Sponsor Content Above the Clutter with Pete Krainik
Episode Three: Steinway & Sons
Brought to you by: IBM
David Camp, the Republican chairman of the House Ways and Means Committee, is trying to pass a huge tax-reform bill. Within his plan is a provision that is a veritable disaster-in-waiting. If passed, it would devastate the advertising industry and weaken economic growth across our economy as a whole.
What is this provision? In an effort to find "ways and means" to reduce taxes for corporations by 10%, Mr. Camp is proposing we close loopholes in our tax code. Apparently, he views our entire industry as one giant loophole.
Right now, businesses can deduct expenses for advertising in the year it is spent. The IRS deems advertising as "an ordinary and necessary business expense" -- which it is.
If Mr. Camp's proposal were to pass, only half of that money would be allowable as an expense in the year it was spent. The rest would be amortized (or divided up and expensed) over a 10-year span.
This doesn't just include costs for the development, production and placement of advertising. It includes your job. The provision states, "Advertising expenses would include wages paid to employees primarily engaged in activities related to advertising and the direct supervision of employees engaged in such activities."
Those employees are you.
This is a compliance nightmare. What is considered "advertising" today anyway?
If you're not familiar with how a business is run, the wages you pay employees are a standard expense. Imagine you owned a business and suddenly you couldn't deduct half the wages you paid to one group of employees for 10 years, what would you do? You would fire them.
Our industry needs to get smart about our arguments to combat this initiative. In order to combat this effectively, we need to first understand where our enemy is coming from. In the words of Sun Tzu, "Know your enemy and know yourself and you can fight a hundred battles without disaster." Otherwise, we risk being seen as just a bunch of people with their heads on the chopping block, scrambling to keep their jobs.
The justification for the provision points out that, "Expenditures that create a long-term benefit generally must be capitalized and recovered through depreciation or amortization, rather than deducted currently."
$137.8B U.S. ad spend for top 200 advertisers
From Mr. Camp's point of view, investments in branding are reaped over multiple years so should be amortized as such. This is the same way capital investments are treated: Buy a piece of furniture and it's amortized as a deduction over several years. Advertising provides a long-term benefit, the thinking goes, so it should be capitalized and recovered too.
The problem is that Mr. Camp clearly does not have a strong grasp of today's advertising industry. I mean no disrespect to the chairman. The majority of people actually working in our industry have trouble grasping it. But most of those people aren't proposing to decapitate this industry they don't understand.
Mr. Camp's thinking is flawed for several reasons:
1. The lines between advertising and direct response have blurred. Direct response makes up a huge slice of the advertising pie. Yet, it is more akin to sales than long-term brand building. Look no further than Google's $60 billion in annual revenue for evidence of this. This would have the same impact as amortizing the salaries and commissions you pay your sales force. It's simply bad business. Not being able to deduct the costs involved with driving those sales demotivates selling. Companies (and economies) only grow when stuff gets sold.
2. This proposal implies that the benefits of advertising are reaped over a 10-year period. That's ludicrous, particularly in industries like retail, restaurants and automotive, where driving leads and traffic next week, not next year is the objective of a large proportion of expenditure. Even for pure brand advertising, the pace of business today means a decade is a ridiculously long time. Entire industries are disrupted in the blink of an eye. Start-ups are formed with the intent to be flipped within five to seven years. Legacy brands must evolve and communicate rapidly if they are to survive and thrive too. Ten years has no basis in reality.
3. Mr. Camp's proposal contains an exemption for the first million dollars of ad spend. This simply is a joke. The vast majority of spending in this industry is from companies far above that. This inclusion is simply meant to placate the long tail so congresspersons don't get a deluge of calls from angry small businesses.
4. This absolutely, positively will hurt our economy. Advertising drives business, but companies answer to The Street today. They will spend less on advertising if they have to wait years to reap the benefits. This is a no-brainer. If they spend less, not only does our industry take a hit, it will become harder for businesses as a whole to do business.
Now, Mr. Camp would likely tell you that this will just be a trade-off. Since companies would pay a lower tax rate they'd have more money to invest in things like advertising. This doesn't take into account that there is a dramatic trend where companies are reticent to spend any money that doesn't reap a short term ROI. The more likely scenario is that tax savings wouldn't get spent. Short-term shareholder profits (and executive bonuses) would trump longer-term, less directly recoverable investments in marketing.
5. This is a compliance nightmare. What is considered "advertising" today anyway? Is social media advertising or customer service? Is e-commerce the equivalent of advertising or a digital equivalent of a sales force? Are PR-generating activities advertising or just stuff companies do? Mr. Camp defines them as "any communication to the general public intended to promote… trade or business." No doubt, people who think the Internet is a "series of tubes" would be tasked to answer these questions. Regardless, ensuring conformance to such regulatory nonsense would be a costly administrative nightmare.
The Joint Committee on Taxation suggests this provision would increase revenues by $169 billion over a decade. Mr. Camp needs this money, not because it's the right thing to do for business, but so that he can justify a huge corporate tax break. However, this proposed law is dangerous and ill conceived. Most agree that this bill doesn't stand a chance of passing this year, but what about next? We, as an industry, should make it our business to come together and make damn sure that doesn't happen.