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Sunday, April 1, 2018

Drug Ad Deductions and Tax Policy - S. 2478

S. 2478 (115th Congress), End Taxpayer Subsidies for Drug Ads Act, caught my attention for a few reasons. First, I'm always surprised at the number of television and multi-page magazine articles on various drugs. I don't think the drug companies are solely trying to reach doctors who could actually prescribe these drugs as there are less expensive and more direct ways to reach that audience. So, apparently, they are trying to convince viewers that they might need one of these drugs and they should ask their doctor.  It seems very puzzling to me.

S. 2478 would add IRC Section 280I, to provide that "no deduction shall be allowed for expenses relating to direct-to-consumer advertising of prescription drugs." It also defines this term.

Senator McGaskill (D-MO), sponsor of S. 2478, says that in 2015, drug companies deducted $6 billion for these ads. She is concerned that consumers suffer via increased cost of the drugs and the public's subsidy of the advertising. Per McGaskill, the drug companies "are surfing off taxpayer dollars to push prescription drugs." She also suggests that some drug companies spend more on marketing than on R&D. In addition, she notes that this bill does not prohibit the ads, it just removes the taxpayer subsidy for them via the tax deduction.  [3/1/18 press release]

Is this good tax policy? Consider the following:

Equity - Are similarly situated taxpayers treated similarly? Well, drug companies are treated similarly. But other companies can still get a deduction for their ads despite the public's subsidy for them.

Simplicity - Generally, special rules add complexity to the law because it isn't usually easy to define the exception. For example, what about an ad that is primarily informing us about an illness or disease and with less magazine space or television time, telling us about the drug?

Neutrality - Tax systems are for raising revenue for government operations, not for affecting our decisions. S. 2478 seems aimed at encouraging drug companies to decide to devote less dollars on advertising. That won't mean they spend it on R&D though. They could use it for larger dividends.

Appropriate design of an income tax - The design of an income tax is that businesses report revenues and deduct the costs of generating those revenues. Denial of a deduction goes against the design of an income tax. Expenses contrary to public policy can justify denial of a deduction, such as denial of a deduction for fines and penalties. Are drug ads contrary to public policy? Shouldn't the company and its board of directors decide what is appropriate to generate revenues and profits?  Customers (doctors and patients) can also vote by boycotting products where the company spends more than the customers think is appropriate, or voicing their concern with letters to the company or via social media.

Senator McGaskill's bill brings attention to the issue. Additional data to share with the public might also help encourage companies to move advertising dollars to R&D or lower prices.

What do you think?

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