advertising's impact on society, in terms of information and entertainment. Without advertising to subsidize it, there could be no free press. The same goes for much of the entertainment available on television. Advertising facilitates an environment in which entertainment and information are available to everyone. Changing the deductibility of advertising in the tax code is a direct threat to this environment.
Despite grassroots outreach, strong data and history itself, some lawmakers insist on pursuing a faulty path in a quest for tax revenues. That's why we need even more members of the advertising community -- agencies, clients, publishers, broadcasters -- to get involved.
Corporate tax review has come up twice previously, with the Tax Reform Act of 1986 and the Budget Reconciliation Act of 1993. Both times the advertising deduction was preserved. What we see now poses the most serious risk of a change in the treatment of advertising in decades. This is due to the urgency of reducing the U.S. corporate tax rate, currently considered the highest in the world, to a lower, more competitive rate.
We must bring the full power of our collective voices to the opposition. If you haven't already, contact your members of Congress and let them know that what we do is essential to the businesses in their districts and in the nation as a whole. General tax reform may a worthy goal, but changing the advertising deduction is not the path to take.