Rep. Dave Camp (R-Mich.), the outgoing chairman of the House Ways and Means Committee, unveiled his tax reform package Wednesday, and the bad news for the advertising and media industries is that it includes new limits on the advertising tax deduction. As feared, Camp's proposal would cut the deduction by half in the first year with the rest amortized over 10 years.
To help out small businesses and local advertisers, Camp's draft would allow companies to expense the first million dollars of advertising, provided the total advertising budget does not exceed $2 million.
Camp's proposal, at nearly 1,000 pages, would lower the corporate tax rate from 35 to 25 percent and simplify and reduce tax rates for individuals into two brackets, 10 and 25 percent. To pay for those decreases, he had to find some "pay fors." The advertising tax deduction—for more than a century treated as an ordinary, fully deductible business expense—is now being treated as a loophole or special interest.
When asked in a press conference about the deduction, Camp argued that the reduction in rates to 25 percent would compensate for the change in deductibility. "For all businesses, the top rate is going to be 25 percent, so there is going to be a significant rate reduction," Camp said.
While there may be a "significant rate reduction," it would overstate business income, said Kyle Pomerleau, an economist with the Tax Foundation, a Washington, D.C.-based research think tank. Because businesses wouldn't be able to deduct the full value of advertising, they "would be taxed higher than they otherwise should have been taxed," Pomerleau said. "Camp unfortunately moves in the wrong direction with this change."
The advertising tax deduction has been the top policy issue for the advertising industry. For months, the advertising lobby has been trying to get the provision removed from an unreleased draft, to no avail.
"It's crazy that they kept this in there. What boggles my mind is that extending the amortization over 10 years is called a 'simplification.'," said Clark Rector, evp of government affairs for the American Advertising Federation. "Beyond that, it's a sledge hammer to business, a dis-incentive to advertise, and counterproductive to stimulating the economy."
Now, the ad lobby has a very real target.
"We'll be out in force," said Dan Jaffe, evp of the Association of National Advertisers. "We're not against tax reform, but this provision would make the effort to sell more expensive. If the provision wasn't harmful, why does the proposal include an exemption for small business?" Jaffe said.
ANA research conducted by Nobel Laureate in Economics Lawrence Klein warned that if chairman Camp's proposal were enacted, it would put at risk more than 1.7 million jobs and $456 billion in sales.
Media also stand to lose if the ad tax proposal isn't cut. "NAB strongly opposes any job-killing proposal that would limit the ability of thousands of large and small businesses from fully deducting their annual advertising expenses," said Dennis Wharton, evp of the National Association of Broadcasters."Advertising on local radio and television stations is a key driver of the American economy."
The good news is that Camp will be crunched for time in an election year when members begin running for re-election in May. Even in the GOP-controlled House, it will be an uphill climb, let alone getting it through the Senate.
Asked about tax reform, speaker John Boehner (R-Ohio) wasn't encouraging (he actually said, "Blah, blah, blah,") and laughed off any chance of it coming it up for a vote this year, according to a report in The Hill.
The near future of tax reform in the Senate is an even bigger question mark for a chamber that's already been derided as the most do-nothing Congress since Harry Truman was president. Both Majority leader Harry Reid (D-Nev.) and Minority leader Mitch McConnell (R-Ky.) have expressed skepticism that any tax reform could get done this year, and Sen. Ron Wyden (D-Ore.), the new chairman of the finance committee is focused for now on a series of expired tax breaks known as the tax extenders.
That doesn't mean advertisers should write it off because even though it may not happen this year, Camp's proposal starts the discussion rolling. And Camp, who spent three years preparing for this moment, is determined to see it through.
"I don't think we can afford to wait. I'm not going to settle," he said during a press conference when asked about Rep. Boehner's reaction to moving tax reform this year. "We need to have this debate."
"I don't see it getting through the House this year, but it's a clear and present danger," said Mike Zaneis, evp and general counsel of the Interactive Advertising Bureau.