March 11, 2003

Legislative Activity

Date: March 11, 2003

To: Texas Advertising Clubs and Federations

From: Jeff Perlman, EVP-government affairs
Clark Rector, Jr, SVP-state government affairs

Re: Advertising/Services Tax Bill Introduced

State Senator Eliot Shapleigh (D-El Paso) has introduced legislation (SB 1031) that would impose the state sales and use tax on many services, including "advertising media services" and "management, consulting, or public relations services." Senator Shapleigh is a member of the Democratic minority on the Finance Committee.

Lobbyists I have spoken to in Austin believe that at this time the threat is minimal. As you know, for the first time the Republicans control both Houses of the legislature, as well as the Governor's mansion. Governor Rick Perry, Lt. Governor David Dewhurst and Speaker Tom Craddick have all indicated strong opposition to raising taxes. Many observers in Austin believe that it is highly unlikely that Republicans would allow any new taxes to pass in their first year of total control of the state government.

However, the reality remains that the state is facing a budget deficit estimated at anywhere between $10 and $15 billion and legislators will not have an easy time balancing the budget without new sources of revenue. Any time a bill of this type is introduced we must take it seriously.

It is premature for the industry to begin a highly visible, grass-roots lobbying campaign against the bill. We do not want to call undue attention to the proposal and create a major problem where one does not currently exist. That does not mean you should sit back and do nothing. If you have a good relationship with your Senator or Representative, or are talking to him or her on another matter, by all means let him or her know you are aware of and very concerned about the advertising/service tax bill.

You can find more information, including a copy of the bill and contact information for legislators, by visiting the Texas Legislature's website at www.capitol.state.tx.us.

We will continue to watch developments in the legislature closely, stay in contact with our sources in Austin and let you know of any further developments. Do not hesitate to call me at 1-800-999-2231 if you have any comments or questions.

A tax on advertising should be opposed because

  • National advertising dollars will leave the state. Marketers will move to markets where they can reach the most consumers with the fewest dollars. Florida taxed advertising for six months in 1987. While that tax was in effect national advertising purchases increased 3%. In Florida they decreased 12%!
  • Advertisers can reach many Texas consumers using untaxed out of state media from across the border. During the 1987 Florida tax, Pensacola broadcasters encountered revenue losses of 45%. Most of that money went across the border to competitors in Mobile, Alabama.
  • Local media will suffer huge losses. Advertising is the primary source of revenue for the print media and the sole source for broadcasters. A reduction in advertising would inevitably result in a loss of jobs and a decreased ability to provide quality content and programming.
  • An ad tax is too complex and expensive to administer. The Florida Department of Revenue spent millions of dollars to hire over 200 new auditors in 1987. The executive director admitted afterwards, "It was not enough."

A tax on advertising is bad public policy:

  • Placing a tax on advertising services and/or placement increases the cost of advertising. Because most clients operate on a fixed advertising budget, they will compensate for the tax by decreasing their advertising purchases. This will have a direct — and negative — impact on the advertising industry, economy, consumers and the state.
  • Advertising is the engine that fuels the economy. Less advertising means fewer sales. Fewer sales mean reduced revenue and fewer jobs. Fewer sales also result in less sales tax revenue for the state.
  • Prices may rise. Studies show that advertising fosters competition and helps lower the price of products and services. Less advertising means less competition.