The COVID-19 pandemic has blown holes in state budgets coast to coast and a move in the nation’s capital may soon catch fire elsewhere. The Council of the District Of Columbia this week advanced a plan that would raise several taxes and eliminate other tax breaks. Most troubling to broadcasters is a proposed 3% tax on advertising services. It would cover any expenses related to the planning, creation and placement of advertising on radio, television, print, and digital media. The Council said it expects the ad tax will raise $18.4 million in the fiscal year that begins Oct. 1 with that number growing to $79 million within a few years.
“Many jurisdictions are exploring new ways to broaden their tax bases to help account for the budgetary blow delivered by COVID-19. One of these new sources is adding the sale of advertisements to the list of those goods and services subject to a sales tax,” said the budget outline. It points out that the city of Phoenix and the province of Quebec in Canada have also turned to an ad tax to help raise money. “While some of these jurisdictions have focused on digital advertising, the Council’s tax includes the sale of all advertisements, not just digital, and the sale of personal information,” the plan says.
The proposal was a surprise to the media industry, which has successfully lobbied against similar proposals. Since 1987, more than 100 advertising taxes similar to the one proposed by the Council have been considered and rejected in 40 states. This includes Maryland, where the state legislature this year passed a tax on digital advertising. But the tax was ultimately vetoed by the governor in May as “unconscionable” due to the COVID-19 pandemic and economic crisis.
The Association of National Advertisers says the proposed tax in Washington is even more comprehensive since it would cover all advertising.
“The Council is considering an extremely misguided tax that has failed everywhere it has been tried,” said Dan Jaffe, ANA Group Executive Vice President. “Advertising taxes suppress consumer demand, slow job growth, and ultimately cause products and services to become more expensive for consumers. A tax on advertising is always counterproductive but would be even more damaging during the COVID pandemic and the accompanying severe economic downturn. Clearly, this tax could be backbreaking for small businesses and community publications.”
Jaffe also said the advertising industry is extremely valuable to the economy of the District of Columbia and the entire U.S. as a driver of sales and employment. “The Chairman claims that the proposed tax will raise $18 million in revenue,” Jaffe said. “But this ignores the fact that the advertising industry generates vastly greater amounts of economic activity and tens of thousands of jobs in D.C. This tax undermines the economic benefits imparted by the advertising industry.”
The D.C. Council needs to take further votes before this bill will be finalized and enacted. The next vote on the budget is later this month.
Over the years, cash-strapped states have increasingly been looking at abolishing tax emptions as a method to raise money. The most recent fight was two years ago in California, but it has had plenty of company. Several other ad tax proposals have popped up in several states, including Illinois, Oklahoma, and West Virginia. None has been adopted, however, after lawmakers in each state learned the devastating results of a short-lived ad tax in Florida in 1987. State broadcast associations have also closely worked with advertisers and other business groups to fight the proposals.
A 2015 IHS Economics study commissioned by the ANA found advertising accounted for $5.8 trillion in U.S. economic activity and supported more than 20 million jobs, which represents 14% of all U.S. employment.