The Border Adjustment Tax Is Dead—but Its Replacement Could Be Worse

An ad tax would cripple small businesses and change media’s makeup

House Ways and Means Committee Chairman Kevin Brady. Chip Somodevilla/Getty Images

Will the government stifle free speech through tax reform?

Recently, the American people received confirmation of what was already expected: The border adjustment tax is officially dead and will not be included in the 2017 tax reform proposal. While this is a good thing for the U.S. economy, BAT’s death has led to speculation about what will replace it.

House leadership has already signaled that it will be looking at former Chairman Dave Camp’s 2014 tax reform plan as a blueprint for potential revenue raisers. But many are concerned that the advertising tax provision in Camp’s 2014 plan is a top contender for replacing the BAT as a revenue raiser to help achieve overall “revenue neutrality.”

A few months ago, I highlighted how an ad tax would be terrible economically, but I did not sufficiently emphasize the empirical data on the subject. Research has shown that advertising turbocharges the economy. A 2014 study estimated that advertising spending generates over $5 trillion in sales annually—which was then 16 percent of the economy—all while creating 20 million jobs, or 14 percent of total U.S. employment. In just six months, an ad tax previously destroyed 50,000 jobs in Florida, costing more to implement than the revenue it brought in.

Regardless of the economic implications, though, Congress shouldn’t support an ad tax because every member of that body swore an oath to uphold, protect, and defend the Constitution. The First Amendment ensures commercial free speech cannot be regulated in any way, shape or form.

By holding 50 percent of American advertising costs hostage for a decade, Camp’s advertising plan will be singling out ad spending from other business expenses like wages, salary and research—all of which are 100 percent deductible. This special exception for advertising would undoubtedly be unconstitutional. First Amendment scholar and Capitol Hill veteran Bruce Fein has confirmed there is plenty of Supreme Court precedent to prove this.

Changing the amortization of advertising would, in effect, exacerbate income inequality. Only organizations wealthy enough to wait a decade for the expensing would be able to continue their advertising. The others, especially small businesses and mom-and-pop stores, would be forced to downsize. Many would undoubtedly fold.

This would be especially true for already hurting local newspapers, some of which depend on advertising for 70 percent of their revenue. With an ad tax causing even more local newspapers to fail, how will American families know what is going on in their communities? Will The New York Times or Washington Post be sending reporters out to rural towns or small urban suburbs? I don’t think so.

Think about the Pandora’s Box of negative implications this tax would bring. Once general deductibility is tampered with, lobbyists will have the precedent they need to change the expensing even further. Special interest groups will begin fighting each other with legislation aimed at damaging or eliminating their competition.

Congresswoman Rosa DeLauro has already introduced a bill that would remove the deductibility of advertising for unhealthy food products. Once the Camp ad plan is passed, what will come next? Perhaps other controversial purchases like cigarettes, ammunition and alcohol. What about singling out the deductibility of ads for particular, politically disfavored institutions? The FEC has already pondered regulating news sites for political bias, so what will stop Congress from completely removing deductibility for ads on websites like Huffington Post or Breitbart, depending on which party is in charge?

The good news is that many in Congress have already taken note of these negative implications. Led by Congressmen Kevin Yoder and Eliot Engel, 124 congressional members signed a letter urging leadership to ensure that an ad tax does not get slipped into the 2017 tax reform proposal.

The health of our economy and the sanctity of the Constitution depends on Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady killing this disastrous provision. Both are too smart and principled to let it happen. But if they do, Republicans will feel the political whiplash in elections to come.

Peter Ferrara is a senior fellow at the Heartland Institute, and Senior Adviser to the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.

The Border Adjustment Tax Is Dead—but Its Replacement Could Be Worse