Congress may throw ad deduction overboard


If marine marketers didn’t have enough to worry about — what with the ongoing debate as to where to put their scarce advertising dollars in either old or new media — now comes Congress with a real “gem” for the new year. There are clear indications that our newly re-elected officials are actually toying with the idea of limiting or disallowing the federal tax deduction for business advertising expenses.

According to the Association of National Advertisers, a congressional staff proposal to this effect that has been floating around the House Ways and Means and Senate Finance committees for years may be getting under way in the months to come. In fact, the outgoing chairman of the Ways and Means Committee, Rep. Dave Camp, R-Mich., unveiled a 1,000-page “tax reform” package in the last Congress that would cut the deduction by half in the first year, with the rest amortized over 10 years. Similar provisions were included in draft Senate legislation when the Democrats were in the majority.

In a branch of government not known for its bipartisanship, the fact that congressional leaders in both houses from both parties are even contemplating such a move, which will affect so many well-entrenched business interests, is a conundrum — at least on the face of it.

On the one hand, the business community has been clamoring for “tax reform” since the ink was dry on the last comprehensive overhaul, the Tax Reform Act of 1986. A Democratic Congress passed it and President Reagan signed it into law.

The most salient aspect of that legislation was that it was “revenue-neutral.” In other words, although changes were made to tax rates and preferences, the amount of money the government took at the end of the day remained the same.

Now, with “tax reform” slated to be one of the top priorities of the new Republican congressional majority, all eyes are turning to the new Ways and Means chairman, Rep. Paul Ryan, R-Wis. The former vice presidential candidate will have to figure out how to craft revenue-neutral legislation that will cut corporate tax rates but eliminate a variety of loopholes and tax preferences to raise corresponding revenue.

Unfortunately for anyone who has to manage a marketing budget, Ryan has basically indicated that he will start working from the former Republican chairman’s draft, according to Daniel Jaffe, executive vice president, government relations, of the ANA.

“Advertising has always been an ordinary and necessary deduction, going back to the beginning of the tax code in 1913, and has never been treated as a loophole,” says Jaffe, pointing out that the purpose of advertising is to drive sales and that reducing the deduction could result in a significant drag on economic activity.

“Limiting or eliminating the deduction will be very counterproductive and will have a particularly devastating impact on the media, which has been struggling for years,” he notes.

That said, the prospect of generating an estimated $169 billion in new tax revenue over 10 years is a target with a very big red bull’s-eye that must have some on Capitol Hill salivating, particularly those who are hell-bent to lower the corporate tax rate and are more than willing to throw a number of long-established deductions overboard in order to achieve their goal.

Some might say that this kind of thinking is reminiscent of the infamous luxury tax that was levied on a variety of high-priced products, including boats, during the George H.W. Bush administration in the early 1990s. That tax crippled the boating industry, which has yet to fully recover from the hit it took more than two decades ago. In fact, the last time Congress seriously considered changing the tax treatment of advertising expenses was during the first Bush administration.

Although some may think the advertising industry is crying wolf, two congressional hearings on the issue just in the past two years have convinced the ANA that the threat is imminent and serious. To stem the approaching tide, the association has ramped up its lobbying efforts and launched a campaign to counter the threat.

“We’re in favor of lowering the corporate tax rate, but we don’t see any legitimate reason to subject advertising to adverse treatment,” Jaffe says, adding, “This is not going to sneak in as part of some omnibus bill. It’s the seventh-largest revenue source in the draft legislation and people are going to know what’s happening.”

As this column goes to press, any move forward on the legislation should come sooner rather than later, now that the lame-duck Congress appears to be finalizing stopgap tax legislation that will simply extend a number of tax preferences for the remainder of 2014 instead of for a period of two years, as was hoped.

As a consequence, a push will be on to craft and approve a comprehensive “tax reform” package in the first six months of the new year before the summer recess. After that, everything on Capitol Hill will be caught up in 2016 election-year politics.

Michael Sciulla is president of Credibility & Company Communications, as well as vice president of the Marine Marketers of America and a member of the board of directors of both Boating Writers International and the Marine Marketers of America. During a 28-year career at BoatUS he built the association’s brand as membership grew from 30,000 to 650,000 and testified more than 30 times before a number of congressional committees.

This article originally appeared in the January 2015 issue.


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