Lawmakers eyeing tax deductions on drug ads

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Drug and advertising industry advocates are sounding the alarm over congressional threats to tax drug advertising.

The Advertising Coalition, whose members include PhRMA as well as advertising and media industry trade groups, yesterday urged members to contact their senators and urge them to reject any measure that would tax advertising as part of a healthcare reform package.

“Our concern is grounded in the First Amendment,” said Jim Davidson, executive director of the Advertising Coalition. “When government is extracting this from you, it has the effect of taxing and thereby restricting speech.”

Currently, drug companies, like any others, can consider the cost of advertising fully deductible as a necessary business expense. But back in the fall, then-House Majority Leader Rahm Emmanuel, now President Obama's chief of staff, told advertisers and agencies that the industry would have to choose between tax deductions for consumer advertising or for R&D. Then last week, a key Democrat, House Ways and Means Committee Chair Rep. Charlie Rangel (D-NY), told reporters: “One thing that's not off the table is you can pick up $37 billion knocking out the deduction for advertising.”

It wasn't clear where Rangel's $37 billion figure came from, though that would presumably far exceed the cost of deductions for consumer advertising of prescription drugs, for which pharmas spent around $4.3 billion in measured media last year, according to Nielsen Company data.

Pulling the tax exemption was among options discussed in PhRMA's recent talks with the White House and Senate Finance Committee Chair Max Baucus (D-MT). PhRMA last week agreed to make $80 billion in cost-savings on drugs sold in the US, including selling medicines half-price to seniors in the Medicare Part D "donut hole" coverage gap. Other details of the agreement have yet to be finalized, pending scoring by the Congressional Budget Office.

Either way, it's clear that the deductions are on the menu as lawmakers look for ways to pay for healthcare reform.

“PhRMA's put $80 billion on the table,” said John Kamp, executive director of the Coalition for Healthcare Communication. “If you're in the buffet of revenue options, you're in it until the bill is passed, and when you're looking at [a cost-savings target of] $1 trillion-$2 trillion, $37 billion is a nice number.”

The month of July will be make-or-break for healthcare reform legislation, said Kamp, noting that a markup is expected in the Senate around mid-month. Key members of Congress will include senators and representatives from pharma- and advertising-dependent New York and New Jersey, including Rep. Rangel and Sens. Charles Schumer (D-NY) and Robert Menendez (D-NJ).

Taxing advertising would make it prohibitively expensive for many drug companies. That might suit some of the largest pharmas fine for the moment, as a broad drop-off in advertising would largely freeze market share, serving those that field many category-leading brands well. But in the ever-changing environment of prescription pharma, with breadwinners losing patent protection and new drugs launching constantly, the long-term impact on the industry could be enormous.
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