Can Your Job Survive an Ad Tax? | ANA

Can Your Job Survive an Ad Tax?

Advertising and marketing expenses have long been tax-deductible. Proposals to change that could have massive consequences for the industry

Davide Bonazzi/theispot.com
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Call it a tax cliff. Call it a fiscal cliff. Call it the "Super Bowl of tax." Whatever you call it, the effects of many tax reforms enacted by the 2017 Tax Cuts and Jobs Act (TCJA) — which are set to expire after 2025 — will be felt, and lawmakers have made it clear that "all tax provisions are on the table to be reconsidered and renegotiated," says Drew Goesl, partner at Capitol Counsel, a bi-partisan, Washington, D.C.-based government relations firm, and executive director of the Advertising Coalition (TAC), an industry organization working to preserve advertising's tax-exempt status.

With tax reform top of mind in Washington, TAC is in overdrive educating policymakers about the economic contributions of advertising and the would-be repercussions of taxing advertising. According to research commissioned by TAC and conducted by IHS Markit, advertising generated $7.1 trillion in U.S. sales activity and supported 28.5 million U.S. jobs in 2021. By 2026, advertising will generate an estimated $9.5 trillion in sales activity and support 31.9 million jobs domestically, according to the study.

Because companies need advertising to get the word out about their products or services, advertising and marketing costs are 100 percent tax-deductible from federal corporate income tax as an "ordinary and necessary" business expense.

This is not a new policy. "The ability to deduct advertising costs in the year in which they are spent has been in federal law since 1913," Goesl notes.

Reversing the precedent could generate significant government revenue. Other potential upsides could be "more quality-focused advertising or funds being funneled into beneficial public projects," says Jonathan Feniak, a practicing attorney with a background in corporate finance. But Feniak also notes the downsides would be substantial for the advertising industry, the economy, small businesses, and customers.

The Tax Man Cometh?

The degree to which advertising's federal tax status is in jeopardy depends on whom you ask, but several legal experts, government insiders, and advertising industry representatives tell ANA magazine that lawmakers are considering an ad tax among a long list of tax reform measures. Clark Rector, EVP of government affairs at the American Advertising Federation, explains that the Joint Committee on Taxation might consider limiting the deduction of advertising by allowing businesses to deduct only a portion of their advertising spend, or by requiring companies to amortize a portion of their spend over five or 10 years.

Deducting ad spend over several years does not make sense, Rector says, because companies do not benefit 10 years later from an ad bought in 2024.

"The ad you buy today hopefully generates a response in the near-term. If you want to continue the response, that same ad is not going to do it. You need to continue to advertise," he explains.

Another strategy potentially under consideration is taxing or amortizing advertising for specific industries, such as pharmaceuticals. The concept has some appeal for both sides of the aisle, but advertising industry advocates oppose ad taxes of any kind and worry that singling out sectors could escalate to broader advertising taxes.

States Testing the Waters with Digital Ad Taxation

Changes to advertising's tax status on the state level are already underway.

In March, Nebraska's Revenue Committee advanced a sales and property tax overhaul that included a proposal to tax all advertising, eliciting push-back from local broadcasters.

In May, a bill to tax Big Tech to fund a tax credit for the news industry in California squeaked through the Senate Appropriations Committee and will proceed to the state Senate floor. If the bill passes, all online ad revenue above $2.5 billion would be taxed at the sales and use tax rate of 7.25 percent. While obviously intended to target Google and Meta, California's proposed law would likely lead to price hikes that would negatively affect small- and medium-sized businesses that rely on Google, Facebook, and Instagram advertising to grow their business.

While it is hard to predict exactly how many jobs would be lost because of a federal ad tax, Goesl believes the figure would be substantial given the millions of jobs advertising supports.

Maryland established a similar law in 2021 — the Digital Advertising Gross Revenues Tax (DAGRT) — but the law is trapped in legal limbo, as it is potentially fraught with legal issues, Feniak says. DAGRT's constitutional problems potentially include violating the Interstate Commerce Act and the Internet Tax Freedom Act, which bars multiple or discriminatory taxes on electronic commerce.

"A tax specifically targeting digital advertising could be seen as discriminatory when compared to other forms of media and advertising that aren't taxed in the same way," Feniak explains.

If the tax is deemed unconstitutional, Maryland would have to return all the money it has collected from the tax. The constitutional complications the state's bill is facing may deter some states from pursuing advertising taxes of their own.

Christopher Oswald, EVP and head of law, ethics, and government relations at the ANA, worries that, to address legal challenges and generate more revenue, lawmakers might rewrite laws targeting large advertising companies to apply to smaller ones, too.

