Advertising : At Halloween, it gets a rock - Statutes make advertising the Charlie Brown of speech

The then-president of a firm where I worked as a creative director once told me he wasn’t certain what the key to effective advertising was, he just knew we needed to do some. He viewed ad expenditures as an integral part of running a business, just like the physical plant or the down-and-away sliders (the company was a baseball team).

Recently proposed budget legislation in the U.S. continues a pattern of often treating advertising like a baseball team : Charlie Brown’s.

This newest pitcher-undressing proposal involves allowing companies to treat only half their advertising expenses as incurred in the current year for tax purposes. The company would then amortize the other half over five or ten years. Budgeteers Senator Max Baucus and Representative Dave Camp reason that the taxman should treat advertising partly as a long-term expenditure because audiences retain its impact long after the current year.

In some cases that may prove true. Met Life’s long-running campaign starring the Peanuts characters, for instance, has had significant longevity. Perhaps one can conceive that the initial placement did derive five percent of its sales from consumers who recalled its brand message a decade after its debut. Of course, the insurer continued similar messaging in subsequent years, so it would seem impossible to measure that impact precisely.

We might also find it difficult to measure the influence of sponsored tweets from, say, twitter.com/OfficialPeanuts over a decade-long span. That’s because that form of advertising hasn’t existed for a decade. Do some creative directors huddle with their media planners to determine how to construct messaging such that purchased tweets will remain somewhat effective in ten years? Perhaps so. And maybe there’s a Great Pumpkin, too.

Sure, sites like YouTube extend the shelf life of some TV ads, but companies can also have ongoing expenses associated with such exposure, such as talent residuals. The point is : Different advertising efforts have different aims and cost structures for the short and long terms and a suggestion that the value of every brand communication depreciates over the same length of time seems unsupportable (see also our previous blog post on Defining Advertising,). The same is true for the cost of other good or bad decisions that impact a brand over those years. If you have a lame company Christmas party (maybe with a play where one dog plays all the animals), it could hurt employee morale for years.

So if the ad amortization plan doesn’t add accuracy to the tax code, what does it offer? Its framers intend it to provide revenue lost from cutting the corporate tax rate to 25%. If reducing the corporate tax rate will “jumpstart”⁽¹⁾ growth, as Senator Baucus put it, then the resulting larger revenue pool will compensate for a certain amount of that lost tax money, perhaps all of it.

Writing about the proposed budget in Ad Age, American Association of Advertising Agencies President and CEO Nancy Hill notes, “The research firm IHS Global Insight estimates that ad sales in the United States could be reduced by as much as $446 billion, with 1.7 million U.S. jobs placed at risk.”⁽²⁾ I have no idea whether the IHS figures are accurate, but the supply-and-demand curve for every product always shows that raising the cost of something means less of it gets consumed. Companies currently try to use precisely as much advertising as they judge efficient when weighed against other ways they could spend the money. If the bill distorts the ads’ true cost (which it will through long-term inflation, at the very least), firms will substitute other inputs. For instance, it might be most efficient in an absolute sense to spend 40% of your budget on advertising and 60% on sales rep salaries. Since this bill artificially favors sales personnel over advertising, a company might shift to a less efficient 20/80 split given the incentives they’ve inherited. The overall effect is a loss of productivity for American business. Add in the inefficiency caused by nightmarish compliance costs (also touched on in our previous post) and it seems far from certain that halving the advertising deduction will, in fact, make up the revenue lost from the 10% reduction in the corporate income.

While the revision would have a negative overall impact on American productivity, some companies might benefit, at least in terms of market share. The companies would include those who need advertising less than their competitors. Big brands or legacy industries who have established brand equity in the minds of consumers might see their competition stifled, specifically competition with fresh, new ideas who need to communicate about their innovation. Those startups will especially feel the pain of an expense they must deduct over ten years when they just hope their business makes it ten days. Companies like General Electric, General Motors, and Citigroup (all donors to David Camp’s last campaign⁽³⁾) might feel less net effect. And, of course, when those established firms’ R&D departments do come up with new ideas, it will be tougher for them to communicate their own improvements. Hey, everybody knows where the neighborhood Psychiatric Advice Stand is. If it is more expensive for Linus to inform people about his new competing one around the corner, Lucy benefits. Does the world benefit when policy inhibits new ideas from coming to market?

Advertising contributes a lot of new ideas itself. So why does it get a rock in its bag when it arrives at the taxman’s door wearing its innovative multi-eyed ghost costume? Historically, advertising has been easy to single out.

