Why an Advertising Tax Is the Worst Idea

President Donald Trump and the Republican majority in Congress are moving full throttle on tax reform, hoping to save American families thousands of dollars by lifting nonsensical burdens on businesses and the middle class. While all of the details aren’t yet public, the Republican tax bill is expected to deliver President Trump’s promise of a shrunken corporate tax rate, cash brought back from overseas, increased investment, and lower prices on American goods.

The recently released White House blueprint, which is expected to lower taxes by $1,600 for the average American, is excellent. Congress and the White House need to ensure that it’s kept great.

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But crummy “add-on” proposals lurking in the swamp threaten tax reform like an alligator anticipating a chomp at prey. Ways and Means Committee Chairman Kevin Brady (R-Texas), one of the architects of the impressive blueprint, has yet to officially rule out replacing corporate tax revenues with an “advertising tax,” which would decimate small businesses.

Former Rep. Dave Camp (R-Mich.) designed this questionable proposal back in 2014. It promised to reduce the 100 percent business advertisement deduction to 50 percent, with the remaining taxable 50 percent reimbursed over a 10-year span. This would be a radical change to the longstanding belief that advertising expenditures are a necessary component of businesses that shouldn’t be taxed, just like paying wages to employees. The resulting perverse incentives would run amok.

The sheer size of the advertising market partly explains why politicians salivate over its potential to feed big government. Advertising is a staple in today’s competitive markets, which reward attractive branding and targeted customer outreach. In 2014, the $296 billion spent on advertising generated $5.8 trillion in consumer spending and 20 million American jobs. It’s no surprise that these advertising jobs pay $96,000 average annual salaries on, far above the national rate.

But the devil is in the details. Advertising is especially important for new businesses that lack established customer bases. Many new businesses fail, with 20 percent dying after one year and half of all businesses exiting the market after three short years. Only about a third of businesses reach the 10-year reimbursement mark promised by the advertising-tax proposal.

Like too many of Washington’s swampy deals, the advertising tax is just another corporate welfare check for America’s special interests. With most firms expiring before their promised reimbursement periods, the advertisement tax places a new entry cost on small businesses and startups. While the elite and established companies can more easily afford it, and will likely see their contributions return in a 10-year window, the little guy has to pay more to play, and competition would suffer as the result.

Business models will also suffer under an advertising tax. Retailers and manufacturers often enter co-op advertising agreements that improve efficiency by streamlining engagement. Instead of having retailers and manufacturers separately advertise products, co-ops empower manufacturers to offer incentives for retailers to display their products. This symbiotic wealth transfer would be disrupted by the administrative requirements of the advertisement tax, which could easily impose double-fees, discouraging co-op partnerships.

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History shows us that the advertising tax is doomed to fail. Currently, no state in the country taxes advertising because of its poisonous results. Once upon a time, though, Florida’s elected officials gave it a try. Its results were 50,000 lost advertising jobs, a 12 percent decrease in ad purchases, and an exodus of business to surrounding states. Strapped for revenue, Illinois recently considered a similar ad tax, but it was soundly defeated, as the state’s businesses loudly expressed disapproval and a willingness to move elsewhere.

To accomplish meaningful tax reform with the current margins in Congress, Senate Republicans will need to use the reconciliation process for budget-neutral tax reduction that broadens the tax base and replaces distortionary taxes with spending cuts, not dumb ideas like the ad tax. Anything else is merely stirring the pot, potentially spilling its contents and burning us all. Reducing the corporate rate won’t help as many people as it should if we shift its burdens by adding harmful new taxes.

Andrew Magloughlin is deeply involved in the conservative and libertarian movements. He has think tank and political campaign experience and previously led the Young Americans for Liberty chapter at American University.