Proposed Md. digital ad tax is a tax on small businesses

Originally published in the Daily Record

Carol Park Feb 28, 2020

For a state that routinely hands out millions in tax incentives to attract tech companies, Maryland likes to punish innovation by way of new regulations and taxes.


In desperate search of funding sources for the $32 billion Kirwan education overhaul, legislators Bill Ferguson, D-Baltimore city, and Thomas V. Mike Miller, D-Calvert and Prince George’s, are arguing that Maryland should become the first state in the United States to impose a 2.5% to 10% digital advertising tax. The tax would apply to revenues of companies like Facebook and Google that advertise to Maryland residents and is expected to generate up to $250 million annually.


Opponents of the tax say it may be neither constitutional nor legal. After all, the First Amendment protects advertisement as free speech, and federal laws prohibit taxing internet companies in a discriminatory way. While these concerns are valid, discussions surrounding legality overshadow what is perhaps an even more serious drawback of the proposed tax: its likely economic impact.


The proposed tax would unfairly hurt Maryland’s small businesses that rely heavily on digital ads. While the bill aims to target tech giants like Facebook and Google, these companies will naturally pass costs on to businesses that use their services by making every ad more expensive. Large businesses can either absorb the increased costs or reduce advertisement since their products are already established in the market. Small businesses, on the other hand, may suffer catastrophic consequences.


According to a study by Deloitte and Taj, a Deloitte legal provider, only 5% of the digital ad tax’s burden would fall on tech giants. Instead, businesses would absorb 40% of the costs and consumers would absorb 55%. Matt McDermott, president of the American Advertising Federation of Baltimore, is therefore correct to argue that the proposed tax aims to “snipe” giant online companies for quick cash, but instead waves a “bazooka” at local companies.


Other states’ experience with digital ad taxes provides cautionary tales for Maryland. After Florida adopted a digital ad tax in 1987, advertising purchases in the state decreased by 12% and ad revenue dropped by $100 million. In just six months, Florida repealed the tax. Ohio also extended the sales tax to digital advertising in 2016, only to reverse it later that same year.


Nevertheless, it is not a surprise that Maryland would ignore these warning signs and propose a tax that would hurt consumers and innovation. The digital ad tax represents an attempt to squeeze the fast-growing online advertising industry. This approach closely resembles the way Maryland has approached ridesharing innovations like Uber and home-sharing companies like Airbnb, by regulating and taxing them to protect traditional players such as taxis and hotels.


For small businesses that cannot afford traditional ads, digital ad platforms provide a more cost-effective and administratively less burdensome option — a low barrier to entry that can help them expedite their growth. But since traditional advertising is not taxed in Maryland, businesses may have to go back to more traditional, costlier and arguably less effective advertising methods. Therefore, a digital ad tax is protectionist, discriminatory and distortionary. Taxing only certain businesses and not others providing identical services violates principles of fair taxation.


Therefore, Maryland should reject the new digital tax bill and encourage small businesses to continue using innovative and affordable 21st-century advertising services. That is the least that Maryland, a state with the 8th-worst business tax climate in the nation, according to the Tax Foundation’s State Business Tax Climate index, can do for entrepreneurs who choose to operate here despite the state’s abysmal business environment. Rejection of the proposed bill would signal Maryland’s desire to block further anti-business measures and improve its tax climate.


All in all, attempting to pay for the extravagant Kirwan education plan on the backs of already highly taxed Maryland businesses would be preposterous economic policy. Legislators have pledged to raise Kirwan funding without a broad-based increase to the state’s individual taxes, and the digital ad tax has been suggested as an alternative. But to suggest that the proposed digital ad tax is a tax on corporate giants and not on individuals would be false and misguided.


Carol Park is a senior policy analyst at the Maryland Public Policy Institute.