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Advertising tax

Advertising tax

Written for legislators and newspaper publishers/editors (to share with their readers) on the potential impact of a tax on advertising to the state’s economy.

A tax on advertising would harm Iowa’s economy

Currently, advertising is exempt from the state sales tax. It is always of concern that Iowa politicians may be tempted to eliminate some of the exemptions to the sales tax. They could claim that they passed no “new taxes” since the sales tax is not a new tax. Instead, they could argue they just made the tax “fairer” by subjecting more products and services to the tax.

Advertising helps generate economic activity and jobs in Iowa.  Advertising is an economic force that generated $53.4 billion in economic activity in Iowa in 2014, activity that is projected to grow to $68.1 billion by 2019, representing 16.3% in total economic activity in the state.

Sales of products and services that are supported by advertising helped support 173,300 jobs in 2014, projected to grow to 202,700 jobs by 2019, 11.9% of Iowa’s 1.74 million jobs. From drug stores to supermarkets and auto dealers, advertising is the cornerstone of their marketing efforts.

A tax on advertising would decrease sales in Iowa and result in the loss of thousands of jobs. A recent study by the economic consulting firm IHS Global Insight highlights the sales activity and jobs created in our state’s economy that are stimulated by advertising. The economic model developed by IHS estimates and predicts the impact of advertising on sales and jobs as distinguished from the impacts of other market factors such as consumer buying power, life stage buying behaviors, technological advances, and simply the need to replace obsolete or depleted items.

IHS found that applying the six percent Iowa tax to sales of advertising would increase the cost of advertising and cause a decrease in ad spending. In fact, for every one percent increase in added tax costs on advertising, it is estimated that advertisers would reduce their spending on advertising by 1.2 percent. In addition, the lower spending would have a negative impact that would ripple through the economy. The higher cost would result in fewer ads. Fewer ads would mean fewer people would see the advertised products and services, resulting in decreased sales for those businesses and reduced sales for suppliers to those advertisers. Lower consumer demand reduces revenue, creates fewer jobs, slows the economy and reduces its usefulness as a revenue source.

Total advertising-related sales in Iowa in 2019 are projected to be $68 billion. IHS predicts that the added cost to businesses of a six percent sales tax would lower sales in the state by seven percent.

A sales tax on advertising would hurt Iowa companies competitively. Advertising dollars that are currently spent in Iowa would be shifted to media agencies outside the state. Iowa advertising firms would be at a competitive disadvantage when trying to secure national or regional advertising.

Other states have learned that defining what “advertising” to tax is impossible. State government and businesses would need an army of accountants and lawyers to administer the tax. Some of their questions: does taxable advertising include business cards? Sales calls? Telephone calls? Websites? Logos on clothing? Storefront signs? Sports arenas? Race cars? Ads for tax-exempt merchandise? Convention booths? What about advertising prepared in Iowa but run only in other states? What about advertising messages sent via email or via text messages over mobile phones or social media?

A tax on advertising creates a new layer of hidden taxes. This is multiple-taxation. Advertising is not an end product, such as a bar of soap, which is already subject to the state sales tax. Since a large portion of any tax on a business is generally passed on to the consumer, families would end up paying a “double sales tax” for most products and services.

A sales tax on advertising is a bad idea for Iowa.