NEW YORK (AdAge.com) -- The pharmaceutical industry and ad trade groups are bracing for the very real possibility that Congress will rescind the tax deduction drug companies receive on their direct-to-consumer advertising, throwing a $4.7 billion ad category into chaos and creating a slippery slope that leaves other "suspect" industries vulnerable to a similar move.
"Oh, it's real," said Dick O'Brien, exec VP-director of government regulations for the American Association of Advertising Agencies. "It's not at all uncommon for the Congress to enact a controversial measure like this, secure in the knowledge that the courts will, in time, have the final say on whether it violates the First Amendment." But, he added, by the time challenges move through the court system, "many people who used to create and place DTC advertising will, of course, have lost their jobs."
The proposal has put lobbying groups on alert, given that it comes as a new administration and Democratic Congress seem to have made advertising a potential target. "Issues that have been dormant for decades are suddenly moving rapidly in this Congress," said Dan Jaffe exec-VP government regulations for the Association of National Advertisers, "and, I have to say, they're keeping us up at night."
ANA has marshaled the resources of ABC, CBS, NBC, Fox, the Magazine Publishers Association, the Newspaper Association of America and the Outdoor Advertising Association, who sent a joint letter to the House Ways and Means Committee and to the Senate Finance Committee "saying this is a counterproductive proposal," Mr. Jaffe said.
Ad groups argue that the measure could result not just in loss of jobs in the pharmaceutical industry, but also deal another blow to beleaguered media already hit by a recession that's forced spending cuts among marketers in general. It also raises questions about just what would be considered "advertising" for purposes of the tax, considering that the pharma industry has been steadily diverting dollars from traditional media to digital marketing.
'Steep even by Swedish standards'
Rep. Charles Rangel (D-NY), chairman of the Ways and Means Committee, said last week that Congress' proposal would prohibit pharmaceutical companies from taking tax deductions on direct-to-consumer advertising of prescription medications. It is just one option of many on the table as a way for the government to help pay for the Democrats' proposed health-care-reform bill. A preliminary review of the bill by the nonpartisan Congressional Budget Office found it would cost $1 trillion over the next 10 years to fund.
"One thing that's not off the table is: You can pick up $37 billion knocking out the deduction for advertising," Mr. Rangel was quoted as saying in numerous published reports.
"We think turning the tax system [into] something that is focused on raising revenue from those who are not highly regarded by either the public or legislators is a terrible change in the system and will have deleterious impacts for the public," said Mr. Jaffe. Mr. O'Brien said the $37 billion would be spread out over the 10 years of funding the health-care reform bill, but still questioned the number. "It comes out to $3.7 billion in taxes a year on advertising spending of about $5 billion a year -- that's steep even by Swedish standards."
But Mr. O'Brien and many others aren't laughing; they fear such a proposal could have a domino effect. Any reduction in pharma advertising, they said, would lead to loss of jobs at drug companies and ad agencies, and in turn reduced revenue for TV broadcasters, newspapers and magazines at a time when those media are already struggling. The $4.7 billion pharma companies spent on DTC ads last year represents a 14% drop from 2007, according to TNS Media Intelligence.
A spokeswoman for the Pharmaceutical Research and Manufacturers of America declined to comment, saying it had yet to see the wording in the health-care-reform bill. Several big drug companies also declined to comment at this time, although a spokesperson for one top five drug-maker who asked for anonymity said: "Even if it happens, I can't imagine us moving tens of millions of dollars from TV and print into newer, or social, media. We'd just have to work with [the loss of a tax deduction]."
"Congress is being cute here," said Chris Schroeder, CEO of Health Central, a Washington company that hosts the largest collection of online health communities and whose top source of revenue is DTC advertising. "They are not 'banning' DTC, but possibly effectively doing the same thing by hand-picking a specific business expense and pulling it out of tax deductibility. No other industry is told that a generally acceptable expense no longer is one. ... Of course, the less they advertise the less revenue the government will get, ironically. There are costs in building websites, putting up YouTube videos -- are those 'advertising' costs? And are they as effective as engaging audiences in condition-specific web sites, magazines and televisions shows?"
While many believe prohibiting the tax reduction is a violation of the free speech protected by the First Amendment, other legal experts disagree. "The truth is, nobody has a 'right' to tax deductions," said Kevin Outterson, associate professor of law at Boston University. "I believe this is the case here [with Mr. Rangel's proposal], and that this is something within the purview of Congress. But it won't stop the drug industry from advertising. It's too effective for them."
On one point, though, he and the ad groups agree: "I find it strange that they would go after just drugs to pay for health reform and not, say, tobacco or alcohol," Mr. Outterson said.
Or would they? "Eliminating the deduction for this one category creates a very troubling precedent for all advertising categories," Mr. O'Brien said. "It uses the tax code to shut down the advertising for any category that loses favor with the Congress. That's not what the Founding Fathers intended."