April 3, 2017 by Paul Dughi
The Trump administration has put tax reform on the table for debate. There are very few people that would argue what we have right now is working fine. One of the things under discussion, however, is eliminating the business deduction for advertising.
Businesses are able to deduct the cost of ordinary and necessary businesses expenses, such as rent, utilities, and salaries – anything a business needs to keep the door open and generate sales. The deduction was codified in 1913 and has been permitted ever since. Advertising was part of the list of allowable deductions and considered an ordinary and necessary cost of doing business.
So what happens if ads are taxed?
It will be a big problem for media companies. Ads in newspapers and magazines, television and radio, and digital ads will all be affected. A change to the advertising deduction would, in essence, make every ad bought more expensive.
While the ad tax is bad for media companies, it’s just as bad for the small, local enterprises that rely on advertising to build their brands and reach more customers. Eliminating that deduction is, in essence, placing a tax on advertising and the impact stretches much farther than just media outlets that sell ads. In an increasingly cluttered world, advertising is necessary to build and maintain a brand and reach new customers. Without it, economic growth stalls and sales drop.
Disclaimer: I work for a media company. We sell ads. I hate this idea. But not just for media, it’s likely to be crushing for local businesses – especially new ones that need to get the word out and invite people to their place of business.
Right now, every dollar a company spends on advertising is 100% deductible. There’s talk of cutting that deduction by half and taxing the remaining 50%.
What would that do to businesses?
“As an example, let’s say a company has a $500,000 ad budget. If the ad tax is passed, they will only be able to deduct half. That means the business will have to pay tax on $250,000 more of their net income. That’s a lot of your profit going into the government’s pocket.” – SOURCE: National Association of Broadcasters
Congress believes an ad tax would generate a staggering amount over the next few years: $169,000,000,000.
Most of that will come from small and medium-sized businesses, the little guys in your town that are trying to stay in business up against the likes of the mega-stores and the on-line retail giants.
Cuts in advertising will mean less sales and fewer jobs. Small businesses would be hurt the most.
Advertising accounts for $5.6 trillion dollars in economic impact in the U.S. and helps supports 22 million jobs. Any kind of tax would negatively impact the economy. Some studies show cutbacks could cost more than a million jobs and hundreds of dollars of lost economic activity. Even a modest reduction that limits the amount a business may deduct of its total advertising spending could cost the nation 1.6 million jobs and $419 billion in economic sales activity.
It was tried in Florida in 1987. The results were painful.
Advertising purchases decreased by 12%. Ad revenues dropped by $100 million dollars. Florida lost 50,000 jobs and $2.5 billion in personal income – numbers traced back to the “ad tax.”
In only-the-government-could-do-something-so-wrong, it actually cost the state of Florida more to administer the new ad tax than it collected. Oops.
The law was repealed after just six months.
After devastating the economy, the law was repealed just six months after it was voted in. That’s blindingly fast considering how slowly the wheels of government turn. Oh, and the Governor lost his re-election bid.