With many states depending on sales tax for revenue, it’s only natural that they want to focus on ways to help in-state businesses increase sales. So the recent moves by Governor Mark Dayton (D) of Minnesota and Governor John Kasich (R) of Ohio can only be described as perplexing. Both governors proposed expanding their state’s sales tax to include all forms of advertising, including the very advertising that businesses rely on to drive more sales.
“He gets you coming. He gets you going,” Ohio Democratic Party Chairman Chris Redfern quipped after Kasich released his budget.
Ohio’s advertising tax is part of a two-year $63.3 billion budget proposed by Governor Kasich, which includes an expansion of the sales tax to cover 81 previously untaxed business to business services. The sales tax on advertising would increase 5 percent. According to the governor’s estimates that expansion is supposed to account for $4.5 billion in additional revenue to the state.
“Everybody in the advertising food chain gets hurt, but the local media are the ones that really get hit,” said Keith Scarborough, the Association of National Advertisers’ senior vice president for government relations told AdWeek.
As Dennis Hetzel of the Ohio Newspaper Association writes:
“The proposal exempts national advertising sold by radio and television and does not appear to tax Internet advertising. Consider the impact on local merchants. For example, the local hardware store would have to pay sales on television advertising but Lowe’s and Home Depot’s would not.”
In Minnesota, Governor Dayton’s budget would impose a sales tax increase of 5.5 percent on advertising. In a state where the advertising industry creates over 400,000 jobs and advertising expenditures account for approximately 20 percent of Minnesota’s economic activity, according to The Advertising Federation of Minnesota (AdFed), Dayton’s move to collect more tax dollars looks shortsighted. AdFed claims that the tax would “destroy” the state’s entire communication industry.
Hyperbole aside, history does not back Governor Dayton’s or Kasich’s plan to tax advertising. All the states that passed a similar tax have repealed it. Florida in particular serves as cautionary tale. Florida’s dalliance cost the state more than 50,000 jobs, according to a study by Wharton Econometrics, and $2.5 billion in personal income after 30 months because of lost advertising revenue.
In both budgets the advertising tax components are likely bargaining chips thrown into the proposal in a “see what sticks” mentality. In both states the proposed budget will trigger partisan battles where many special interests, not just those related to the advertising industry, will attempt to defend their interests. Governor Kasich didn’t shy away from framing the upcoming budget battle in those terms, saying to the Toledo Blade:
“Nothing is in concrete, but at the end of the day, if we fail, I’m not failing…We have a bill in the legislature. All the special interests will go down there. Maybe they’ll win. Wouldn’t that be a great outcome, huh? Special interests win again. One of the things we have to realize in this state is if all we think about is ourselves, we’re not going to do better.”
The sentiment will appeal to many, but it’s picked the wrong target. For both states, less advertising will mean fewer sales, less sales tax, and less income tax revenue. It ultimately equates to a net loss in both jobs and revenue.
Here is hoping that both Ohio and Minnesota learn from history and fold sooner rather than later on this dangerous bet.