The Complicated Nature of the Deductibility of Drug Advertising

June 15, 2018

In the heat of a tough reelection campaign, Sen. Claire McCaskill (D-MO) has made health care a key issue. While the president recently released a series of policy proposals for lowering prescription drug costs, the Missouri Democrat is pitching a different idea: ending the deductibility of advertising expenses for drug companies. While there are policy arguments against direct-to-consumer drug advertising, trying to manipulate the tax code to curb these advertising campaigns is a clumsy and fraught way of achieving that end.

The idea of ending the deductibility of direct-to-consumer (DTC) pharmaceutical advertising is not a new proposal. Not only did Sen. McCaskill propose an amendment to the Tax Cuts and Jobs Act removing this deductibility, former Sen. Al Franken (D-MN) proposed a similar bill in 2016, and former Secretary of State Hillary Clinton included ending this deduction in her health-care plan during her 2016 presidential campaign.

Drug companies spend more than $6 billion on drug advertising specifically, so removing the deductibility of only drug advertising would mean roughly $1 billion of revenue annually.

There are several flaws with using tax policy to curb drug advertising. Removing the deductibility of drug advertising violates the principle of neutrality of the tax code: no specific industry should have a different set of rules. Additionally, it violates neutrality to treat advertising expenses as any different from normal business expenses, as a bipartisan group of legislators, including Senate Minority Leader Chuck Schumer (D-NY), reaffirmed last year. Allowing firms to deduct (and ideally immediately fully expense) advertising costs is pro-growth policy; restricting the ability to deduct these expenses increases costs and reduces the ability of firms to create jobs and spur economic growth.

While those in the health-care community can debate the benefits or costs of allowing DTC drug advertising, Sen. McCaskill’s proposed approach of eliminating the deductibility of drug advertising is not sound tax policy. Ending the deductibility of advertising would impose heavy costs on businesses and violate the principle that businesses should be able to immediately and fully deduct all business-related expenses. While curbing DTC drug advertising could be an option, using the tax code to achieve that end is an economically flawed approach.

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