Lawmakers knew they would have to tangle with K Street when they tackled tax reform. But are they ready to mess with Madison Avenue?
Sen. Max Baucus's (D-Mont.) latest discussion draft bill for tax reform slashes into the business expense deduction for advertising. The plan could trigger a lobbying backlash from advertisers, broadcasters and cable television.
Reducing that tax break would strike at Big Media’s bottom line, but lobbyists said it would hurt Main Street as well.
“It would have a devastating impact, not just for advertising but for the economy in general.”
Advertising costs have been treated as an expense deduction for businesses since the tax code was created in 1913. Under the code now, business can expense 100 percent of their advertising costs immediately.
Baucus, the Senate Finance Committee chairman, proposed to alter that deduction in a discussion draft for tax reform that was released Thursday. Under the senator’s proposal, half of a business’s advertising expenses can be expensed right away, while the other half can be amortized over the next five years.
Stalling the deduction for years wouldn’t mesh with today’s quick-fire marketing on phones and websites.
“This stuff used to happen over months and years. It now happens over minutes and hours. The selling period is very, very short, so the theory of postponing the deduction doesn't work. The success of the ad world, which literally built the Internet, is now all about rapid sale, rapid response,” said Jim Davidson, executive director of the Advertising Coalition, whose members include CBS Corp., the Walt Disney Company and Time Warner Inc.
Clint Stretch, a former top official at the Joint Committee on Taxation, said the rationale behind ending the tax treatment of advertising was simple. Companies, especially those selling high-end products, use advertising to build a brand that lasts far longer than a year.
“Advertising, in many circumstances, is really about building the long term for an organization,” said Stretch, also formerly of Deloitte Tax.
The tax treatment of advertising was also looked at during the 1986 tax reform process. But the provision never seemed that threatened, in large part because of how high profile its supporters were.
“It's typically been regarded as pretty toxic, because of the influence of people who are advertised in and on,” Stretch said.
Lawmakers who put the advertising provision on the chopping block could hear from a broad swath of media supported by ad sales, including newspapers.
In a statement, MPA-The Association of Magazine Media said reducing the deduction would have “a profound impact on the entire advertising and media industry.”
A spokesman for the National Association of Broadcasters (NAB) said the deduction was “a jobs issue.”
“Advertising is what drives commerce around the country. Our members are fully engaged on this issue,” said Dennis Wharton, an executive vice president for NAB.
Lobbying on the ad deduction is well underway. On Thursday, Rector with AAF sent out an action alert to his members, telling them to whip up opposition to Baucus’s plan among their senators.
“I'm getting a tremendous response from my members. This is their business. This is their livelihood. They are writing letters. They are making phone calls,” Rector said.
The AAF’s members include some of the world’s biggest ad agencies, such as Leo Burnett, Ogilvy & Mather Worldwide and Young & Rubicam.
Rector has also shared with lawmakers an economic study by IHS Global Insight that shows advertising accounts for $5.8 trillion in U.S. economic output, and helps support nearly 20 million jobs. Rector has now asked the consulting firm to study Baucus’s proposal to see how many jobs would be lost.
“The purpose of advertising is sales,” said Dan Jaffe with the Association of National Advertisers. “It makes no sense to come after us.”
Public interest groups have targeted the advertising deduction for specific products in the past, and cheered Baucus’s plan.
“We are glad that tax deductibility is in the mix, and there is some meaningful discussion surrounding that,” said Margo Wootan, director of nutrition policy for the Center for Science in the Public Interest (CSPI).
Legislation has already been introduced this year that targets deductions for advertising for junk food, pharmaceuticals and tobacco. CSPI is “focused on eliminating the deduction for advertising that can hurt people's health,” according to Wootan.
“The government right now is providing a subsidy to companies that are marketing unhealthy food and obesity to children,” Wootan said.
The lobbying to preserve the current treatment of advertising costs illustrates the difficulty in reforming the tax code.
Tax breaks for housing, healthcare, charitable contributions and offshore profits have already received plenty of attention. But the advertising provision shows that there are a slew of preferences with fierce defenders on K Street.
“It underscores that there can be a lot of surprises in tax reform, and that they're going to have look hard to find revenue,” Stretch said.