Industry Goes on Offense to Guard Ad Tax Deduction

With States and Feds Desperate for Revenue, Adland Leaders Are Taking Preemptive Action

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Two weeks ago, Dan Miller, director of client services at DDB Seattle, sat down on the same side of the table with newspaper, radio, and TV representatives to talk with Rep. Dave Reichert, R-Wash., about the advertising tax deduction.

Mr. Miller and his cohorts pointed out to the congressman that 40,000 jobs alone in their 8th District suburban Seattle market are tied to advertising. They asked him to consider the fact that advertising deductibility is important to small businesses, helping them with everything from the cost of business cards and restaurant-window signs to radio, TV, and print media buys.

But Rep. Reichert isn't concerned about the tax. He hasn't drawn up a proposal for or against it. In fact, there are no bills, motions, or even openly voiced concerns in Congress right now against advertising deductibility.

Instead, Mr. Miller's meeting was a pre-preemptive one, because he, like many others in the ad industry, believe a challenge to the ad tax deduction is coming.

Taking into account the current situation in Washington -- many newly elected congressional representatives who won on promises of restoring financial stability and dealing with the deficit -- ad industry insiders believe an assault on advertising deductibility is more likely now than it has been in many years. With the news last week of a tax code review by the Senate Finance Committee, it's almost certain that it will at least be closely examined.

This will be "the most serious examination of the ad tax deduction we've seen in a generation -- since the Reagan administration," said Dick O' Brien, exec VP-government relations for the American Association of Advertising Agencies. "It's real and it's serious, and we should gear up for a rigorous debate on advertising tax deductibility in the next year or two."

It would not be the first attack on the deduction that's been on the books since Congress enacted the tax code in 1913. In fact, the issue came up so often in the late 1980's that a group of ad industry associations commissioned independent researcher Global Insights to build an economic model detailing the impact a decrease or elimination of ad deductibility could have. That group, which includes the 4A's, ANA, National Association of Broadcasters, and the Newspaper Association of America, continues to request frequent updates on the study and uses that data to sway congressional members in their home states as well as Washington.

The big sway is this: Ad expenditures in the U.S. total $5.8 trillion, or 19% of the total economic output of the country. Almost 20 million jobs, or 15% of all U.S. jobs, are supported by advertising-driven sales, according to the latest Global Insights survey.

Of course, some states would feel a bigger crimp than others. In New York, advertising generates $423 billion, or 19.5% of its total economic activity. Some 1.2 million of the jobs in the state are tied to advertising in New York. However, even less ad-centric states are dependent.

Missouri, for instance, generates $97.6 billion related to advertising, and while only 408,473 jobs have ties to advertising, that accounts for 14.6% of its work force. Oregon's 251,173 advertising-related jobs make up a similar 15% of the jobs in the state, while advertising generates $67.1 billion.

Dan Jaffe, exec VP-government relations at the ANA, said, "Initially I was worried about the smaller states, but what we found is that there is no state in which there would not be significant impact. Even the state with the smallest advertising expenditures, Alaska, doesn't go below 13% of its jobs."

The argument is that if a tax deduction is reduced or eliminated for advertisers, they will do less advertising, and many businesses, already operating on thin margins thanks to the recession, would likely have to cut back. Less advertising also has a broader ripple effect that would have economic implications.

Clark Rector, exec VP-government affairs at AAF, said, "As advertising goes down, sales go down, and it's harder for new businesses to compete. Advertising increases competition, lowers prices and gives consumers information. ... It is the engine that drives a consumption-based economy."

And he, like many others, said advertising is in the tax code as a deduction just like electricity, travel expenses and computers because it is part of the cost of doing business.

"It's not a tax break, it's a business expense, just as rent on offices or hiring costs. If you're going to sell products to consumers, you're not going to be able to sell a whole lot if they don't know you exist," Mr. Rector said.

There are other concerns. Eric Mower, chairman-CEO of Eric Mower & Associates, Syracuse, N.Y., and 4A's chair of government relations, said global competition is an issue.

"Probably just as serious, if not more so, is the disadvantage to many American companies that compete with foreign manufacturers. ... Americans would be forced to absorb that and continue to spend just to hold their share of market," he said. "You're changing the economic environment for American advertising, and it will place [American companies] at a distinct disadvantage."

While a full-on ad tax deduction assault is the greatest concern, also worrisome to advertisers is an industry-by-industry attack. That tactic has been tried in the past, most recently in 2009, when a group led by Sen. Al Franken, D-Minn., introduced legislation to disallow ad tax deductions for the advertising and marketing of all prescription drugs . However, that provision never made it into the final health-care-reform bill that was passed.

Industry insiders worry that any foot-in-the-door in one industry will lead to more and more ad deductions challenges across all industries. They also question the First Amendment legality of "punishing" one industry over another. "We know if they take a slice out of one industry, they will not stop," Mr. Jaffe said.

It's not just one controversial category, pharmaceuticals, that has been targeted. Alcohol, tobacco, violent entertainment and so-called non-nutritional foods have all been the subject of legislative tax proposals. It's also not a Democratic or Republican target , but opposition at different times, across the aisle.

Yet as bleak as that all sounds, there is still some optimism among ad insiders. "A lot of representatives and senators, when they think about it, and think about their own careers maybe as small-business owners, or of relatives who own small businesses, they will put two and two together and realize the advertising expenses their son-in-law has are part of his doing business, and start to think of it differently than just Super Bowl commercials," said Mr. Miller.

WHAT’S AT STAKE AND WHO GETS HURT IF DEDUCTION DISAPPEARS?

Ad Agencies

  • Lower revenue. Marketers that cannot absorb the cost of losing the tax deduction will cut back ad budgets. Agencies will have less work and will make less money.
  • Fewer jobs. Less work means fewer creatives, producers, writers, and support staff.

Marketers

  • Higher taxes. The immediate consequence is that advertisers will now have to pay taxes on the previously deducted ad expenses.
  • Less advertising. To compensate for increased taxes, many with an already tight ad budget will have to cut advertising to compensate.
  • Lower revenue. While not an exact science, well-executed advertising has proved to increase sales. Less advertising would then mean lower overall sales.
  • Foreign competitors could gain an edge. If marketers cut advertising, while foreign competitors not facing the same restrictions maintain it, the latter could grab a mind-share advantage with consumers.

Media

  • Lower revenue. The marketers who have to cut back on ads won’t be spending as much with TV, radio, magazine, internet and newspaper properties.
  • Possible content cuts. Fewer ads mean fewer pages in magazines and newspapers, and less revenue to pay for online marketing and new programming and staff at TV and radio stations.

Consumers

  • Less information. Fewer ads mean less information for consumers, from the sales at the local grocery store to the movies they might like to see to the latest prescription medicine they could benefit from.
  • Possible increased costs. Marketers may raise prices to try to recoup their now higher tax bills.

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