Tax reform bill would have negative impact on newspapers
House Ways and Means Committee Chairman Dave Camp released in late February a comprehensive tax reform package with the goal of fixing “America’s broken tax code by lowering tax rates while making the code simpler and fairer.” At the heart of the sweeping proposal is the lowering of the corporate tax rate from 35 to 25 percent, and consolidating the seven individual tax brackets into two – a 10 percent and 25 percent bracket. There is, however, a 10 percent surcharge assessed on some professionals earning $450,000 or more in income.
In order to get revenue that would offset this lowering of rates the chairman is proposing major changes in the business and individual sections of the federal tax code, and some of these changes would have a serious impact on newspapers across the country. For example, the legislative proposal would:
- Require a newspaper (or any publication) to deduct the cost of circulation development over a three-year period instead of in the year the cost is incurred;
- Increase from 15 to 20 years the period over which a newspaper could deduct the cost of intangible assets that are acquired in a transaction; and
- Create a new “safe harbor” provision for the classification of workers that would require federal income tax withholding on payments to independent contractors.
All of these provisions are problematic but the biggest blow to newspapers, other media and advertisers is a provision in the proposal that would limit the business deduction for advertising expenses. Since the creation of the Tax Code more than 100 years ago, advertising has been treated as an ordinary and necessary business expense that is fully deductible, just like salaries, rent, utilities and office supplies. Under the proposal, a business would be able to deduct only 50 percent of their advertising costs in the year that ads are purchased and expense the other 50 percent over a 10-year period. There is an exemption for businesses with advertising expenses of $1 million or less. So, under this approach, an automobile dealer that spends $6 million this year on advertising for 2014 models can deduct $3 million and spread the remaining $3 million over 10 years. This means that the dealer would be able to recover the last 10 percent or $300,000 of the cost of advertising a 2014 car model in the year 2024.
While NAA commends Chairman Camp for putting forward proposals to start the conversation on tax reform, we respectfully argue that many provisions are not grounded in sound economic policy. Limiting the business deduction for advertising costs has more to do with raising revenue to offset the 25 percent corporate rate than a sturdy economic theory justifying a major alteration in 100 years of tax policy.
The two leading economic experts on the role of advertising in the economy, Dr. Kenneth Arrow and Dr. George Stigler, have said, “Proposals to change the tax treatment of advertising are not supported by the economic evidence.” In fact, the economic evidence demonstrates that advertising is a key engine for economic activity and job creation in this country. A recent study by IHS Global Insight for the Advertising Coalition, of which NAA is a member, estimates that every $1 spent on advertising generates nearly $22 in economic activity (sales) and every million dollars in advertising supports 81 American jobs. This same study projected that advertising driven sales of products and services help support 21.7 million jobs or 16 percent of the 136.2 million jobs in the U.S.
In our view, this proposal would make advertising more expensive and likely will reduce the overall spend on advertising. This will limit the ability of sellers to connect with buyers just when our economy is beginning to find firm footing. This will also come at the worst time for newspapers and other media that rely on advertising to support the distribution of news and other information in our local communities.
In the months ahead, NAA will be working closely with our member newspapers as we educate policy makers on the negative impact of these tax reform proposals on newspapers and other media. As the process moves forward, we will provide periodic updates.
If you have any questions please contact Paul Boyle.
Last Updated: March 27, 2014
First Published: March 14, 2014