Here’s the Latest: Tax Reform
A call for comprehensive tax reform has been a frequent refrain in Washington in recent years, from the Obama administration to Congressional leadership on both sides of the aisle. Last Congress, Rep. Dave Camp introduced the Tax Reform Act of 2014, a product of his three year Chairmanship of the tax-writing House Ways and Means Committee. While garnering serious attention for attempting to overhaul the U.S. tax code for the first time since 1986, Camp’s effort never received a vote on the House floor. His proposal is, however, expected to serve as a benchmark as future tax reform negotiations continue. A key goal of business tax reform for Republicans, the majority party in both Chambers, is to reduce the maximum corporate tax rate from 35% to 25%. To get there, Camp’s proposal would repeal numerous tax credits and eliminate deductions across many sectors of the U.S. economy.
Importance to Magazine Media:
Of paramount importance to magazine publishers is the treatment of advertising expenditures. Advertising is the lifeblood of the magazine media industry, and can account for up to 75% of industry revenue in a given year. Under current law, advertising costs are considered ‘usual and customary’ business expenses that are 100% deductible in the year they occur. The Camp proposal would change the tax treatment of advertising by allowing businesses to deduct only 50% of their advertising costs in the occurring year with the remaining 50% to be amortized over a 10-year period. This provision is one of the largest revenue raising provisions in the Camp proposal, scored at $169 billion over 10 years.
By MPA’s estimates, amortizing 50% of advertising expenditures over 10 years would increase advertising costs by almost 25% in the first year of full implementation. This would have a dramatic impact on the U.S. consumer magazine industry. Even reducing the maximum corporate tax rate from 35% to 25% would likely not make magazine media whole in Camp’s amortization proposal for advertising.
The effects of Camp’s proposal go beyond magazine media. A 2015 IHS Global insights study found advertising accounts for $5.8 trillion in U.S. economic output and supports 21.7 million jobs. Every $1 spent on advertising yields $19 in direct/indirect economic activity. If advertising becomes more expensive, due to the imposition of a new tax, economics show that there will be less advertising. A reduction in the quantity of advertising could have a staggering effect on the economy. The consequences of less advertising will ripple through the entire U.S. economy from media companies, advertisers and their agencies to the multitude of U.S. industries -including manufacturing, agriculture, healthcare, finance, housing, retail trade and construction- that depend on advertising to move their products and services.
State of Play:
In the Senate, Finance Committee Chairman Orrin Hatch has launched a series of bipartisan tax reform working groups tasked with analyzing current law and providing possible reform options. The working groups have completed a number of hearings on tax reform, received stakeholder comments [A link to MPA’s comments can be found here and here] and released their recommendations to the Committee. While the recommendations offer several suggested goals for comprehensive tax reform –like lowering the current 35% tax rate- the reports did not offer specifics for achieving those goals.
In the House, former Republican Vice Presidential Nominee Paul Ryan has replaced Camp as Chairman of the Ways and Means Committee. While Ryan has not expressed a viewpoint regarding the amortization of advertising expenses or offered specifics for his tax reform plans, he is expected to release a proposal prior to 2016 elections. As one of the most vocal and respected national tax reform advocates, his position will likely be highly influential during the election cycle and beyond.