MPA battles potential ad tax bill; media groups try to shield ad deductions from attack - Magazine Publishers of America

MPA battles potential ad tax bill * Washington, D.C.--A group of major advertisers, the Magazine Publishers of America (MPA) and other media associations are arming themselves for battle with this year's revenue-hungry Congress by supporting two forthcoming reports opposing a possible advertising tax bill.

Both reports will prepare a case for the status quo, which allows companies to continue to write off advertising costs as a business expense on their taxes. The concern is that Congress may try to force companies to amortize advertising costs over several years, under the theory that advertising--like buildings or other tangible assets--generates income over a number of years, according to James H. Davidson, MPA's outside tax counsel and representative for several media companies before Congress. Given President Bush's mandate not to raise taxes, Congress may be forced to "squeeze money out of the existing system," he says.

One report supported by the MPA argues that an ad tax bill would hamper international competitiveness, hurt small media outlets, and discourage the entry of new domestic products. The second report attempts to rebut the argument that advertising has long-term durability, focusing on players in a few major markets.

The first report, which should be completed by mid-February, is paid for by the Advertising Tax Coalition (ATC), a group of advertising and media associations, of which MPA is a charter member. The second, also due in early 1989, is being paid for by the Leadership Council (LC), which includes Time Inc., Mars Inc., General Foods, Kraft Inc., Philip Morris Cos. Inc., Ogilvy & Mather, Joseph E. Seagram & Sons Inc., Leo Burnett Co. Inc., and American Express Co.

Requiring companies to deduct advertising expenses over many years, Davidson explains, would effectively raise the cost of advertising, reduce advertising volume, and hurt small media outlets that are frequently the last buy for an advertiser. If ad costs can't be written off, he asks, "what does that do to these small companies?"

Moreover, a cut in ad volume, Davidson argues, would make it more difficult for companies to introduce new products and would give customers less information about U.S. products. "What about the impact on foreign competition if advertising costs more for U.S. products?" Davidson says. "Let's say Toyota can fully deduct all its advertising costs but General Motors can't. That doesn't seem to be enhancing our ability to compete internationally."

Whether the issue comes up at all in Congress "will be determined by how badly it needs revenue," explains Davidson. "If Congress has to make a choice between cutting social security payments or taxing ads, you can guess which one they'll pick."

Both reports are preventive lobbying, he explains. The ATC report, which he is directly involved with, "is just one arrow in our quiver.

"The ideal situation would be to prepare so effectively on the subject that no one would dare [propose changing the tax law]," he says. But Davidson adds, "We know there is growing interest in advertising just because of the size of the dollars. Even if tax policy is somewhat strained, there is clearly enough money there to make people pay attention. You have to recognize reality and get ready for it."

The logic of amortizing ad costs is murky, Davidson argues. "There are hundreds of thousands of company expenditures that you could say generate income a year later--developing a corporate public relations program, for instance, or building a circulation list for a magazine. Employee training is the classic example. All these have value more than one year later, but it would be impossible to amortize them.

"Who can say when you buy an ad whether or not it will have any income-generating ability a year later? Some ads clearly do not--the weekly grocery ad, for instance, or this weekend's car special. If Ford runs an ad about what a great car it makes and then stops advertising, how much value would that one ad have a year later?"

The ATC study is being conducted by Lexecon Inc., a Chicago-based consultant with two Nobel-winning economists on staff. The LC study is being conducted by William Lilly and Rudolph Penner, former head of the Congressional Budget Office.

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