The Gathering Storm

Advertisers now face the most serious threats from state and local ad taxes in more than a decade. Due to the coronavirus pandemic and the subsequent economic meltdown, numerous states are scrambling to pay the rapidly escalating bills for health care, education, transportation, and other key government-related activities. Brian Sigritz, director of State Fiscal Studies at the National Association of State Budget Officers, warns that “States are facing significant increased spending demands, sharp revenue declines, and all states are facing budget gaps and shortfalls.”

Many states carefully developed significant “rainy day” funds, but none of them were ready for the economic monsoon driven by the COVID-19 crisis. Moody’s Analytics, for example, projects that an unprecedented 34 states will see budget gaps in this fiscal year of 10 percent or more — even after using all their reserves. The Center for Budget and Policy Priorities estimates that state budget shortfalls from the pandemic’s economic fallout could total $650 billion over three years. Because every state except Vermont is required to balance their budget on an annual basis, state leaders are now forced to cast about frantically for budget palliatives and panaceas. Faced with the distasteful alternatives of massive firings or furloughing staff, or drastically reducing spending for key services, many state and local leaders are now examining every potential tax option.

Unfortunately, desperate times often lead to desperate solutions. In this search for revenues, quite a few states (including South Dakota, New York, Nebraska, Maryland and just last week the District of Columbia) are attempting to impose taxes on advertising. For the first time in the U.S., some of them are targeting digital advertising. The Maryland legislature, for example, passed a digital ad tax that rose to as high as 10 percent of gross receipts of some companies’ digital advertising activity in the state. Fortunately, Maryland Governor Hogan stepped in and vetoed the bill calling it “misguided” and emphasizing that the state should not “raise taxes and fees on Marylanders when many are already out of work and financially struggling.”

These types of sentiments, however, have not stopped other states and localities from trying to impose far more sweeping proposals. The proposed D.C. 3 percent ad and data tax, for example, would tax virtually every aspect of advertising from planning, to creation, to placing and displaying ads in the District. Each of these activities could lead to a separate taxing event.

The attempted “solution” of ad and data taxes is incredibly shortsighted. Advertising taxes suppress consumer demand, slow job growth, and ultimately cause consumers to pay more for products and services. Imposing ad taxes is especially counterproductive during an economic downturn, when businesses are already struggling to survive.

It’s clear that advertising levels have been reduced substantially since the start of the pandemic. According to the Interactive Advertising Bureau, almost one quarter of media buyers, planners and brands paused spending until the end of the second quarter; 46% indicated they intended to adjust their ad spend across the same time period; and three quarters of them expect the pandemic to have a bigger impact than the 2008 financial crisis. 

Taxing advertising also could especially impact small enterprises attempting to reopen after being shuttered, as they need to communicate to prospective customers that they are again ready to do business. Local community media that had already been struggling in D.C. have said that the ad and data tax would be backbreaking.

Since 1987 over 40 states and localities have considered more than 100 advertising tax bills and rejected them as counterproductive. Tomorrow the D.C. City Council is scheduled to vote on the ad and data tax. We and numerous segments of the business and media community have urged the Council not to burden the effort to sell that generates sales taxes and jobs in the District. We hope the Council will respond to these concerns.

This is hardly the time to pile additional costs onto business operations; rather, we should be creating incentives for business recovery and job creation. The battle is far from over, and we need to batten down the hatches: the storm has indeed gathered, and it is already blowing hard.