Congress is finally seriously talking about tax reform for the first time since President Reagan signed the Tax Reform Act of 1986, but there is a fly in the anointment.
The current draft being proffered contains a proposal to alter the Internal Revenue Code to tax advertising for the first time since the income tax was created in 1913. Currently businesses are allowed to deduct advertising expenditures just as they do other necessary business expenses, such as wages and rent.
The tax reform draft proposes to allow only 50 percent of advertising expenses to be deducted, while the rest would be amortized over 10 years — a move that would complicate tax compliance rather than simplify it. It is estimated that over a decade this proposal would generate $169 billion in additional federal revenue, money drained needlessly from the economy.
Americans for Tax Reform — who, as the name suggests, are all for tax reform — have come out strongly against this proposition, saying any revenue generated would be dwarfed by its negative effects.
The tax reform group’s president, Grover Norquist, penned a letter to Congress earlier this year saying that not only should ads not be taxed, but that implementation of full business expensing would grow the GDP 5.4 percent and create a million jobs, while the perks of small business cost reduction techniques like fuel cards would allow the small businesses to survive.
“Implementing full business expensing is a vital step toward creating a pro-growth tax code. At the same time, taking the existing treatment of advertising costs in the other direction by forcing it to be depreciated over multiple years makes no economic sense and undermines both the economic gains and the rationale for moving to full business expensing,” Norquist wrote.
He also pointed out, “In total, advertising directly or indirectly supports almost 22 million jobs and $5.8 trillion in total economic output. Every dollar of advertising spending generates $22 of economic activity. Advertising associated with local radio and television is alone projected to contribute more than $1 trillion in economic output and 1.38 million jobs.”
The impact on the print media, which is the prime source of local news coverage, could be devastating as well.
According to the Brookings Institute, the total number of newspapers in this country has already declined from nearly 1,800 per million population in 1945 to about 400 in 2014.
According to Adweek, from 2000 to 2013, annual U.S. newspaper ad revenue dropped from $63.5 billion to $23 billion. Meanwhile, Google’s ad revenue has grown to nearly $50 billion a year.
This past week David Williams, writing ironically enough at the online site Townhall, pointed out, “The decline of national outlets is one thing — in most cases, online news suffices — but the shrinkage of local papers is far more dangerous. Many areas only have one source of local news. When that one small paper goes bankrupt due to a draconian federal ad tax, there won’t be anybody to cover the local council meeting or report on communal crime. The Wall Street Journal or New York Times certainly won’t have the space, desire, or bandwidth to send in journalists for local stories. And so, many residents will be left totally in the dark about what is happening around them.”
Fortunately, some in Congress are paying heed to the warnings being offered by those who represent both the media and the advertisers who would be financially harmed by the advertising tax plan.
In April, 124 members of the House of Representatives signed a letter addressed to House Speaker Paul Ryan and Minority Leader Nancy Pelosi warning of the problems the ad tax would create. Signers include Nevada’s Democratic Reps. Dina Titus and Ruben Kihuen.
“The potential for strengthening our economy through tax reform would be jeopardized by any proposal that imposes an advertising tax on our nation’s manufacturing, retail, and service industries,” the letter states, noting advertising contributes 19 percent of the nation’s GDP.
It goes on to argue, “Advertising has been accorded the same treatment as all other regularly occurring business expenses, such as employee wages, rent, utilities and office supplies, throughout the 114-year life of the tax code. Any measure that would tax advertising — and therefore would make it more expensive — cannot be justified as a matter of tax or economic policy.”
The House letter concludes, “Advertising also is responsible for supporting the high-quality news, information, and entertainment that is a cornerstone of our democracy and upon which our constituents rely.”