"State revenue systems were intended for a nation of smokestack industries in deep economic depression" during the 1930s, said a newly released report from the National Conference of State Legislatures and National Governors Association. "Today, services are supplanting manufacturing as the economic linchpin, the economy is increasingly global and new information-based industries appear almost daily."
The long-awaited report declined to recommend that revenue-starved states start to consider expanding their sales taxes to advertising and other services but came awfully close.
"This is a set of options," said Bill Pound, executive director of the National Conference of State Legislatures. "And while there are problems concerned with the taxation of services, it also is a more fair and equitable way for states to deal with their problems."
Ray Sheppack, executive director of the governors association, agreed that taxing services was fraught with political problems but said it would be no more politically risky than continuing to raise property or income taxes, or to reduce services.
Ad industry reaction to the report was wary.
"This is a ticking time bomb," said Dan Jaffe, exec VP at the Association of National Advertisers. "My interpretation of what they're saying is that things are right now a little better in the states ... but that there are structural problems ... that they may try to deal with by taxing. That's what makes this a serious threat."
Perhaps the most formidable obstacle to state taxation of advertising is the memory of what happened in Florida in 1986. Then, Gov. Bob Martinez and the Legislature enacted a sweeping tax on services, only to back down six months later under intense political heat.
"Advertising certainly is at the bottom of the list of services likely to be taxed," said Harley Duncan, executive director of the Federation of Tax Administrators. "And that's because of the Florida experience" along with potential problems with administration.
Mr. Duncan said states likely could avert First Amendment challenges to ad taxes if they developed a broad-based tax that affected all, or at least most, services and avoided singling out advertising.
States that currently rely on only two of three basic state financing vehicles-sales tax, property tax or income tax-would appear the most likely to attempt to tax advertising and other services, he said.