True tax reform

According to conventional wisdom, Washington gridlock prevents passage of major tax reform this year.   With so much at stake, however, it’s dangerous to sit on the sidelines and depend on political inertia to determine the outcome of this crucial debate.

The tax reform train already is leaving the station in both the House and the Senate.  Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, just released a comprehensive tax reform proposal.  Similarly, Sen. Ron Wyden (D-Ore.), the new chairman of the Senate Finance Committee, announced he will pursue an active agenda to reform “the dysfunctional, rotting mess of a carcass that we call the tax code.”

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The advertising community naturally is laser-focused on proposals to limit the deduction for advertising expenses.  Businesses, large and small, know that advertising is the major driver of sales, an essential component of job creation, and the foundation of most media in the U.S.  Since 1913, when the federal income tax was first enacted, advertising expenditures always have been fully deductible, treated the same as any other ordinary and necessary business expense, like salaries, rent, utilities and office supplies.

The ad deduction never has been a tax preference, “loophole” or special interest benefit.  Rather, it provides an opportunity for every company throughout the U.S. to communicate efficiently with consumers about products and services.

Nevertheless, Representative Camp’s tax proposal significantly reduces the advertising deduction, allowing only 50 percent of advertising expenditures to be deducted currently, and the remaining 50 percent to be amortized over ten years.  Former Finance Committee Chair, Max Baucus, before departing for Beijing as the new ambassador, proposed a 50% current deduction with the remainder amortized over five-years. It is now to be seen what Senator Wyden will do.

Two Nobel Laureates in economics, Dr. Kenneth Arrow and Dr. George Stigler, after a careful review of the literature, concluded that amortizing advertising is totally arbitrary and not based on legitimate tax or economic policy considerations.  This is demonstrated by the wide divergence in amortization periods proposed by Representative Camp and Senator Baucus.  Without a firm analytical foundation, the choice of an amortization period appears totally dollar driven.

Also, a recent important study commissioned by The Advertising Coalition, including the Association of National Advertisers, provides critical data in regard to the ad tax issue.  The study conducted by IHS Global Insight Inc., that utilized a sophisticated model of the U.S. economy first developed by Nobel Laureate Dr. Lawrence R. Klein, determined that limiting immediate advertising deductibility would have major detrimental economic effects in every Congressional district and state in the U.S.  Put simply, decreasing the existing ad tax deduction to 50 percent and imposing a longer amortization schedule for the remainder will place directly at risk more than a million jobs and hundreds of billions of dollars in sales.

These advertising tax proposals clearly place significant new tax liabilities on business.  A number of U.S. corporations expend multi-billions of dollars on advertising every year.  Many more U.S. companies annually spend hundreds of millions of dollars.  Even in the initial year, if either amortization proposal were imposed, the tax burden on these companies would be substantially greater; and this tax burden never ceases.   As long as a company continues to advertise, every year it will lose 40% of the current ad deductions it now enjoys. 

It is simple economics.  If Congress makes advertising far more expensive by imposing a major immediate tax on it, there will be less advertising.  IHS Global Insight estimates that for every dollar spent on advertising, $22 of sales occur.  Taxing advertising will dramatically reduce the amount companies can and will spend on advertising, leading to a downward spiral of stifled spending and job losses.

True tax reform must be focused on closing tax loopholes and special interest write-offs to lower the top nominal corporate tax rate in order to increase international competition and provide greater economic stimulus. True tax reform, however, must not be allowed to damage the healthy aspects of the tax system-like the existing ad deduction provision- which are fully consistent with a properly functioning net revenue income tax.

Congress should quickly reject this proposed major tax on advertising and stop its potential to undermine severely our economy, American jobs and sales.

Jaffe is executive vice president of Government Relations for the Association of National Advertisers (ANA).