Grassroots Lobbying Kit

Talking Points: Advertising Tax

Iowa and other states have learned it’s a scheme that simply doesn’t work: Arizona, Iowa and Florida each passed a tax on advertising… and repealed it because it hurt their economy and was impossible to administer. During Florida’s six-month ad tax experiment, its department of revenue processed 12 million magazine advertising transactions, the administrative cost of which exceeded the tax collections. Since 1987 (when the Florida services tax was repealed), advertising taxes have been considered in 40 states and rejected in each case.

An advertising tax is economically unsound. Nobel Laureates Dr. Kenneth Arrow and the late Dr. George Stigler noted in their 1990 Lexicon Study that advertising is the most economically efficient means of marketing a product or service. Advertising promotes the entry of new firms and products in the marketplace and promotes lower prices. Studies by the Wharton Econometrics Forecasting Associates show that a tax on advertising would slow economic growth because when the cost of advertising goes up; there is less advertising (which leads to less consumer demand). This slows the economy in general. Either way, an advertising tax is a self-defeating source of revenue to the government.

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? Grocery receipts? Telephone calls? Faxes? Logos on clothing? High School Yearbooks? Storefront signs? Sports arenas? Racecars? Napkins? Ads for tax-exempt merchandise? Convention booths? Would in-flight magazine ads on planes flying into Iowa be taxed? What about advertising prepared in Iowa but run only in other states?

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.

An advertising tax would significantly hurt Iowa’s small businesses. From drug stores to supermarkets and auto dealers, cooperative advertising is a cornerstone of their marketing efforts. A state sales tax on advertising could seriously threaten these agreements. National firms, in an attempt to use their limited cooperative advertising budgets would likely shift these dollars to states that do not diminish their selling impact through advertising taxes.