Alert: Threat to Advertising Deductibility Renewed

September 15, 2009

To: All AAF Members
From: Clark Rector, Executive Vice President-Government Affairs
Re: Threat to Advertising Deductibility Renewed

Last week Senator Bill Nelson, D-Fla., sent a letter to the editor of the St. Petersburg Times in which he stated his intention to offer an amendment to healthcare reform “eliminating the tax break drugmakers get for TV advertising.” 

You probably recall that a similar idea was considered, and rejected, last June when the House Ways and Means Committee drafted their version of healthcare reform legislation. 

Senator Max Baucus, D- Mont., Chairman of the Senate Finance Committee has stated his intention to release the compromise legislation drafted by the so called “gang of six” Democratic and Republican members of the Committee later this week.  Senator Nelson is not a part of that group, but does sit on the Finance Committee. 

Chairman Baucus would like the committee to begin “marking up” the legislation next week.  Senator Nelson has not indicated whether he intends to introduce his amendment in committee, before the full Senate, or both.

It is absolutely essential that members of the Finance Committee hear strong opposition to this proposal from their constituents in the advertising industry.  Please circulate this alert to your ad club members and/or employees and urge them to place calls.

The core of your message should be that the Nelson amendment must be opposed because it is a tax on advertising and if adopted is unlikely to stop with prescription drugs.  Who knows what might be next when the government needs more money?  Advertising for all products and services helps generate $6 trillion in economic activity and supports more than 21 million jobs.

More detailed arguments are listed below, as is a link to the contact information for the key member of each Senator’s staff.  Again, it is vitally important that you circulate this alert and make your calls soon.

Please let me know if you get any reaction from your Senator’s office and do not hesitate to contact me if you have any comments or questions.

Thank you for your help with this important matter.

Click here for the Senate Finance Committee staff list

Limiting advertising deductibility of pharmaceuticals should be opposed because:

  • The Tax Code and its deductions should be applied equally to all ordinary and necessary business expenses. Even at the height of public criticism of the tobacco industry, Congress did not discriminate between the treatment of the cost of advertising tobacco products, which is fully deductible, and the cost of advertising other products. Some may recall that Congress "affirmed" a ban on television and radio advertising of tobacco products. But it did so after the industry elected to withdraw this advertising rather than face government sponsored antismoking ads. This also took place before the Supreme Court had enunciated the doctrine that protects commercial speech under the First Amendment.

  • The underlying goal of eliminating the deduction for advertising prescription medications is very straightforward – it is to make speech about the product more expensive. That will assure there is less advertising, and less advertising will result in fewer sales of the advertised prescription medications, particularly to Medicare Part D eligible patients. In other words, Congress would be taxing speech to save money on a federal program of spending.

  • The denial of the deduction would make this advertising 35 percent more expensive (assuming the top federal corporate tax rate). Assuming that the affected companies do not have wealthy uncles or unlimited supplies of spare cash, they likely will reduce their advertising by a similar amount, resulting in a loss of speech to consumers. Thus, the loss of the deduction is no more than a tax on advertising.

  • In Grosjean v. American Press Co., Inc., 297 U. S. 233 (1936), the U.S. Supreme Court struck down a 2 percent Louisiana tax on newspapers with more than 20,000 circulation per week. The 13 affected newspapers were critics of Governor Huey Long and sued to challenge the tax as an unconstitutional tax on speech. The U.S. Supreme Court agreed.

  • Section 162 of the Tax Code provides for the current deduction of all ordinary and necessary business expenses. This section applies to all such expenses – rent, utilities, salaries, and every form of daily business operation. Virtually all advertising costs are ordinary business expenses. Imagine the world of business however, if Congress were to pick and choose favorite products – products that would get the deduction and products that would be denied the deduction. What else might be on the hit list? For example, would generic drugs be entitled to the deduction, but not brand drugs? What about vehicles that cannot achieve the efficiency of 20 miles on a gallon of gas? What about a bank that fails its stress test?