Will the Taxman Cometh? | Industry Insights | All MKC Content | ANA

Will the Taxman Cometh?

The ANA gears up to tackle the possible threat of taxing advertising

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One of the top priorities of the Trump administration and the Republicans in Congress is corporate tax reform. The U.S. has the highest statutory corporate rate in the world at 35 percent. The ANA is working hard to protect the current full deductibility of advertising costs as the tax reform debate progresses in Washington, D.C. Congressional leadership has stated that tax reform will come later this spring or summer.

Debate over how to lower corporate taxes could pose a threat to long-standing tax deductions, like the one for advertising.

Speaker of the House Paul Ryan and the majority leadership are strongly supporting a plan developed last year by the House Ways and Means Committee. This plan, known as "A Better Way," would replace the corporate income tax approach, which has been in place since 1913, with a destination-based cash flow consumption tax. The proposal imposes a flat 20 percent tax only on earnings from sales of output consumed within the United States. All business investments could be immediately written off — including buildings and heavy equipment — but without any deduction for interest costs. Critically, under the so-called border adjustment provision, the cost of imported supplies would no longer be deductible from taxable income, while all exports would be.

The border adjustment provision has significantly divided the business community. The powerful Koch brothers, the retail industry, car dealers, toy manufacturers, and oil importers all strongly oppose this provision. They claim it will severely injure their businesses and impose major new costs on consumers for basic goods and services. A different group of equally powerful companies, whose businesses are primarily U.S. based or export driven, are organizing to support the border adjustment provision.

President Trump has stated that he is not thrilled with the border adjustment approach but has not dismissed it. Now that Treasury Secretary Steve Mnuchin is in place, announcement of the White House tax reform plan is likely to come soon. In the meantime, Senate Finance Committee Chairman Orrin Hatch has indicated that he plans to proceed with changes to the current corporate income tax structure rather than following the House approach.

Bottom line: the U.S. has a very fractured business community in regard to tax reform. Everyone wants to lower corporate rates, but beyond that there is no clear consensus. The ANA is laser-focused on making sure that whether there is a consumption tax or income tax approach, no tax reform plan imposes a cost or additional financial burden on the effort of companies to market their products or services to consumers.

If the border adjustment provision meets too much political opposition and is scrapped by the House, it would blow a trillion-dollar hole in the plan that would somehow have to be filled. This is one of the ways advertising deductibility could be swept back into the debate. As always, advertising deductions continue to be seen as a potential pot of gold (see sidebar, below) — Congressional revenue estimates have stated that amortizing 50 percent of advertising expenses would bring in $169 billion to $200 billion in additional taxes within either five or 10 years.

There may also be an effort to restrict the tax deductibility of direct-to-consumer (DTC) pharmaceutical advertising. Minnesota Senator Al Franken has introduced legislation, with 15 cosponsors, to end the tax deduction for DTC ads. Similar legislation has been introduced in the House.

The ANA is presently holding meetings with key Congressional leaders in their states and districts to stave off tax threats, and invites ANA corporate members to participate in these meetings to explain the importance of advertising to their successful operations. We have never been presented any legitimate tax or economic policy basis that would justify increasing taxes on advertising to reach the goal of lowering the overall corporate tax rate. More importantly, studies by several Nobel Laureates in economics have demonstrated that advertising is the most efficient way to market products and that, annually, advertising generates trillions of dollars in economic activity and supports almost 20 million jobs distributed throughout all sectors of the U.S. economy. To preserve this growth, the ANA will continue its efforts in Washington, and in state capitals across the country, to ensure the taxman does not come for advertising.

 


 

On the Local Scene

If Congress passes fundamental reform of the federal corporate tax code, that could have major impacts on state tax bases. Most states that impose a corporate income tax rely on federal rules, definitions, and calculations. Any major changes in the federal corporate tax code could have significant implications on state taxation, which is why the ANA is working closely in a number of states with our corporate members, broadcasters, publishers, and other allied groups to oppose any tax on advertising. The ANA, for example, helped provide funding for the No Ad Tax coalition in Illinois.

Over the past 25 years, the ANA has helped defeat more than 120 ad tax proposals in more than 40 states. These successful efforts have saved the ad community potentially billions of dollars in additional tax burdens. To help sustain these efforts, the ANA, in association with The Advertising Coalition, commissioned a study by IHS Global Insights, which demonstrates the benefits of advertising to the national economy and to each of the 50 states. The "Economic Impact of Advertising in the United States" study shows how advertising is one of the major engines supporting economic activity and jobs in all sectors throughout the U.S. This report is a powerful tool in discussions with both federal and state lawmakers.

After a quiet year in 2016, state ad tax advertising threats once again appear to be on the rise. While corporate tax reform is in the very early stages with Congress and the Trump administration, state governments across the country are hard at work on adopting their budgets for the new fiscal year, which begins July 1. Several states are still struggling to recover from the recession and face budget shortfalls. Unfortunately, taxing advertising has been proposed or discussed in several of those states. Here's what's happening in four of them:

  • West Virginia faces a $500 million budget shortfall for the 2017–2018 fiscal year. Gov. Jim Justice (D) recently proposed a budget that would increase the state sales tax (currently 6 percent) by one-half percent and eliminate the current sales tax exemptions for professional services and advertising.
  • Oklahoma also faces a budget shortfall and Gov. Mary Fallin (R) released a budget proposal that calls for more than $800 million in new revenue through "sales tax modernization" by taxing more than 164 previously untaxed services, including "Radio, TV, Publisher Representatives." Gov. Fallin had proposed taxing advertising last year but the legislature rejected that approach.
  • Kentucky faces a serious funding shortfall in its state pension system. In his "State of the Commonwealth" speech, Gov. Matt Blevin (R) said that he would be calling a special session later this spring to reform the tax code. He urged lawmakers to examine every aspect of the tax code and warned that there will be "sacred cows that are turned into hamburger." Several commissions have examined tax reform in Kentucky in the past several years and have called for expanding the sales tax base to tax more services.
  • Finally, Illinois has entered the second year without a formal budget and continued gridlock between Gov. Bruce Rauner (R) and the Democrats who control both houses of the General Assembly. While he has not specifically called for an advertising tax, the governor has stated that he would accept a package with new revenues if it also contained several government reforms.

— D.J.

 


Dan Jaffe is the group EVP of government relations at the ANA.


 

 


 

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