Lawmakers and officials struggling with poor finances in North Carolina, Illinois, Pennsylvania and California are eyeing a tax on advertising as a way to help solve state budget crunches. At the federal level, lawmakers are looking at limiting the advertising tax deduction as part of broader federal tax reform.
A tax on advertising is the media and marketing industry’s worst nightmare. That’s why broadcasters and advertisers are experiencing a lot of sleepless nights right now in several states where legislators are seriously considering such a tax.
Taxing advertising or limiting the advertising tax deduction at either the state or federal levels could take millions, if not billions out of ad budgets. For media companies across all platforms dependent on advertising, it would be a huge blow to the top line.
While proposals to tax advertising usually get beaten back, it also usually takes a concerted lobbying campaign by broadcasters and advertisers to do that.
Today, lawmakers and officials struggling with poor finances in North Carolina, Illinois, Pennsylvania and California are eyeing advertising as a way to help solve state budget crunches. At the federal level, lawmakers are looking at limiting the advertising tax deduction as part of broader federal tax reform.
None is closer than North Carolina to actually imposing a tax on advertising on all media, from broadcasting to outdoor and print to the Internet.
The state Senate has passed a bill that includes a tax on advertising and other services that could bring in $171.3 million a year. The House budget bill doesn’t include the ad tax so whether it the tax stays or goes will be up to the conferees from They have until Aug. 14 to sort it out.
“North Carolina bears watching,” says a lawyer/lobbyist familiar with the legislative process there.
“The communications media — broadcasters, newspapers, cable, outdoor, all distributors and users — we’re all of the view that taxing advertising would be an unwise public policy. If you start creating disincentives for businesses to advertise, you end up unintentionally harming the economy.”
Currently no state taxes advertising, but that doesn’t mean states haven’t considered it. In fact, one state, Florida, learned the hard way. It imposed an advertising tax in July 1987 and was forced to repeal it six months later after some of the nation’s largest advertisers, such as Coca-Cola, NBC, Procter & Gamble, cut ad spending within the state by $81 million.
Associations pulled their conventions out of the state, costing Florida $34 million in hotel room bookings. Florida’s TV stations lost about $15 million because of the boycott. As for the governor, he lost his bid for reelection.
“Florida is a compelling story and, if you’re a legislator, it’s hard to ignore,” says Dennis Lyle, president of the Illinois State Broadcasters Association, who is combating an ad tax threat in his state.
The ad tax idea came up in Illinois as part of Republican Gov. Bruce Rauner’s campaign blueprint for state recovery. So far, it’s yet to make it into a bill, but that could change. State legislators are meeting once a week in Springfield to hammer out a budget.
“Our concern is the leadership might have a discussion on a Sunday, and by Tuesday, this is attached to a shell bill,” Lyle said.
Lyle is taking no chances. Broadcasters in Illinois started early with their offensive, forming a coalition with media and advertiser organizations and putting up a website in May, noadtaxillinois.com. They also got some help from the playbook of Ohio and Minnesota broadcasters that fought back similar proposals last year.
Media and ad lobbyists are also watching California and Pennsylvania to see if ad tax proposals take hold. In California, Sen.Robert Hertzberg is proposing a major expansion of the state service tax that might include advertising and and has said that if he cannot get it through the legislator he might opt for a ballot initiative. Meanwhile, in Pennsylvania, lawmakers have are including new taxes on services and there is fear that advertising could be among them.
In making their case, broadcasters and advertisers are armed with what they hope is compelling data from the Association of National Advertisers.
The analysis from HIS Global Insight shows just how much advertising contributes to the economy nationally and in every state. Overall, every dollar spent on advertising, generates $22 in economic activity.
In North Carolina, advertising expenditures contributed $147 billion to the economy, supported 636,355 jobs, or 15.7% of all the jobs in the state, the report says.
Ad spending in Illinois contributed $267 billion to the economy or 17.3% of the total economy, it says. Advertising supports about 956,613 jobs, or 16.5% of all jobs in the state.
“Once legislators understand the implications for the economy and small businesses of imposing a cascading sales tax, the thoughtful legislators generally come to the realization that it’s not a smart policy to put in place,” the North Carolina lobbyist says.
While state associations fight the good fight on the state level, the national advertising and media lobby has also been on high alert in Washington. Last year draft tax reform plans in both the House and the Senate included limits on the advertising tax deduction as a way to pay for other measures.
Those proposals would have taken the advertising tax deduction, considered a normal and tax deductible cost of doing business since 1913, and limit the deduction to half of current year ad spend with the rest amortized over five to 10 years.
This year, the ad tax deduction is still in play, but it’s not singled out like it was in last year’s proposals. This time, it’s only one of six options legislators might consider for squeezing more tax dollars out of the business community.
The six options were offered in the business income tax report, one of five bipartisan reports produced by working groups on the Senate Finance Committee. Sens. John Thune (R-S.D.) and Benjamin Cardin (D-Md.) headed up the business tax working group.
Limiting the advertising deduction isn’t specifically recommended as part of a final package. But it is No. 3 on the list of discussed options to pay for tax reform, listed as bringing in additional tax revenue for the federal government of $169 billion over 10 years.
“It’s good news and bad news — we weren’t singled out. But when you are highlighted and spotlighted, that’s always cause for concern,” says Dan Jaffe, EVP of the Association of National Advertisers. “We’re not out of the woods.”
The top two major revenue-raising items listed are depreciation changes ($260 billion) and amortization of research and experimentation expenditures ($192 billion).
It’s not clear that any of the options will become actual proposals, but Jaffe said it is still important for advertisers to keep the press on lawmakers. Advertisers have already won over a few converts, such as Sen. Chuck Schumer (D-N.Y.).
“Making advertising more expensive would undermine a leading engine of the economy. Our data shows in every congressional district, advertising is a major source of jobs and major source of economic activity. We’re 19% of the GDP in the U.S.,” Jaffe says.
The Senate Finance Committee has made significant progress on tax reform, but the betting in Washington is that Congress won’t have time this year to do a full tax reform bill. Congress has a lot on its plate, including Iran, looming budget, debt ceiling and tax extender battles and the mounting distraction of the 2016 election.
“In a presidential year comprehensive tax reform is about as easy to do as social security reform,” NAB President Gordon Smith said in a speech before the New York State Broadcasters last month.
An outlying concern is if Congress decides it need a big “pay for” or offset for another program that compels Congress to look for sources of revenue.
“I haven’t heard anyone doing that at this point,” says Clark Rector, EVP of the American Advertising Federation.
For now, broadcasters and advertisers aren’t letting their guard down. “We’re part of a very large coalition of manufacturers and others in the business community who regard this as very, very harmful,” said Smith in his New York speech.
“So be interested in it, but don’t lose any sleep over this issue passing any time soon. Again, we’re laying the predicate now for the next president and the next Congress when these kinds of things could move, could happen.”