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This article was originally published in The Tan Sheet

Executive Summary

ADVERTISING DEDUCTION RESTRICTIONS OPPOSED BY NDMA on the grounds that "any proposal which would limit the deductibility of advertising expenses would not only limit the availability of self-health care products, but would slow our economic recovery rather than stimulate it," the Nonprescription Drug Manufacturers Association said in an Aug. 27 letter to House Ways & Means/select revenue measures subcommittee Chairman Charles Rangel (D-N.Y.). The subcommittee recently proposed capitalizing and amortizing a percentage of ad expenses over a period of years as one of several revenue-raising measures. The revenue-raising measures were discussed by the subcommittee at a Sept. 8 hearing. Ad expenses are currently fully deductible in the first year; the subcommittee proposal does not specify what percentage of advertising expenses would be capitalized and amortized. However, annual reports published by the Congressional Budget Office since 1990 have estimated that amortizing 20% of advertising expenses over four years could raise $ 17.5 bil. over five years. NDMA asserted that the limits on the deductibility of advertising expenses "would mean less competition and less opportunity for small business to deliver important information about its medications and health services." The association added that its "member companies depend heavily on advertising to empower consumers to make intelligent choices in caring for their health," and argued that "thanks to advertising, OTC medicines are competitively priced, offered in a wide variety of sizes and packages, and available in almost a million retail outlets." NDMA concluded its letter to Rangel by stating: "The ability of Americans to have safe and effective medicines available to treat their daily aches and pains is critical to our nation's productivity as well as keeping health care costs down." Testifying in opposition to the subcommittee proposal at the Sept. 8 hearing was Estee Lauder Corporate VP-Tax & Real Estate Gerald Gibian, who was representing the Committee for Competition on through Advertising. Gibian declared that "there is no policy justification for further limiting the deductibility of advertising beyond the limitations set by present law." "Enactment of any such proposal would create a barrier to expansion of markets for goods and services, thereby impeding economic growth at a point in time when economic growth is desperately needed," he continued. The Committee for Competition through Advertising is a coalition that also includes magazine publishers and advertisers such as J. Walter Thompson, Ogilvy & Mather and the Omnicom Group. Gibian asserted that "more advertising is needed to make the products' existence and attributes known to potential customers." He added that "virtually all" U.S. trading partners permit a deduction for advertising, which, he said, would put the U.S. at a competitive disadvantage. "Capitalizing a portion of advertising expenses would create a mismatching of income and expense," Gibian noted in his written comments to the subcommittee. "In general, the anticipated effect of advertising is to increase sales in the immediate future." He added at the hearing that "economic studies show that the value of most advertising is entirely eliminated within one year." Devising and implementing a definition of "advertising" for tax purposes would be "extremely difficult and would add a great deal of complexity to the tax law," Gibian pointed out in comments. Furthermore, he said, it is "unclear" whether activities such as product demonstrations, trade shows, free samples and phone or mail solicitations would be defined as "advertising" under the proposal. Gibian's written comments assert that under the proposal, "businesses likely would shift their marketing activities from those falling under the new tax definition of "advertising" to other similar activities," such as increasing sales forces or direct mail solicitation, "even though these methods may not be the most effective means of promoting" their product. Thus, he maintained, "purely in response to a change in the tax law, resources would be diverted from their most efficient uses" and a "significant portion" of the anticipated revenue gain from the proposal would be eliminated as businesses "seek other means to market their goods and services." Also opposing the ad tax deduction proposal at the hearing was the Association of National Advertisers (ANA), the Ad Tax Coalition, the Newspaper Association of America, the Ad Hoc Group to Preserve Deduction for Advertising, the National-Retail Federation and the Leadership Council on Advertising Issues, which includes Unilever.

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