"It's incrementalist, right? We'll go after the big guys first, and then as we need more money, we'll just make sure that we catch more and more people from a policy point of view," Oswald says.

Taxing advertising might sound like a "simple" way to generate government revenue, but the strategy has been proven to negatively affect a state's economy — a reality today's lawmakers may be unaware of, Rector says.

In 1987, when Florida passed a broad-based tax on services that included advertising services, several big brands stopped running commercials in the state, and marketing companies redirected budgets to neighboring states. Six months later, legislators voted to repeal the tax — but not before broadcasters lost $93 million in ad sales and the state lost an estimated 14,000 jobs.

'Job Loss' and Budget Cuts

Rector explains that lawmakers see advertising as an easy target, because an ad tax would generate significant revenue and they think they are sparing consumers. "They don't understand the ripple effect," he says.

While it is hard to predict exactly how many jobs could be lost as a result of a federal ad tax, or by increases in state advertising taxes, Goesl believes the figure would be substantial given the millions of jobs advertising supports. Certainly, ad agencies would see job cuts as brands reduce spending, says Alison Pepper, EVP of government relations and sustainability at the 4A's.

"I could also see job loss in brands' marketing departments, which are always under pressure," she says.

The advertising industry may conjure images of Madison Avenue, but job losses in advertising would impact regions nationwide, not just industry hotbeds — as advertising is big business, virtually everywhere. Rector observes that the percentage of jobs supported by advertising in Alabama (17 percent) is not much different than in New York (20.1 percent), according to the TAC-commissioned study by IHS Markit.

"The absolute numbers are different given the population, but the percentages are remarkably similar in virtually every state and every market across the country," Rector says.

Besides job loss, taxing advertising would make it harder for small companies to compete with large ones, potentially reducing competition, increasing pricing for consumers, and hindering entrepreneurism.

"If we penalize companies for spending money to grow their bottom line, we're kind of shooting ourselves in the foot. We want our companies to grow and to thrive because it helps everybody. Losing tax benefits could very likely result in U.S. employment opportunities moving abroad, negatively impacting our economy here at home," says Lisa Zeeveld, chief financial officer at BELAY, a mid-sized remote staffing organization offering U.S.-based virtual assistants, accounting professionals, and social media managers.

Zeeveld credits the company's nine consecutive years of exponential revenue growth to inbound marketing.

"We would not have a business if it were not for our marketing team and the advertising they place," she says.

As BELAY's executive team does not make marketing decisions based on tax positions, Zeeveld doesn't think a federal ad tax would deter the team from spending.

"We know — at the end of the day — no one's going to hear about us if we don't spend dollars on advertising," she says.

State taxes on digital advertising, on the other hand, would force the company to reevaluate its marketing strategy and potentially redirect funds to target markets without digital ad taxes.

Since BELAY advertises nationally, Zeeveld could feasibly redirect spend from markets in states with a digital ad tax to markets where advertising is cheaper. But such pivots are not an option for local businesses with one or a few locations. Thus, Zeeveld worries about the ramifications of ad taxes on startups and mom-and-pop stores that "need to be able to advertise in their local publications."

"Taxing advertising and marketing has a cascading effect that negatively impacts not just the big companies, but the smaller challenger companies, and then ultimately the American consumer through higher prices, and that's no good for anybody," Oswald says.

Emily Emery, VP of government affairs at News/Media Alliance, worries about the impact of ad taxes on local economies as well. If advertising costs more and companies spend less, it will decrease media companies' revenue, which could especially affect local media. Emery explains that media companies traditionally use a hybrid monetization strategy that includes subscriptions and advertising. Advertising enables media and news providers to deliver free or low-cost journalism.

"Any contraction or significant decrease in revenue stream will have an impact on the ability of Americans to access high-quality journalism," she cautions.

The devastating domino effect of an ad tax could be enough to persuade lawmakers from creating such tax policies — but not if they are not aware of these downsides. Oswald notes that education and outreach are critical, especially because of how many new faces are in Congress. Eighty-six of Congress's 535 members are serving their first term, and the new class is the youngest in recent history. These representatives haven't seen the ad tax debate play out before, and they may also be unaware of advertising's role in economic growth.

"You don't want to tax drivers of growth — that is just counterproductive for the economy and employment," Oswald says.

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Jacqueline Lisk

Jacqueline Lisk is a writer who covers business, marketing, technology, lifestyle, and health. Her articles have appeared in the Boston Globe, Ad Age, Forbes, Fortune, and Inc. magazine, among other publications. You can connect with Jacqueline on LinkedIn.

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