If you're reading this you are likely in the business of advertising. That means you will be affected if Congress passes any tax provision or bill that changes the long-held deduction of advertising costs. This is a possible outcome of the battle over tax reform in Washington.
For decades, U.S. businesses have been allowed to deduct 100% of advertising costs as an ordinary and necessary expense. But two approaches under consideration will radically change this. One comes from the House Ways and Means committee under Chairman David Camp, R-Mich., and the other from the Senate Finance Committee under Chairman Max Baucus, D-Mont. These proposals call for businesses to deduct only 50% of costs in the year the advertising runs and then amortize the deduction of the remaining 50% over a period of five or 10 years.
It's worth noting that both Mr. Baucus and Mr. Camp, despite being from different parties and chambers, toured the country together over the summer in advocating for tax reform. This coordination is expected to continue and will give the pending legislation even more heft.
Equivalent of ad tax
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 35% corporate rate down to 25%. Changing the advertising deduction is one of several means being considered to fund this rate reduction.
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 affected by any resulting reduction in ad spending. The research firm IHS Global Insight estimates that changes in the ad deduction could reduce advertising-induced sales in the U.S. by more than $446 billion and place 1.7 million U.S. jobs at risk.
Impact on society
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 equals $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 and utilities. Advertising-tax deductions enable the ad 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 TV. 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 Omnibus 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, 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.