GOP Front-Runners Spar Over Netco Ad Taxes

High-tech supporters of GOP presidential hopeful George W. Bush Thursday went on the offense against rival Sen. John McCain, R-Ariz., criticizing a provision of his tax bill that would reduce corporate tax breaks for advertising as "the first substantial tax increase on the Internet."

A group of tech executives touring New Hampshire on behalf of the Texas governor this week said that the McCain tax plan includes closing loopholes in write-offs for advertising that would stifle the growth of online companies, many of which are spending millions of dollars to build their brands.

"This is going to cost millions," said Floyd Kvamme, partner with the Menlo Park, Calif.-based venture capital firm Kleiner Perkins Caufield & Byers, in a conference call with reporters. "Companies that have a large stake in advertising - Ameritrade, Yahoo, eBay - will see double-digit increases in their taxes."

The plan at issue, while not detailed in McCain's tax plan, involves a U.S.

Congressional Budget Office proposal backed by McCain that would allow companies to deduct 80 percent of advertising costs in a tax year, with the remaining 20 percent spread out over a four-year period. The McCain camp calls the issue "tax equity reform," and says it's part of a plan to eliminate corporate tax breaks in favor of giving individuals tax relief.

The McCain campaign fought back after the press conference, issuing a statement accusing Bush of taking campaign donations from some of the "special interests and lobbyists" who stand to gain by preserving these tax breaks. "Judging by his attacks on Senator McCain's proposed loophole closure for advertising costs, Governor Bush would rather give tax breaks to his wealthy supporters than to middle-class Americans," the release said.

The release noted that McCain's proposal allows Netcos to continue to deduct the cost of advertising, but proposes that the deduction be spread over a period of more than one year. "This will in no way adversely effect the e-commerce revolution," the statement said. "Advertisers choose the Internet due to the number of individuals 'logging on.'" At the same time, McCain has been pushing Bush on the issue of Internet taxes.

McCain has signed a pledge vowing to support a permanent ban on Internet taxation. Bush has supported an extension of the current moratorium on new taxes on the Internet, but prefers to assess the work of a congressional commission now studying the issue.