Advertising Biz Stunned by Draft Proposal to Cut Ad Deduction

Ramifications for all media, but particularly struggling newspapers

Just as advertisers and media execs feared, Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means committee, is proposing watering down the advertising tax deduction. Multiple sources have told advertising and media lobbyists that the measure, which could cost advertisers millions and reduce revenue for ad-supported media, has been written into a working draft of a tax reform bill.

The provision would allow advertisers to deduct only 50 percent of all ad expenses in the first year and amortize the remaining 50 percent over the next 10 years.

If Camp has his way, a tax reform bill will be introduced and clear the committee by the end of the year.

Lobbyists suspected this was coming, surprised that lawmakers all but ignored data showing that for every $1 spent on advertising, $20 in sales was generated, per IHS Global Insights. 

Learning of the threat to all but obliterate what has been a recognized business expense for more than 100 years, advertisers and media lobbyist representing the major TV networks met Thursday to discuss strategy.

One lobbyist called the situation "DefCon 1."

"We take this more seriously than any other threat we've seen in many years. It's a sweeping proposal," said Dan Jaffe, evp of the Association of National Advertisers, following Thursday's meeting. 

The 10-year amortization clause has advertisers scratching their heads. The theory behind the proposal is that advertising builds value over time. But as any advertiser knows, just about all advertising has a short shelf life because it is aimed at pushing a sale. Auto ads, for example, are promoting a single model, or driving people into the showroom. Other products may not even make it. What is the lasting value of BlackBerry advertising? Brand value ultimately depends on the product and consumer satisfaction, which is why advertising is a business expense.

"There simply is no economic or tax policy justification for the proposed changes and that is the view of economic experts like Nobel prize winners George Stigler and Ken Arrow who stated that they could find no economic basis for amortizing advertising tax deductions," Jaffe said.

Advertisers liken the proposal to creating a new tax on advertising because everything a business can't deduct now gets taxed, making advertising a lot more expensive. For any media, but particularly the struggling newspaper business, the ramifications could be deadly.

"This would come at the wrong time when we're beginning to our sea legs in the digital world. Media companies are going to get hit twice. Potentially, it could mean staggering job losses," said Paul Boyle, svp of public policy for the Newspaper Association of America. "It puts more than 1.6 million jobs at risk," Boyle said, citing an IHS Global Insights study the advertising lobby commissioned. "In this economy, do they want to jeopardize that? We need to make a better case that this is an ordinary, necessary business expense," Boyle added.

Lawmakers, the lobbyists said, seem fixated on hitting a specific number and getting the corporate tax rate down to 25 percent.

"They [Ways and Means] are obsessed," said Clark Rector, evp of government affairs for the American Advertising Federation, which sent out an alert to its members. "It's a crazy proposal; it's unhinged from any economic reality."

"They [Ways and Means] are only looking at how much revenue it would bring to the government, not at the impact on the economy," Boyle said. "We hope we can convince them it would have a more damaging effect on the economy than providing any benefit in lowering the rate."

Passing tax reform in Congress remains a monumental task and advertising and media lobbyists are casting a wide net in discussions with Congress. Camp still has to convince House leadership and Sen. Max Baucus (D-Mont.), chairman of the finance committee, is not as far along on tax reform.

The time to kill the proposal is now, lobbyists said. "It's starting to get legitimacy and once that happens, bad ideas never go away," said one broadcast lobbyist. 

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