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New House Speaker May Push for Tax Reform that Impacts Advertising

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As we head into election season, partisan political agendas are being set.  But one issue has historically received bipartisan support – tax reform.  And that issue may have received a big boost in a recent political change – Paul Ryan’s rise to House Speaker.

Ryan’s speech just before being sworn in as Speaker indicated that one of his top priorities is tax reform.  Ryan stated, “How reassuring it would be if we actually fixed the tax code, put patients in charge of their health care, grew our economy, strengthened our military, lifted people out of poverty and paid down our debt.”

That tax reform was the first thing mentioned was not a surprise – Ryan is one of Congress’ most knowledgeable on tax policy and has long advocated a reduction in taxes as a key to economic growth.  One Republican staffer went so far as to say, “It’s his No. 1 priority – it’s what he cares about most.”

And it’s a great platform – who wouldn’t want a reduction in taxes and what business wouldn’t support it?  Past drafts of tax reform legislation have received bipartisan support and authorship in the House Ways and Means Committee.

The problem is that the singular soundbite “let’s lower taxes” hides a huge iceberg beneath the surface.  Any tax reform legislation will not be a single sentence that lowers the tax rate while keeping everything else the same.

If you reduce the revenue generated from taxes by lowering rates, that revenue must be replaced by other means.  So credits, deductions, and other provisions will be cut.  And in the last tax reform draft by former Ways and Means Committee Chairman Dave Camp (R – Mich) the 7th highest revenue replacement item was removing the deductibility of advertising costs as a business expense.

The proposal was to allow 50% of the ad expense to be deducted in the year it is incurred with the remainder amortized over 10 years. (A 5 year amortization proposal is on the table but by all counts viewed as not generating sufficient revenue to be a realistic option).

That kind of tax reform would be a triple whammy for those in the advertising business in raising costs for advertisers, raising costs for agencies and publishers, and reducing competitiveness with other advertising methods that may not be treated similarly such as email marketing.

While there are some provisions in the draft that would make it apply directly only to larger companies, even if those provisions stuck, it is likely the impact would be felt across the board as the increased costs trickle down.  For example, it might impact the amount of money franchises receive from national brands or impact the benefits to local businesses from coop programs. And if the larger players and platforms like Google and Facebook experience higher costs, who doesn’t expect that to be reflected in higher prices?

On the other hand, businesses who pay taxes at the highest corporate rate currently imposed by the IRS may see a net benefit from the lower tax rate.  Just like individual income tax, the amount of taxes paid by companies varies greatly based on many factors and nuances of the tax code.  A reduction in the corporate tax rate will help some and hurt others depending on how that tax cut is accomplished.

So will it happen?  The motivation is certainly there – Ken Kies, a tax lobbyist, expects Ryan to be more involved in tax reform than any speaker has before.  Next year might be a tall order given that it is an election year.  But after that we should expect a strong push.

In closing, if you take away one thing, remember nothing is ever free – the promise of lower taxes might sound good, but for those of us in the advertising industry, the higher costs are unlikely to be a worthy trade-off.

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