The year for the marketing tax?

The year for the marketing tax?

By Jon Bigelow • Executive Director of the Coalition for Healthcare Communication

Fighting COVID-19 – both the pandemic and the recession it provoked – is President Biden’s top priority, and he is asking Congress to pass two huge economic packages. Few dispute that more relief and stimulus is needed. There’s a growing risk, however, that the new fiscal reality facing the federal government resurrects the idea of a pharma marketing tax.

Rescue and Recovery

Even before Inauguration Day, President Biden introduced an initial, $1.9 trillion package of COVID-19 relief dubbed the “American Rescue Plan.” By the time you read this column, revisions will have been made to win votes in Congress, but the initial plan included direct stimulus checks, extended unemployment benefits, paid leave for caregivers, funding for vaccination programs and reopening schools, and aid for state and local governments.

President Biden promised to introduce a second bill, the “American Recovery Plan,” later this winter. Early reporting is that this legislation will incorporate further COVID-19 relief plus candidate Biden’s “Build Back Better” infrastructure and climate change initiatives, totaling $3 trillion in spending. He will offset this cost with new revenue, presumably drawing from his campaign tax proposals – raising corporate tax rates, increasing the tax rate for individuals with incomes over $400,000, and making adjustments to estate taxes, the income threshold for Social Security taxes, and other tax provisions.

The arithmetic is daunting

There is widespread agreement that the nature and extent of the recession prompted by the COVID-19 pandemic requires unusual economic relief measures. Most economists oppose broad tax increases in the midst of so sharp a recession. Tax increases on middle class Americans are never politically palatable, and there also will be strong opposition – especially among Republican senators, at least a few of whose votes will likely be needed – to increasing taxes on upper-income Americans and corporations. 

Yet consider: In fiscal 2016, the federal deficit was $584 billion. Despite strong economic growth, after the 2017 tax cuts the deficit rose to nearly $1 trillion in fiscal 2019. Then the pandemic arrived; with the combination of the March 2020 COVID-19 relief bill, higher spending on the social safety net, and the sharply reduced tax revenue that accompanies a profound recession, the deficit soared to $3.1 trillion in fiscal 2020. In September, the Congressional Budget Office (CBO) projected this year’s deficit at $1.6 trillion – and that was before the $900 billion relief package passed in December, the proposed $1.9 trillion Rescue package, and the potential $3 trillion Recovery bill to come.

The resulting string of multi-trillion-dollar deficits will create a debt burden that will hang over the federal government long after the pandemic passes and become increasingly onerous when interest rates rise from current near-zero levels.

That’s the background against which Democrats and Republicans will be negotiating as they consider the Recovery bill’s spending and tax proposals. This is a scenario that raises the risk of the pharma marketing tax.

Raise revenue, hit pharma

For over a century, businesses have been allowed to deduct marketing costs as a business expense. The idea of eliminating this deductibility for marketing of prescription drugs – in effect, taxing pharma marketing – has come up a few times in recent years; Sen. Al Franken, D-Minn., offered such bills in 2009 and 2016, Sen. Claire McCaskill, D-Mo., proposed one in 2018, and Sen. Jeanne Shaheen, D-N.H., introduced a bill in 2019 that candidates Biden and Kamala Harris endorsed. Notably, a pharma marketing tax was very much in the mix during negotiations over the 2017 tax cut bill.

Advocates of a pharma marketing tax want to raise revenue, of course, and the potential is significant. For example, the CBO estimated one earlier version of this idea would raise $37 billion over 10 years. Equally important is the expectation that the pharma industry would not increase its spending to offset the amount paid in taxes, so there would be less drug advertising; this goal was explicit in the titles of the bills – “Protecting Americans from Drug Marketing Act” (Franken) and “End Taxpayer Subsidies for Drug Ads Act” (McCaskill and Shaheen).

Of course, pharma marketing is an important part of the health communication that informs patients and clinicians about diseases and therapies. Pharma marketing messages must be accurate, non-misleading, and within FDA-approved labeling. They educate consumers about the conditions for which medications are prescribed, provide balanced information on risks and benefits, and encourage patients to talk with their healthcare professionals. Of course, it is the healthcare professional who makes the clinical assessment whether to prescribe any therapy and, if so, which therapy. 

Normally the tax code treats product categories equally, not singling out one specific type of message. Ironically, a pharma marketing tax would impose on the marketing of lifesaving drugs a tax burden that would not apply to marketing of, say, tobacco, liquor, or firearms.

The danger ahead

So far, each time a pharma marketing tax has been proposed, it has been averted, but don’t be lulled into a false sense of security. These battles have not been easy. On behalf of the healthcare marketing and communications industry, the Coalition for Healthcare Communication has supported efforts by The Advertising Coalition (which represents broadcasters, media outlets, advertisers, and agencies) to make House and Senate members and staff aware of the economic and educational benefits of advertising as well as legal objections to removing tax deductibility if one product category is singled out. Yet past success does not guarantee future results.

The greatest point of danger may come in the final stages of negotiating a large spending package such as the “Recovery” bill. Negotiators will be searching for ways to cut the price tag, will be trying to balance many competing interests, will be in a hurry, and will limit visibility into the final wheeling and dealing. Even members of Congress sympathetic to the value of advertising may consider this tax measure a trade-off worth making to avoid some other hard choice.

Even if a pharma marketing tax is avoided this spring, the continuing high federal deficits almost guarantee further efforts in later legislation. Stay tuned!