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Minnesota Governor Backs Down as Coalition Rallies Against Proposed Ad Taxes

Trade Groups, Agencies Fight State Initiatives Before They Can Spread

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Doug Spong, president of Minneapolis ad agency Carmichael Lynch, isn't sugarcoating the effect a tax on advertising would have.

Carmichael Lynch's Doug Spong
Carmichael Lynch's Doug Spong
It "would absolutely devastate our industry," Mr. Spong told the Minnesota House of Representatives' Taxes Committee on Feb. 28. "It would handicap all Minnesota agencies," he said, because they would have to raise their fees to cover the tax.

Mr. Spong is part of a broad coalition that is wasting no time trying to derail budget proposals by Minnesota and Ohio that would tax advertising sales.

And it looks like his efforts may have already paid off. Gov. Mark Dayton said he's rethinking his business-to-business tax and it won't be part of the budget he releases this week. Even so, that might not kill the idea once and for all. Minnesota Senate Majority Leader Tom Bakk said he still wants to consider an expanded sales tax. And it's too early to tell if the moves to tax advertising will be snuffed out in other states, including Louisiana and Arizona, that are considering overhauls of their sales-tax system.

Minnesota had taken the lead in the movement to tax creative services. The state had drafted a bill and has been holding hearings on Mr. Dayton's budget proposal calling for an extension of the state's 5.5% sales tax to many business-to-business services, including advertising.

Arguing that the Democratic governor's plan is a tax on economic development that would strangle their businesses, advertising agencies, newspapers, broadcasters and others banded together to try to kill the proposal.

Members of this coalition, called the Minnesota Communications Industry Coalition, lined up to testify before the Taxes Committee last month.

Mr. Spong told the tax panel that he moved 20 years ago from the Chicago suburbs to Minneapolis because it has a thriving advertising industry.

Minneapolis-St. Paul is No. 9 on the list of top U.S. metro areas for advertising in terms of those employed in the business, according to the Bureau of Labor Statistics.

But Gov. Dayton's new tax threatened to change that. And if it has been removed completely, he'll need to find another way to find as much as $2.2 billion in revenue.

The American Association of Advertising Agencies was also part of the coalition.

"I think the opposition of the ad business and the impact it would have is coming out loud and clear," said Peter Kosmala, senior VP-government affairs for the 4A's.

He said states that tax advertising "become unattractive to business."

Several states, including Florida and Iowa, taxed advertising in the late 1980s, but were forced to repeal those taxes.

"Florida was legendary," Mr. Kosmala said. "A media boycott stifled all the [ad] revenues in the state."

Mr. Kosmala is also watching what Gov. John Kasich is doing in Ohio. The Republican governor has proposed a budget that would broaden the base of the sales tax in his state.

If Ohio's legislature approves, sales of print advertising and ads on billboards, radio and TV would be subject to a 5% sales tax. Advertising agency fees would also be taxed.

There's no legislation to implement the plan, aimed at raising enough revenue to allow the governor to cut income taxes. But the Ohio House of Representatives' Ways and Means Committee scheduled hearings on Gov. Kasich's plans on March 6 and 7, the first step in drafting a bill.

Mr. Kosmala said Gov. Kasich tried to tax advertising when he served as chairman of the U.S. House of Representatives Budget Committee, a position now held by Rep. Paul Ryan, R-Wis. Gov. Kosmala said opposition to the plan was so strong, with hundreds of calls to his office from Ohio ad agencies, newspapers and broadcasters, that then-Rep. Kasich had to drop it.

The tax may again prove unpopular.

"My understanding is, in both Minnesota and Ohio, there isn't a lot of enthusiasm for the advertising tax," said Clark Rector, VP-government affairs at the American Advertising Federation.

Dan Jaffe, head of the Association of National Advertisers' Washington office, said he's spoken to ANA members in Minnesota and Ohio "and the response we get is very negative."

Yet taxes on advertising are very attractive to governors looking for new ways to raise money.

Gov. Bobby Jindal of Louisiana and fellow Republican Gov. Jan Brewer of Arizona are also looking to raise more money through sales taxes and could adopt something similar to the proposals under consideration in Minnesota and Ohio.

Louisiana Department of Revenue Secretary Tim Barfield told a local radio station that the state has not "ruled anything out," but acknowledged that "there's historically been a lot of resistance to taxing news media." According to BusinessReport.com, the American Advertising Federation of Baton Rouge is already pushing back. Federation President Hunter Territo told BusinessReport.com that "the type of tax would increase the overall cost of advertising" and that would "have a negative impact not only on the advertising agencies in town but also on the overall economy -- less advertising, less sales, fewer jobs."

The ANA's Mr. Jaffe made the same argument, noting less advertising means fewer sales, and that means less sales-tax revenue.

"Just because a state needs money doesn't mean you take steps that are counterproductive," he said.

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