For one thing, despite being a form of speech, it has received less than robust First Amendment privileges. In Valentine v. Chrestensen in, 1942, the Supreme Court ruled that commercial speech was not entitled to First Amendment protection.⁽⁴⁾ Truthful advertising clawed back a bit of freedom over the next few decades, including the 1976 case Virginia State Pharmacy Board v. Virginia Citizens Consumer Council,⁽⁵⁾ and 1993’s Edenfield v. Fane,⁽⁶⁾ but the so-called “Central Hudson Test,”⁽⁷⁾ from the 1980 decision in Central Hudson Gas & Electric v Public Service Commission the Court still provides the state a framework for doing away with disfavored commercial speech. For years, state regulations on advertising by professionals⁽⁸⁾ might have forced Psychiatrist Lucy to take down her “5¢” sign.

Less than half of Americans have a positive impression of the advertising industry, according to Gallup.⁽⁹⁾ Nancy Hill noted that Congress also considered changing the advertising deduction in 1986 and 1993,⁽¹⁰⁾ and the business will continue to serve as an easy target for politicians as long as it retains its negative public perception. But does it deserve to be the Pig-Pen of communication?

In many ways, advertising represents the purest form of mass communication. That’s because you know who is doing the speaking and what they’re trying to accomplish. If you read this blog, you need to do some research to figure out whether I work in the advertising industry (I’ll save you the Googling – I do).  When you read a financial reporter’s column, you may not know what stocks he has in his 401K. If you read a New York Times editorial praising eminent domain, you may not know whether the paper has used the process to reduce their costs on a construction project.⁽¹¹⁾

Advertising is different. You know the source because they put their logo right on it. If Peppermint Patty tells you in a Met Life commercial that it would be smart to plan for your demise, you know it’s because Met Life wants to sell you life insurance. You have the option to ignore the advertisement, research its claims further, to not do business with its sponsor, and to share or not share it with your friends. You can also sue them for false advertising if they lie. You don’t have that recourse when it turns out there are no WMDs in Iraq or that you can’t keep your health insurance.

All communication is advertising in some form or another. You engage in content marketing for your personal brand every time you speak. Straight-up advertising tends to be very honest about its agenda, and not at all wishy-washy.

Does advertising deserve to be treated the way Violet and Lucy treat Charlie Brown, saddled with a lesser status among business expenses? The costs of this Joe Shlabotnik⁽¹²⁾ of laws may be a lot more than peanuts. A decision to implement it might be well be nuts.

 Footnotes

⁽¹⁾ Michael Cohn, “Baucus Proposes Changes Tax Accounting Cost Recovery Rules,” Accounting Today. accountingtoday.com/news/Baucus-Proposes-Changes-Tax-Accounting-Cost-Recovery-Rules-68811-1.html (accessed November 25, 2013).

⁽²⁾ Nancy Hill, “Don't Let Congress Scale Back the Ad-Expense Deduction,” Ad Age. http://adage.com/article/agency-viewpoint/congress-scale-back-ad-expense-deduction/245360/ (accessed December 2, 2013).

⁽³⁾ “Dave Camp,” Center for Responsive Politics. http://www.opensecrets.org/politicians/summary.php?cid=N00008086&cycle=2012 (accessed December 6, 2013).

⁽⁴⁾ T. Barton Carter, Mark A. Franklin, Jay B. Wright, The First Amendment and the Fourth Estate (Westbury, New York : The Foundation Press, Inc., 1988), p. 321.

⁽⁵⁾ T. Barton Carter, Mark A. Franklin, Jay B. Wright, The First Amendment and the Fourth Estate (Westbury, New York : The Foundation Press, Inc., 1988), p. 323.

⁽⁶⁾ “Advertising is Protected by the First Amendment,” Advertising Compliance Service.  http://www.lawpublish.com/amend1.html (accessed December 6, 2013).

⁽⁷⁾ Doug Linder, “Government Regulation of Commercial Speech,” Exploring 

Constitutional Law.  http://law2.umkc.edu/faculty/projects/ftrials/conlaw/commercial.htm (accessed December 6, 2013).

⁽⁸⁾ Deborah Haas-Wilson, “The Regulation of Health Care Professionals Other than Physicians,” Regulation. http://www.cato.org/sites/cato.org/files/serials/files/regulation/1992/10/reg15n4d.html (accessed December 6, 2013).

⁽⁹⁾ Frank Newport, “Americans Rate Computer Industry Best, Federal Gov't Worst,” Gallup Politics. http://www.gallup.com/poll/149216/Americans-Rate-Computer-Industry-Best-Federal-Gov-Worst.aspx (accessed December 6, 2013).

⁽¹⁰⁾ Hill, “Don't Let Congress Scale Back the Ad-Expense Deduction.”

⁽¹¹⁾ Matt Welch, “Why The New York Times ♥s Eminent Domain,” Reason. http://reason.com/archives/2005/10/01/why-the-new-york-times-s-emine (accessed December 6, 2013).

⁽¹²⁾ “Joe Shlabotnik,” Baseball Reference. http://www.baseball-reference.com/bullpen/Joe_Shlabotnik (accessed December 6, 2013).