The latest from DTC Perspectives

The Advertising Deduction Up For Grabs

What has raised tremendous concern lately for DTC practitioners is the Rangel comments on cutting the advertising tax deductions. Charlie Rangel, the powerful Congressman from New York, said ending deductibility of ad spending is on the table to help fund the health care reform bill.

Rangel used a $37 billion savings figure which no one in the trade press can make sense of. The real spending on DTC is about 65-70% of the reported numbers by TNS and Nielsen. Since drug companies do not spend Nielsen or TNS dollars but instead pay in U.S. dollars the annual true spending is about $3 billion versus the $4.8 reported. So where does the other $34 billion in savings come from? It could be Rangel is taking a multi-year saving or it could be he means all pharma promotional spending in a full year. Whatever he means, singling out one industry for punitive advertising tax treatment is unfair and probably unconstitutional.

Making commercial free speech more costly seems to be something the Supreme Court would be interested in agreeing to adjudicate if a first amendment case was filed. The drug industry has the right to advertise lawful products and therefore putting tax barriers in the way would likely be challenged by the advertising agencies and media outlets. Obama and the Democratic Congress certainly have a view that the drug companies are the bad guys. The punishment mentality may lead to irrevocably hurting one of our most vital domestic industries.

I can understand Congress wanting to negotiate prices of drugs it pays for or even re-importing cheaper foreign sourced drugs. The $80 billion just announced by Obama "donated" from the drug companies is evidence that prices are being negotiated down. I cannot understand, however, deciding to choose which businesses will be allowed business expense deductions for a lawful purpose. It is a slippery slope when government decides to put barriers on commercial speech. Maybe luxury items should lose their advertising deductions because not all Americans can afford them? Do we end tax deductions for liquor ads because of alcoholism? Or, how about casino hotel ads because gambling hurts the poor? Where does it stop?

My guess and hope is this will not be in the final bill. For a program that costs over $1 trillion, why face court challenges over $3 billion a year? Rangel also needs to understand that if he did remove the deduction, drug companies may not spend anything on DTC and shift it to investments that are still deductible. The government may get no additional revenue. The $37 billion "re-captured" from the drug companies would end up being $0. I think cooler and wiser heads will prevail over this tax deductibility issue, especially when every ad agency and media outlet contact their Congressman in outrage.

Health care reform is clearly needed and everything needs to be on the table to lead to a better system. Knee jerk punishment funding, however, is not the way to get a good system in place. A good system is one that has broad consensus and a lot of public discussion. Ramming a bill through before it can be fully vetted by the American public is a recipe for fiscal and political disaster. I know Obama has the right intentions, but his current plan is not as viable as he makes it out to be. All Americans want better and cheaper coverage. Most agree we need universal coverage. Americans love theoretical improvements. Of course then tell them they will have to pay higher income taxes, miscellaneous service fees, rationing of services, and nuisance taxes and suddenly they are not so enthusiastic.

We can cover the uninsured in many ways that are cheaper and easier to administer than a government alternative plan. We can create disaster illness coverage so no one need go bankrupt from massive health bills. We can give the uninsured tax credits or grants to buy coverage. We can create subsidies for people with pre-existing conditions. We can set up free government clinics in inner cities to replace emergency room use. If we are going to make a once in a generation change, is it critical it be done by August? Slow down Mr. President and you can get more widespread support for what is widely agreed is an essential reform. Ram it through and you will face bitter partisan fights and a potential deficit disaster if cost savings do not appear as you hoped.