Painful Deficit Cuts Could Hurt Pharma Marketers

Will the deductibility of marketing costs survive the deficit debates?

Although it may be tempting to ignore all of the heated tax and spending discussions in Washington, you need to know that the debates could directly affect you and put your job at risk. Indeed, within the next few months, the Coalition for Healthcare Communication and the Advertising Tax Coalition may be asking you to talk to your Members of Congress about the importance of medical communication both to the health of patients and the nation’s economy.

There is much rhetoric and political jockeying going on right now regarding how best to reduce the deficit, but Republicans and Democrats agree that the deficit must be reduced, lest we become a debtor nation without a reasonable credit score and fall into the downward spiral faced by many of our European brethren. However, there is no agreement on how we get there. It is becoming clear that beneath the rhetoric, serious tax changes must be made to achieve the revenue requirements that any new budget will demand.

Underscoring the fact that there are no painless alternatives, tax experts now are looking at some very painful tax initiatives that reach well beyond “tax the rich” and “stop fraud and waste.” Among these changes are reductions in deductions for charities, home mortgages and retirement plans. And, when such mainstream, popular plans are on the negotiating table, we Washington insiders know that other, relatively obscure deductions—no matter how unwise—could be back on the table as well.

 An Attractive Target

The deductibility of marketing costs for medications is one of those relatively obscure but ripe-for-the-picking deductions. It was trotted out three times in the debates on how to pay for healthcare reform and assigned a line item revenue estimate of $52 billion in savings over 10 years. No matter how unrealistic that estimate may be, $52 billion is real money, even in D.C. The deductibility of medical marketing could well be an attractive target for those wanting to complete a deficit-reduction package on a short deadline.

Fortunately, all three times the deductibility of marketing costs came up in health reform debates, it was put back down. But, this outcome was not by happenstance. Instead the measure was rejected because Washington marketing lobbyists—backed by your letters, emails and voicemails—explained that pharmaceutical marketing provides significant jobs in every Congressional district, and even more importantly, provides critical information to doctors and patients on how to use drugs safely and effectively.

Your stake in this deduction may be more critical than you realize. If marketing costs for our products were not deductible, the cost of marketing would go up at the same percentage rate as the tax rate of manufacturers. Understand it thusly: The top corporate tax rate is currently 37%. If the costs of marketing were not deductible, the bottom line cost to manufacturers would increase by as much as 37%.

Consider the consequences in your shop if that happened. Most likely, companies would immediately seek to “meet their numbers” for the current year by slashing projects wherever possible. In subsequent years, companies would recalibrate the return on investment on all marketing expenditures to reflect the higher investment costs and likely adjust their marketing spend accordingly. The cuts would have a cascading effect on the projects and personnel in the companies themselves and have immediate, similar effects on their advertising agencies and media partners.

So, watch these deficit debates with a renewed interest. While the consumer press is not likely to cover our piece of the pie while the debates are raging, PM360 is. Moreover, you are likely to hear from me through your supervisors, who will be alerting you to any imminent danger and asking you to communicate to your representatives.

Stay tuned.

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