Battle brews over Texas tax

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The Texas State Senate votes this week on a constitutional amendment that could bring the nation's biggest ad tax since Florida's historic 1987 levy.

All 31 Lone Star State senators are co-sponsors of a plan offered by Texas Lt. Gov. David Dewhurst and Education Committee Chairman Sen. Florence Shapiro-the owner of a Plano advertising and public relations firm. The plan would reduce local property taxes and replace the revenue by raising the state's sales tax to nearly 8% while eliminating exemptions for all non-medical services.

Ad groups warned that with local add-ons to the state tax, Texas media and ad agencies could see a sales tax of up to 10%.

"We would hate for Texas to face the incredible disaster that Florida faced in 1987," said Ann Arnold, executive director of the Texas Association of Broadcasters. Clark Rector, senior VP at the American Advertising Federation, said support on the senate side is "as broad as we've seen since Florida."

Few details have been offered, but a spokeswoman for Texas Comptroller Carol Keeton Strayhorn said the ad tax could add $165.9 million to state coffers on print and out-of-home buys alone.

Local media groups said that immediate passage of the measure by the legislature is unlikely, since both Texas' governor and its House Speaker prefer to handle the funding crisis in a special session later. But they also feared that Senate approval of the plan could create a precedent for approving the ad tax later.

Donnis Baggett, publisher and editor of the Bryan-College Station Eagle, and chairman of the legislative committee of the Texas Daily Newspaper and Texas Press associations, said publishers are "taking it seriously." But, he added, "We don't think it will pass, so we don't want to jump up and wave our arms and panic.

`deflator'

"It's an economic deflator. If they pass an 8% tax on advertising, what will happen is the average mom-and-dad store will get less exposure and their sales will go down and eventually the state and store revenues will suffer."

Tim McLure, a founder of GSD&M, Austin, told the Texas Senate on May 2 that the tax could devastate local business. "We have spent our entire life trying to bust up the monopoly and working day and night wooing advertisers to Texas," he said. "The proposed tax on services cannot be passed through. It is unrealistic to believe that we can operate at a 10% disadvantage. Passage of this bill will prompt companies to take their business somewhere else."

Executives from PepsiCo's Frito-Lay, based in Plano, did not return calls for comment at press time.

Ad groups expressed concern that Texas might be heading down the path Florida followed in 1987 when it approved an ad tax only to reverse course seven months later. They said senators view advertising, which drives economic spending, as identical to other services. They also said ads could easily be moved out of state if efficiencies drop.

`nightmare'

Richard O'Brien, exec VP of the American Association of Advertising Agencies, warned that computing the fee would be "a nightmare" and said the tax would likely result in advertisers spending their money elsewhere, hurting the state's economy.

Ad groups have offered similar warnings as the ad tax issue has been raised in 15 states this year. One was Connecticut, which proposed an ad tax earlier this year, but ended up approving a far more limited measure.

Dan Jaffe, exec VP of the Association of National Advertisers, said Florida enacted its hike at a time the economy was booming and took a big hit when advertisers moved their agency and media spending. "This is a misguided approach," he said. "If you are a lawyer or a bank, you are rooted in the state. But if you are advertiser you have lots of choices and you are going to put your money where you have the most bang for the buck."

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