AD DEDUCTIBILITY THREAT LOOMS OVER TOBACCO BILL: POSSIBLE AMENDMENT WOULD AFFECT MARKETERS THAT BREAK FDA RULES

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Advertising and media groups are bracing for the biggest ever congressional challenge of the deductibility of advertising as a business expense.

U.S. Sen. Jack Reed (D., R.I.) hopes to amend the tobacco bill the Senate resumes consideration of today to end ad deductibility for any tobacco marketer that breaks Food & Drug Administration tobacco ad restrictions.

Ad groups have sued the FDA challenging the constitutionality of the rules.

Also, a measure removing the deductibility of tobacco ads is being discussed in the House of Representatives -- and not by Democrats critical of tobacco but by usually supportive Republicans.

House leadership may see that as a far more palatable political alternative to raising taxes on tobacco products in its bill, due this summer.

`IT IS A BIG GUN'

"It is a big gun and it appears very possible the trigger could be pulled," said Hal Shoup, exec VP of the American Association of Advertising Agencies. "It is an enormously dangerous precedent and, while it's not a new threat, you don't have to be clairvoyant to see the politics have changed."

A bill tentatively set to be introduced by U.S. Rep. Jim Greenwood (R., Pa.) reportedly eliminates all tobacco ad deductions, using the money gained to fund an anti-tobacco ad campaign.

Rep. Greenwood did not return phone calls for comment by press time, and an aide to Rep. Deborah Pryce (R., Ohio), who is leading the House initiative on tobacco, said the elimination of ad deductibility is among several alternatives being considered, although no decision has yet been made on which to pursue.

COULD BE TIED UP IN COURT FOR YEARS

"We are raising the constitutional issues with key members of the House and Senate leadership," said Jim Davidson, director of the Advertising Tax Coalition, an alliance of advertising and media groups. "We don't believe the First Amendment permits you to single out a message and tax it because of its content."

The ad groups contend the First Amendment challenge could tie up any tobacco measure in court for years and wouldn't raise that much money -- less than 1% of the money in the Senate bill.

They also said the use of monies from tobacco companies to fund an anti-tobacco campaign seems in direct violation of one U.S. Supreme Court decision, Pacific Gas & Electric v. Public Utilities Commission of California.

AD RESTRICTIONS REVIVED?

The deductibility issue comes to the fore as the Senate faces a possible move to reinsert some ad restrictions struck out of the bill a week ago when the Senate dropped a cap on a tobacco marketers' annual liability payments that was to be traded for voluntary ad curbs.

Last week, Sen. Olympia Snowe (D., Maine) was mulling an amendment that would limit the use of cartoon caricatures in advertising and limit product placements in movies not carrying adult ratings, though she had made no decision on whether to offer the amendment or exactly which curbs to include, an aide said.

Sen. John McCain (R., Ariz.) had hoped to finish the tobacco bill this week and send it on to the House, but there were indications the prospects of that happening were declining. The Senate still has some major amendments on farm provisions and tax cuts to debate.

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