Proposed Change to Tax Deductions For Pharmaceutical Companies Will Not Solve Drug Pricing

Attempting to end direct-to-consumer advertising from pharmaceutical companies is not a new idea. Former Senators Claire McCaskill (D-MO) and Al Franken (D-MN) as well as former presidential candidate Hillary Clinton proposed making similar changes. This proposal has reemerged this Congress in Senator Jeanne Shaheen’s (D-NH) legislation, the End Taxpayer Subsidies for Drug Ads Act (S. 141), which would end the tax deductibility of advertising for pharmaceutical companies. This proposal could run up against First Amendment protections and could restrict pro-growth investments.

To begin, it is important to note that taxpayers are not subsidizing pharmaceutical companies’ advertisements. While some deductions are subsidies, a deduction of advertising cost is a business expense. The federal government taxes the income of corporations, and advertising, like rental space or employee salaries, is a business expense that should be written off. Then-Senate Minority Leader Chuck Schumer (D-NY), previously made this same argument saying,  “it is unfair, illogical and counter-productive to treat business advertising costs any different from other ordinary and necessary business expenses.”

On top of the mischaracterization in its title, this legislation could potentially run into First Amendment issues. The protections of free speech guaranteed by the First Amendment also extends to commercial advertising. If this legislation were to go into effect, it would be reasonable to assume some legal challenges could emerge regarding government restrictions of free speech.

Another issue with S. 141 is it would use the tax code to punish a specific industry. Congress should not use tax policy to pick which industries to bolster and which to burden. This legislation applies only to pharmaceutical companies but would still allow other industries to deduct advertising costs. Tax neutrality is the concept that the tax code should strive to be as neutral as possible, and while that is not always possible, in this case the proposed tax change would be an egregious violation of this principle. While there are issues around drug pricing that Congress can and should address, this is the wrong approach.

Lastly, Senator Shaheen attempts to frame this issue as aimed at “Big Pharma,” the proposed change would have far-reaching consequences. Allowing companies to deduct their advertising cost is a pro-growth policy that encourages entities to circulate investment into the economy. Local newspapers and radio and television stations rely on advertising to keep their lights on. Disincentivizing investment in advertising from a major industry could significantly jeopardize local media’s ability to stay afloat.

There are legitimate issues around drug pricing, health care coverage, and other issues that require Congress’ attention, but this legislation’s ham-handed approach will not solve these underlying problems. There is also little demand for a change like this. According to a study from DeepIntent, half of people find direct-to-consumer advertising from pharmaceutical companies useful and 75 percent say better education for consumers will lead to a better outcome. Using tax policy to punish a certain industry for a common business practice is not the right approach to solve the issues this legislation intends to address and could have severe implications for local journalism and other advertising-based industries.