Originally published by Investor’s Business Daily on June 26, 2017.
Republicans have struggled to put together a tax reform plan with enough support to pass Congress. The major hang-up is their self-imposed need to find revenue offsets to “pay for” the pro-growth rate cuts and reforms. However, that challenge shouldn’t mean that every bad idea to raise money, like an advertising tax, should now be on the table.
Talks of a federal ad tax had been dead since the 1950s until former Rep. Dave Camp, R-Mich., gave the idea new life in his 2014 tax reform proposal. Camp wanted to convert advertising from being a fully deductible business expense — as it has been for over a century — to just half deductible, with the rest being amortized over the course of a decade.
While Camp’s proposal went nowhere, current Ways and Means Committee Chairman Kevin Brady recently acknowledged that there “may be a need” to look at some of the revenue raisers in the old plan to complete his 2017 tax reform proposal.
Let’s hope that the advertising tax is not one of the ones being looked at. There’s no good reason to treat advertising costs differently than other business expenses. To do so would be to make the tax code more complicated, instead of less. Even more importantly, it would have drastic negative consequences for the economy.
In 2014, IHS Global conducted a study on advertising’s impact on the American economy, and the results were astounding. IHS found that in just that year alone, the country’s $297 billion in advertising spending generated $5.5 trillion in sales, or 16% of the nation’s total economic activity. It also helped create 20 million jobs, which in 2014 amounted to 14% of total U.S. employment.
Clearly, ad spending is a significant driver of economic growth, providing tremendous return on investment for the American economy (approximately $19 worth of sales activity for every $1 spent on advertising). The labor force participation rate is still sitting at the lowest level it’s been at since the Carter presidency, while higher-paying job sectors continue to struggle. Republicans should be careful not to make these concerning numbers plummet even more out of desperation to score a political “win.”
The dangers of the advertising tax cannot be overstated. In fact, it already has a history of wreaking havoc on the economy.
In the 1980s, Florida briefly imposed one, and it led to the immediate loss of 50,000 jobs and $2.5 billion in personal income. Even worse is the fact that the tax’s administrative costs ended up exceeding the tax revenue. The Florida ad tax was wildly unpopular — so much so that the legislature was forced to repeal it after just 6 months. The New York Times reported that then-Gov. Robert Martinez “suffered political embarrassment in his first year in office by having to shift from ardent support of the tax to advocating its repeal.”
Similarly, a study from the University of Oxford found that Austria’s advertising tax had a noticeable impact on the price of goods. In the case of consumer necessities like food and education, this mandate often led to costs shifting upward. This is to be expected — the less information consumers are exposed to about competing products, the easier it is for market leaders to maintain artificially higher market share.
On the campaign trail, President Donald Trump promised to simplify the tax code for American families and businesses, creating more jobs and economic mobility by leaving more money in the hands of the people who’ve earned it. The advertising tax would undoubtedly fail on these fronts; it will do nothing but worsen the sorry state of the economy.
Kevin Brady and the rest of the Ways and Means Committee should take note of the facts of the matter at hand and learn from history so that the ad tax can be put to bed once and for all.