States are missing out on billions of dollars in essential revenue by failing to tax the rapidly expanding and evolving advertising industry. Modernizing tax codes to include advertising could raise between $16 billion and $27 billion a year across all states for public services like schools, roads, and healthcare, according to a new report by the Institute on Taxation and Economic Policy. (The report includes state-by-state revenue estimates and an overview of current legislative proposals across the country.)
Most state sales tax laws were designed in the mid-20th century when tangible goods dominated consumption. Today, the economy has shifted toward services, yet advertising remains largely exempt from taxation in most jurisdictions. This exemption essentially acts as an implicit subsidy for a sector that in recent years has become dominated by a few massive corporations – Alphabet (Google), Meta (Facebook and Instagram), and Amazon – which now control over half of all U.S. advertising dollars.
“Our state tax systems are currently stuck in the 1950s, exempting services that define the modern economy,” said Nick Johnson, ITEP Senior Fellow and report author. “By continuing to exempt advertising, states are not only leaving billions of dollars on the table that could fund schools and mental health services, but they are also giving a free pass to a handful of tech giants whose business models impose real social costs on our communities, from the decline of local journalism to the rise of social media addiction among teens.”
The report outlines several key arguments for ending the advertising tax exemption:
- Revenue Potential: If all states applied their current sales tax rates to advertising, they could collectively raise approximately $27 billion a year.
- Leveling the Playing Field: Currently, paid subscriptions for services like Netflix are taxed in most states, while ad-funded “free” platforms like Facebook escape taxation.
- Addressing Social Costs: Targeted advertising funds platforms that contribute to mental health harms and the spread of misinformation. States can use excise taxes on these services to mitigate these public health and social costs.
Several states – including Maryland, Washington, Utah, Hawai’i, and New Mexico – have already moved forward with various forms of advertising taxes. State policymakers elsewhere have a significant opportunity to align their revenue structures with the 21st-century information economy while using new revenues to support families with better public services and proven policies like state Child Tax Credits.
