Senate Finance Chairman Max Baucus (D-MT) is encouraging legislation that would limit the advertising tax deduction, a proposal that could stifle marketing spending across a variety of industries. The drafted proposal – which is not formally before Congress yet – would only allow companies to deduct 50% of the money they spend on advertising dollars in year one, with the remaining 50% amortized over the next five years. Currently, companies can deduct 100% of advertising expenses in the year they’re incurred. In effect, the proposal is a way to increase revenue as a trade-off for reducing the corporate tax rate from 35% to as low as 25%.
“America today is using a bloated tax code that was built for businesses close to 30 years ago,” Baucus said, in a statement. “The code is completely outdated and acting as a brake on economic growth.”
Baucus’ proposal follows a similar idea floated recently by Dave Camp (R-MI), the chairman of the U.S. House Ways and Means Committee. Baucus and Camp are working together to try to introduce and pass the biggest tax code changes since 1986, with a limit to the ad tax deduction being only one of several provisions. If a Baucus/Camp measure did pass Congress, local radio and TV stations would almost assuredly be hurt as a majority of their revenue comes from advertising. Besides media, any firm selling marketing products or services – like ad specialty industry suppliers and distributors – could also be impacted.
“Advertising is not a capital expenditure and the effect of most advertising messages or impressions lasts days at best, not years,” said Greg Muzzillo, founder of Top 40 distributor Proforma (asi/300094). “There’s no sensible explanation for expensing something beyond its useful life. I am not smart enough to imagine all the problems this legislation could create for our customers, but I am smart enough to worry that it can’t be good for our customers or our industry.”
Not only could the proposal affect the amount of money a company devotes to advertising, it may also impact how marketing firms allocate their own resources. “We view this proposed legislation as a tax increase or cost increase, which we would have to offset somewhere else in our business model,” said Dave Thompson, president of Top 40 distributor National Pen (asi/281040). “The bottom line is it would not be constructive to growing our business or increasing our total number of U.S.-based employees.”
Baucus and Camp hope to agree on a final tax package by the end of the year, potentially setting up a debate in Congress and a massive lobbying effort to defeat the proposal. “Everyone in our industry should reach out quickly and firmly to their senators in an effort to prevent any further discussion,” said Peter Geiger, executive vice president of Top 40 distributor Geiger (asi/202900). “This is a case where everyone in the industry can and will be harmed should this come to fruition.”