Congress Mulls Scrapping Tax Break for Pharma Ads

Drug Makers and Ad Groups Cry Foul, Citing Free-Speech Protections

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NEW YORK ( -- The pharmaceutical industry's worst fears about the administration change in Washington are coming true.

Rep. Charles Rangel (D-N.Y.), chairman of the powerful House Ways and Means Committee, yesterday said Congress is considering a $37 billion proposal that would deny pharmaceutical companies from taking tax deductions on direct-to-consumer advertising of prescription drugs.

Drug makers and advertising trade groups are up in arms.

"We are facing the most extensive restrictions this country has ever imposed on advertising," said Dan Jaffe, exec VP-government regulations for the Association of National Advertisers. "This would create a precedent that affects far more than DTC. Even if it was just DTC, we would be involved, because it's an important segment of advertising."

The news comes on the heels of last month's controversial move by a newly emboldened Food and Drug Administration to issue an advertising warning letter to Cheerios, saying the beloved cereal brand was actually a drug because of its claim to reduce cholesterol. And it comes ahead of public comments scheduled for later this month regarding draft guidance issued by the FDA for pharmaceutical DTC advertising. The guidelines are sharper than ever, even going so far as to tell pharma companies what kind of headlines, fonts and capital letters to use in print ads.

"I don't know why [the pharmaceutical industry] continues to be a scapegoat, or a target, but it sure seems that way," a VP-communications for one of the top five drug companies told Ad Age. "Other than that, we have no comment."

The Pharmaceutical Research and Manufacturers of America, a trade group, did not return a call seeking comment. The trade group says it is committed to work with the administration on health-care reform, but it remains to be seen what the drug lobby will do if Mr. Rangel's suggestion moves forward.

A way to fund health-care reform?
Mr. Rangel said tax writers in the House are considering the proposal 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 in the next 10 years to fund the bill and offer health insurance to 16 million people who are not covered -- about 35% of the estimated 45 million people in the U.S. without health-care coverage.

"One thing that's not off the table is that you can pick up $37 billion knocking out the deduction for advertising," Mr. Rangel was quoted as saying in numerous published reports after speaking with reporters yesterday.

There seems to be some issue as to where the $37 billion tax figure comes from, considering the pharmaceutical industry spent $4.7 billion on DTC advertising last year. It is likely Mr. Rangel is referring to total sales costs, costs for sales representatives, free samples and more.

"The whole thing is messy, but you can raise $37 billion," Mr. Rangel said, "which means you're taxing somebody $37 billion, and they don't like that."

"What, anytime somebody doesn't like a particular product category, they're going to take away their tax deduction? Or anytime the government wants more money, they're going to take away their tax deduction?" Mr. Jaffe asked. "The Supreme Court has made clear that the differential tax on companies is unconstitutional."

Aimed at only one category
Dick O'Brien, exec-VP-director of government regulations for the 4A's, said advertising for any product is fully tax deductible as a necessary business expense. Mr. Rangel's proposal would eliminate the tax deduction for one product category, prescription medications, in effect making it more difficult and more expensive to advertise than another category.

"It's a patent violation of the First Amendment," Mr. O'Brien said. "Further, we all learned in Economics 101 that making prescription-drug advertising more expensive will prompt advertisers to use less of it. That fall-off in demand will force agencies to reduce the staff creating and placing that type of advertising. That needless loss of jobs seems particularly ill-advised at this perilous moment in the nation's financial health."

Mr. O'Brien said the 4A's will contact Mr. Rangel to work with him "to help prevent this action and the unintended consequences it will trigger."

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