New Public Media

Advertising is everywhere. It’s on billboards, inside those bins at airport security, even embedded in the script of network television shows. Products are “friending” you on Facebook. Commercial television ad lengths just keep increasing. In this week’s installation of our ongoing exploration into funding public media, we examine the idea of both direct and indirect advertising taxes to seed a public media trust fund.

Taxing even a small portion of this $310 billion industry would generate more than the annual funding provided by all federal, state and local government and corporate underwriting for public broadcasting. In short: big money out of a little investment that can be stretched a long way.

Not Only Effective, But Economically Efficient

Why tax advertising in the first place? The current structure has commercial broadcasters and advertisers profiting handsomely off the public airwaves. Taxing advertising to pay for noncommercial media has appeal from a “shared burden” perspective. Everyone in the transaction chain contributes: Broadcasters in some cases will raise their advertising rates or will earn less revenue from ad sales; advertisers may have to pay more to promote their goods and may in some cases raise prices slightly for consumers; and in the end noncommercial media is paid for – and all can share in its benefits.

Opposition from commercial broadcasters and advertisers would be likely, but it is important to analyze this concept from an efficiency standpoint. Consumer demand for product information is not skyrocketing, but the supply of advertising in our lives is, resulting in an inefficient use of resources. Because of this disproportion already exists, the creation of an advertising tax would not cause any market distortion or negatively impact its efficiency. Indeed, consumers and the public media community gain more from the introduction of such a tax than the commercial broadcasters, advertisers and consumers lose.

Direct Advertising Taxes: A How-To Guide

There are a few variations on how this could be done.

Gross receipts tax against advertising revenue: Under this proposal recipients of advertising dollars (i.e., broadcast television stations, Internet advertising, local newspapers, national radio networks, billboard companies, sports stadiums, etc.) would pay a percentage of their revenue generated from advertising sales to the federal government.

Advertising sales tax: In this model, the burden is placed directly on the purchaser of the advertising at the time of sale.

In our proposal, we project that these two variations, with a 2 percent advertising tax (exempting certain struggling industries, such as newspapers and online advertising), could raise $45 billion for the public media trust. In just 11 years the tax and congressional appropriations could cease equating to a $2.25 billion annual budget for public media. This proposal would get public media off the dole in half the time proposed in our spectrum use fee plan.

Indirect Advertising: Amortized Taxes

Under existing law, advertising is 100 percent tax deductible. By allowing only allowing a portion of advertising to remain tax deductible, the remaining amount could be amortized – spread out over the course of a multi-year period, increasing the taxable base of the advertiser. In this scenario the burden is placed on the companies who purchase advertising, not those who sell it, so we would not propose the same exemptions as outlined in the direct advertising tax model.

Considering that advertising’s payoff doesn’t end when the commercial is over, the eyeballs move on to the next billboard or the product placement scene ends, there is another interesting efficiency argument that can be made here. Essentially the “assets” of advertising live on long after the advertisement is over – in the form of branding.

As we explain in our report:

Under current tax law, businesses are required to spread out the value of their capital assets over a multi-year period, because these assets have long-term value that decreases as time goes by. There is no reason to treat advertising any differently, as the cumulative impact of branding has lasting productive effects well beyond the year in which an ad is run.

Under this model (read more here), we assume that businesses will be allowed to deduct 80 percent of their advertising costs for a year, and that the remaining 20 percent will be amortized over a four year period – which could then be earmarked for the public media trust. In this scenario, after a ten year period, the trust will grow to $61 billion and allow for an annual operating budget of over $3 billion. Again, this is a path to self-sufficiency that could be accomplished in just 10 years.

As always, we are interested in hearing your thoughts. Let us know in the comments below what you think of these various advertising tax models. Next week we will talk about the consumer electronic tax – an idea also presented in the recent Federal Trade Commission’s discussion draft for their ongoing investigation into policy recommendations to support the future of journalism.