Editorial - Tax on advertising is wrong approach

Talk about it

While we appreciate Governor Mark Dayton’s willingness to put out a budget plan to address the state’s financial troubles, we have serious concerns about one part of it: placing a new 5.5 percent tax on advertising.

It’s just not a good idea.

No state currently applies a sales tax to the purchase of advertising or related services. Some states that have tried it, like Florida and Iowa, quickly repealed it.

Yes, such a tax would raise money but it would come at too great of a cost. Studies conducted by Dr. Robert Kudrle, a professor at the University of Minnesota’s Humphrey Institute who teaches microeconomic policy analysis and econometrics, documented the harmful effects of a sales tax on advertising. Back in the 1990s, he determined that it would cost the state almost $300 million in annual business revenues, and nearly 6,000 jobs.

There are a boatload of other reasons why such a tax would do more harm than good. The Minnesota Newspaper Association lists a few of them:

• Newspapers are proud to play a role in Minnesota’s vibrant business community. Original, local journalism has never been more important, or under more economic pressure. A tax on advertising creates an economic headwind for Minnesota newspapers that could threaten their ability to continue delivering the critically-important news and information that has been the cornerstone of Minnesota’s communities.

• A sales tax on advertising would be extremely uncertain and expensive to administer. Defining exactly what “advertising” consists of and administering a sales tax applying to it in a fair and workable way would be extraordinarily difficult, and would require an army of accountants and lawyers. Are Little Leaue uniforms included? Grocery receipts? Business cards? Branded sports arenas? Logos on clothing?

• This complexity is magnified by the Internet, since the state’s legal power to collect the tax on Internet-based advertising and promotions is not only very complex, but notoriously inconsistent. The Iowa attorney general stated, “Taxing advertising was like trying to tax the elements of nature.” And during Florida’s six-month ad tax experiment, the Florida Department of Revenue processed 12 million magazine advertising transactions, the administrative cost of which exceeded tax collections.

• An advertising tax is an anti-business signal. A tax on advertising would send a very strong anti-business signal to firms that are considering locating their operations in the state. Advertising dollars that are currently spent in the state would be shifted to media outlets outside the state.

• Most advertising is sold on a business-to-business basis, and a tax on advertising and publications distributing advertising therefore results in double taxation: once on a product’s advertising, then again on the product’s retail sale.

• An advertising tax would hurt small businesses in Minnesota. Many businesses engage in cooperative advertising, where national manufacturers and local retailers share advertising costs. For Minnesota businesses, from hardware stores, implement dealers, supermarkets and automobile dealers to name just a few, cooperative advertising is a cornerstone of their marketing efforts. A state sales tax on advertising could seriously threaten these agreements.

• Advertising is one of the most important drivers of economic activity across the state. A tax on advertising especially hurts local economic activity; when the cost of advertising goes up, the amount of advertising goes down. That deters competition, lowers consumer demand, and reduces local employment.

On Monday, Dayton said the state’s slightly improved budget outlook will prompt him to go back to the drawing board to reconsider his plan. A tax on advertising should be the first thing to toss out.

Tags: opinion, editorials