Ad Groups Bolster Fight for Tax Repeal

Two advertising trade groups last week hired a lobbyist to fight for a repeal of a 3 percent ad tax on creative services, which Connecticut passed Feb. 25 to help fill a nearly $900 million budget deficit.

The American Association of Advertising Agencies and the Association of National Advertisers argue that the tax will further hurt Connecticut’s economy by forcing advertisers to use agencies outside the state. Connecticut Gov. John Rowland estimated the tax will raise $5 million, but according to the 4A’s, the figure is more likely to be $2 million or less.

Under the Connecticut measure, a sales tax will be imposed on or after April 1 on advertising, public relations services and direct mail, including “layout, art direction, graphic design, mechanical preparation or production supervision.” Connecticut’s Department of Revenue must determine how the tax would be applied.

The trade groups fear the tax will prompt other cash-strapped states to take similar measures. Nebraska is considering a proposal to repeal its current tax exemption for ad services, while New Mexico has proposed a 20 percent surcharge on prescription drugs that have been advertised.

The trade groups said they expect the fight to be an uphill battle, since Rowland has included the measure in his 2003-04 budget proposal. “We think this is misguided, and we hope that Connecticut will move quickly to change this policy that will only be harmful,” said Dan Jaffe, ANA evp of government relations.

Connecticut agencies worry they will lose business to surrounding states. Cliff McFeely, president of Stamford, Conn.-based independent North Castle Partners, said he is “horrified” at the ad-tax prospect. “It’s a good way to make Connecticut less competitive from a price perspective,” said McFeely, whose shop is one of the state’s largest, with about $70 million in billings. “Clients today aren’t looking to spend more money.”

Broadcasters are also nervous. Mike Rice, president of the Connecticut Broadcasters Association, said TV and radio stations, as well as newspapers, would be affected, because they prepare some ads in-house. “The tax department may ask us to separate out time and space from production costs so they can tax us on the production,” said Rice. “If it does damage to the economy and doesn’t raise much revenue, we feel that is the basis for asking for [a repeal].”

The Advertising Club of Connecticut is considering paying part of the lobbying costs incurred by the 4A’s and the ANA. The legislature’s original proposal was for a 6 percent tax on paid media, but the ACC rallied to beat back the proposal. “We feel we have a real chance to see this measure repealed,” said Matthew Clark, the group’s president.