Maryland legislators are proposing significant new taxes to pay for the Kirwan Commission’s education reform recommendations. Delegates and senators are mulling a new digital advertising tax (SB 2 / HB 695) and an expansion of the sales tax to include professional services (HB 1628). Where does that leave Marylanders?
Maryland citizens will be left footing the bill for these additional taxes. It is unrealistic to imagine that businesses can singlehandedly absorb substantial new taxes, on top of other recent legislative mandates, without passing along at least some of those costs to consumers. Of special concern is the focus on taxing ads and advertising services. Advertising connects consumers to products and enables businesses to grow. Taxing advertising and advertising services will choke economic growth.
Maryland would be the first in the nation to tax digital advertising. We really don’t know the effects of taxing digital advertising, but we can look to other states to see what happens when print advertising is taxed. The effects are sobering. Arizona, Iowa and Florida each passed broad advertising taxes years ago and each state later repealed the tax. Since 1987, when Florida repealed its advertising sales tax, 40 states have considered and rejected the idea. Florida’s experience is instructive. Advertising fell by 12 percent, and the tax was extremely difficult to administer. The tax was repealed in a special session five months after it took effect. A sales tax on advertising would slow economic growth. When the cost of advertising goes up, there is less advertising, which leads to less consumer demand. Lower consumer demand reduces revenue, creates fewer jobs, slows the economy and reduces the tax’s usefulness as a revenue source.
In addition to everyday consumers, businesses and jobs would be dramatically affected by this legislation. Advertising expenditures account for $101.5 billion of sales in Maryland. That represents 14.6 percent of the $693.1 billion in total economic output for the State, according to economic research for the media and advertising industries that applied an economic model developed by the 1980 Nobel Laureate for Economic Science, Dr. Lawrence R. Klein. The research further shows that sales of products and services driven by advertising help support 393,667 jobs – nearly 15 percent of the 2.6 million jobs in the State.
Who sells the advertising that legislators desperately want to tax? Your local newspaper helps support its news coverage through connecting local small businesses to advertising in print and digital forms. The only source of revenue for TV and radio broadcasters is advertising. An ad tax could ultimately lead to less local news, traffic, weather and sports. Most websites are free and advertising-supported. An ad tax will lead to less content and/or more paywalls making them inaccessible to many lower-income Marylanders. Advertising agencies across Maryland, many of them small businesses, will be at a severe disadvantage when competing with firms located outside the state – firms who aren’t saddled with these additional tax burdens. The sales and use tax is a consumption tax imposed on an end product, not on an intermediate step such as advertising. Advertising is a communications process that helps produce the final sale of a product, which is most like already subject to the state sales tax, thus layering tax upon tax. Ironically, less advertising leading to fewer sales could actually lead to reduced tax revenue.
This toxic cocktail of new taxes will effectively punish Maryland companies for being in Maryland. Advertising, marketing and media agencies in particular will be forced by our leaders in Annapolis to either price themselves out of the market or absorb costs that obliterate their already slim profit margins. This is the antithesis of being “Open for Business.”
Taxing advertising and advertising services doesn’t make good business or economic sense. It will hurt consumers and businesses and slow Maryland’s economic growth.