As part of the belt tightening forced by the coronavirus pandemic, Gov. Larry Hogan (R) last weekend proclaimed a spending freeze by state government. And as the General Assembly pauses between its truncated session and a possible special section at the end of May, Hogan said with no ambiguity that if the Senate and House have pushed legislation that would cost more money, he would not endorse it.
That will most certainly include the Kirwan Commission’s education reform recommendations passed last month, for which the state’s obligation would be $32 billion over the next eight years.
One of many other bills that would help pay for that big new expense would be a new digital advertising tax. The Maryland-Delaware-DC Press Association, of which The Star Democrat is a longstanding member, asked the General Assembly not to advance it because of the disastrous effect it would have on Maryland newspapers and other media. Now, as we are seeing the negative economic impact of the coronavirus across all businesses — including, of course, our loyal advertisers — we are asking the governor to veto it.
If the legislation were to stand, Maryland would become the first state to enact such a tax.
The American Advertising Federation of Baltimore, along with MDDC, also has come out sharply against this digital advertising tax, which could hurt the news industry and the state’s economy overall.
A sales tax on advertising is a really bad idea. 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, according to Rebecca Snyder, executive director of the MDDC. That represents 14.6% of the $693.1 billion in total economic output for the state, according to economic research for the media and advertising industries. The research further shows that sales of products and services driven by advertising help support 393,667 jobs — that’s nearly 15% of the 2.6 million jobs in the state.
Who sells this advertising that legislators so desperately want to tax? Your local newspaper helps support its news coverage through connecting local small businesses to advertising in print and digital forms.
But this isn’t just about newspapers. The sole source of revenue for TV and radio broadcasters is advertising. An ad tax could ultimately lead to less local news, traffic, weather and sports.
Furthermore, most of the websites unconnected to newspapers are free and advertising supported. An ad tax would lead to less content or more paywalls, making them inaccessible to many lower-income Marylanders.
Advertising agencies across Maryland, many of them small businesses, would be at a severe disadvantage when competing with firms located outside the state.
Advertising is a communications process that helps produce the final sale of a product, which is most likely already subject to the state sales tax, thus layering one tax upon another tax. So the irony here is less advertising leading to fewer sales could actually lead to reduced tax revenue.
This toxic cocktail of new taxes would actually punish Maryland companies for being in Maryland. Advertising, marketing and media agencies in particular could be forced by the folks in Annapolis to either price themselves out of the market or absorb costs that obliterate their already-slim profit margins. And this business climate has been hobbled even more by the coronavirus pandemic.
Furthermore, Snyder contends that the legislation could be unconstitutional. “The bill unlawfully taxes speech itself — the advertising, which is entitled to First Amendment protection under long-settled Supreme Court jurisprudence — rather than the underlying economic or business activities, and it singles out certain types of speech for discriminatory treatment based on impermissible criteria such as whether the advertising is digital versus other forms,” she wrote in a letter to Hogan soliciting his veto.
So during a time when newspapers are working around the clock to keep readers informed about the COVID-19 pandemic, this legislation is kicking the news industry when it’s already down. The governor should absolutely veto this and any bill in the future promoting taxes on digital advertising.