Finish Taxpayer Subsidies for Drug Advertisements Act

Earlier this year, Senator Jeanne Shaheen (D-NH) introduced the Drug Advertising Tax Advertising Subsidies Act, which bans companies from deducting the cost of advertising prescription drugs to the public. However, the title of the invoice is a misnomer: the deduction is not a tax allowance.

To begin with, corporate income tax is a tax on profits or income minus costs. Under current law, companies can deduct the cost of pharmaceutical advertising just like any other company can deduct their advertising spend. Tax aid would allow businesses to reduce their tax burden by not just deducting advertising costs. An example of tax aid is the Research and Development (R&D) tax credit: companies can apply for a tax credit to further reduce their tax liability and deduct the cost of R&D expenses. There is no equivalent credit for advertising.

In addition, when discussing the termination of drug advertising deductibility, the tacit assumption is that the Tax Code contains a specially designated “Drug Advertising Deduction”. This does not apply as the deduction applies to all marketing costs. With a neutral tax code, the costs should be deducted in the year in which they are incurred, including advertising.

However, some might still argue that we should deviate from the provisions of neutral tax law to penalize direct mail (DTC) from pharmaceutical companies. The US is one of the few countries that allows drug advertising and there is an ongoing political debate about the merits of DTC drug marketing. There are valid criticisms of drug direct marketing, but there are similarly legitimate arguments for its benefits.

Even if the critics are right, creating different cost recovery rules for different industries is a recipe for complexity and a poor approach to dealing with this problem. In a way, this topic is similar to the political talk about power generation and the fossil fuel industry. There have been several proposals aimed at alleged subsidies to fossil fuel companies that are actually in line with neutral tax principles. While fossil fuels create negative externalities, playing with the corporate tax base definition is a bad way of measuring it.

Likewise, there are many ways to deal with harmful advertising. As the Tax Policy Center pointed out, regulation would be a more appropriate tool to address the potential problems associated with DTC drug advertising campaigns. To take an extreme example, in 1970 the government banned smoking from advertisements on television and radio – it did nothing to change how tobacco companies could deduct their marketing expenses, despite the fact that the Clinton administration proposed it in 1993.

The law on the termination of tax subsidies for drug advertising is not the first bill of its kind. Versions of this proposal were introduced or published in 2009, 2015, 2016, 2018 and 2019. However, they are all based on a misunderstanding of the purpose of corporate tax: a tax on profits or income minus costs.

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