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CLINTONITES EYE AD DEDUCTIBILITY POLICY INSTITUE RECOMMENDS COMMISSION REVIEW CUTTING OR KILLING SEVERAL 'SUBSIDIES'

By Published on .

WASHINGTON-A think tank with close ties to President Clinton has proposed a federal review of advertising's status as a fully deductible business expense.

The Progressive Policy Institute, an arm of the Democratic Leadership Council, recommended that a government commission review ending or cutting several "subsidies" for U.S. industries. Commission recommendations would be sent to Congress for action.

Advertising's current status as a fully deductible business cost was among 22 subsidies targeted by the report. If Congress trimmed all, Uncle Sam could collect an additional $111 billion over four years.

In the case of advertising, the institutenoted that the federal government would reap $17.5 billion over four years by allowing marketers to deduct only 80% of their ad costs while amortizing the remaining 20% over four years.

The report's author is Robert Shapiro, the principal economic adviser to President Clinton in the 1992 campaign. It was then-Gov. Clinton who in 1989 established the Democratic Leadership Council as a platform for centrist Democrats.

All that adds up to enough influence and clout with the White House to grab the attention and anger the blood of ad industry representatives.

Although deductibility has been a chronic topic of discussion among revenue-hungry bureaucrats, ad industry executives thought President Clinton had assured them last May that advertising's deductibility was not under consideration. And in September, Leslie Samuels, assistant secretary of the treasury, testified against changing advertising's deductibility before the House Ways & Means Committee.

But this report appears to have disturbed the ad industry's serenity.

"We're recommending the establishment of a commission ... to look at some of these industry subsidies and decide which don't serve any purpose," said M. Jeff Hamond, economic policy analyst at the institute. "What we've put together is a list of things that could be looked at."

He said an underlying economic basis for denying the full deductibility relies on the notion that some portion of ad expenses build brand recognition and thus should be treated as a capital asset, to be depreciated over time.

"The commission would look to see if increased ad spending causes consumers to change their brand preference for products that are essentially the same, in which case you could argue that the increased ad spending is inefficient," Mr. Hamond said.

Needless to say, the report received a less than enthusiastic response from industry officials.

Jim Davidson, a lobbyist for the ad and media groups in Washington, said the significance of the report stemmed from its origins.

"The significance is that this now has been adopted as a policy recommendation of the PPI, whose parent, the DLC, has been Bill

Clinton's jumping off point, the ideolog ical center for the Clinton presidency," Mr. Davidson said. "It's really troubling, es pecially

with the revenue pres sures that will come from the healthcare focus."

John O'Toole, in the last week of his presidency at the American Association of Advertising Agencies, was not surprised by the proposal.

"Ever since that option paper from the Congressional Budget Office floated it a few years ago, every time someone wants a new source of revenue *.. they look at advertising ... It's a cheap shot," he said.

Mr. O'Toole cited an ad industry commissioned study by Nobel

Prize-winning economists George Stigler and Kenneth Arrow that rejected arguments favoring a reduction in ad deductibility.

"Stigler and Arrow even acknowledged that some of every ad, even an ad for a sale tomorrow, will add to the identity of the advertiser, but no

one can measure it or prove it," Mr. O'Toole said. "Why would you base your tax policy on something that is so amorphous?"

Mr. Hamond acknowledged there is "probably very little" congressional support for altering advertising's deductibility.

"That is why we think a commission is the way to go," he said. "When it's one-on-one in a congressional conference committee, things like this would be saved but not necessarily with a commission."

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