What is a digital ad tax?

The market for digital advertising is booming due to its ability to personalize content and reduce advertising costs for businesses. Recent estimates place the industry at about $600 billion globally and project it to reach $1.1 trillion by 2030. Some argue that consumers benefit from ads that are better tailored to their wants and needs, whereas others contend that there are downsides from the use of ad-supported social media, potentially including worse mental health, particularly in young people, and a rise in political polarization. These downsides are part of the reason that some have called for more regulation of social media companies. For example, former U.S. Surgeon General Dr. Vivek Murthy called for warning labels on social media platforms to alert parents and adolescents about the potential harm to teenagers’ mental health. Additionally, starting with Florida in 2023, now about half of all U.S. states have passed laws to ban or regulate cell phone use in schools to improve academic focus and protect mental health. One type of regulation that has been discussed is a digital advertising tax (DAT). In this article, we define digital ad taxes, describe how they work, and highlight the pros and cons of the approach.

The recent history of digital ad taxes

The idea of digital advertising taxes was notably proposed by Nobel Prize laureate Paul Romer in a 2019 New York Times article titled “A Tax That Could Fix Big Tech.” In that article, Romer argues that a progressive digital ad revenue tax is necessary to address the negative consequences of dominant tech platforms, which currently rely on maximizing user engagement and selling targeted ads. He suggests that this tax could incentivize these companies to shift towards alternative models, such as an ad-free subscription, to avoid the tax. In his 2021 policy brief titled “Taxing Digital Advertising,” Romer expands on the idea and proposes a marginal rate of zero for digital ad revenue under $5 billion and rate increases in $5-10 billion increments. Romer recommends taxing revenue instead of income because income can be manipulated by shifting income from high-tax to low-tax jurisdictions. The goal of his version of DAT is to push the primary targets—media and tech giants such as Google/YouTube (Alphabet), Facebook (Meta), and Amazon—away from manipulating its audiences with the “ad-based business model and towards subscriptions where revenues are instead dependent on the sustained quality of content and user experience.”

In a 2024 Network Law Review article titled “The Urgent Need to Tax Digital Advertising,” Daron Acemoglu and Simon Johnson propose a flat tax of 50% when annual digital ad revenue crosses a $500 million threshold. Similar to Romer’s tax proposal, the primary targets for this tax are media and tech giants. However, the lower threshold of revenues proposed by Acemoglu and Johnson would also discourage smaller media organizations, such as Reddit, Snap and Spotify, for example, from becoming overly reliant on digital ads. Like Romer’s proposal, Acemoglu and Johnson’s proposal aims to shift media companies away from an ad-based business model and towards subscription. The idea is that revenues would instead depend on the sustained quality of content and user experience.

In February 2021, the Maryland state legislature became the first state to enact a digital ad tax bill in the country. The Maryland DAT applies only to firms that generate at least $1 million a year from digital ads within Maryland and whose global gross revenues exceed $100 million. Larger firms face higher tax rates, with the tax ranging from 2.5% to 10%, following a progressive structure based on global earnings. Lawmakers later approved S.B. 787 in May 2021, which pushed the DAT’s effective date to January 2022. The measure also created exemptions for broadcast and news outlets and prohibited companies from shifting the cost onto customers through added fees or surcharges.

There are several lawsuits against Maryland’s DAT filed by more than a dozen companies, including, for example, Peacock TV, LLC v. Comptroller of Maryland. In a recent decision in August 2025, the Court of Appeals ruled the DAT’s ‘pass-through’ ban (prohibiting the shift of cost onto customers) unconstitutional under the First Amendment, while leaving the rest of the law in place. The Court found that this provision regulates speech, how companies can communicate how taxes affect pricing, not just conduct. Other arguments made by the opponents of the tax is that the DAT violates the Internet Tax Freedom Act (ITFA). They argue that it is discriminatory to tax digital advertising services at higher rates than traditional advertising services, including print newspapers and radio. However, the state rebuts that digital ads target individual users and measure interactions, while newspaper ads or other traditional ads are static, so the ITFA doesn’t apply in this case.

In a global context, many countries have introduced a digital services tax (DST), which is a broader category of digital advertising tax. A digital services tax applies to revenues generated through “online marketplaces, social media platforms, sale and licensing of user data, and online ads.” In European OECD countries, as of May 2025, several countries, including Austria, Denmark, Hungary, Poland, and Portugal, have implemented the DST. The structure of implemented DSTs differs significantly among the countries. For example, Denmark’s DST applies only to streaming services, while Austria and Hungary tax revenues from online advertising. The tax rates range from 1.5% in Poland to 5% in Austria. Other European countries have announced or are considering DSTs, although pending policy changes across the EU may lead to repeals of existing DSTs and limits on future ones.

Potential benefits of digital ad taxes

Advocates of digital ad taxes highlight a number of benefits, including incentivizing firms to adopt different business models which may improve the quality of their products, increase competition, and boost government revenue. We detail each below.

1. Incentive to pursue a subscription-based business model

The implementation of DAT will make it more expensive for social media and other online firms to profit from ad revenue. This approach will make other revenue generation models more attractive and make the digital advertising model less attractive. Models like the subscription model rely on improving the platform’s quality of content and user experience rather than sustaining intense emotional responses to generate revenues via ads. In favor of the subscription-based model, Romer argues that people will pay for digital services that they value, as demonstrated by companies such as Microsoft (LinkedIn Premium), Netflix, Duolingo, and Substack.

Romer’s DAT version employs a tiered approach to help reduce the burden for smaller companies. This tax version does not try to limit the use of advertising models by small firms. Instead, the goal is to show them that there are limits to the potential for growth via this advertising model alone. On the other hand, Acemoglu and Johnson’s DAT version would affect smaller firms because of its lower threshold of revenues. These two approaches to a DAT affect smaller media and tech firms differently, but both would incentivize them to pursue other business models to sustain their businesses.

2. Increase competition

The DAT system can lead to more platforms competing against each other in the digital advertising market. Romer’s tax system has a marginal tax rate that exceeds 70% on advertising revenue greater than $60 billion per year. For example, a U.S. firm with digital advertising revenue of $60 billion per year will owe roughly $22 billion in tax. However, if it splits itself into two firms, each with half the revenue, the two smaller firms would each owe $5 billion in tax. They avoid about $12 billion in payments each year in total. That is, as revenue increases, the average tax rate increases drastically. Moreover, Romer’s tiered approach would discourage acquisitions of smaller companies, instead incentivizing large firms to split themselves into independent companies and reduce their market dominance because the combined tax burden on a large firm would be higher than on smaller, separate firms.

3. Raise government revenue

The tax revenue collected from the annual gross revenues of digital advertising companies can help finance government services. Since the implementation of the tax in 2021, Maryland state reported collecting approximately $93 million in 2022 and $82.5 million in 2023. The revenue is earmarked for the “Blueprint for Maryland’s Future Fund,” which aims to provide “adequate funding for early childhood education and primary and secondary education.” Therefore, the DAT offers a stable source of public funds for essential public services, including education, health care, and social security.

4. Redirect AI progress into more socially useful avenues

One of the potentially biggest effects of a digital ad tax, as argued by Acemoglu and Johnson, is that it may redirect AI research away from advertising targeting and towards more socially useful areas. Currently, a disproportionate amount of AI investment is used to optimize ads, predict behaviors, and deliver content, such as recommender systems. For example, Alphabet announced that the company will spend $75 billion on its AI buildout in 2025, including cloud, search, data centers, and ad capabilities. With advertising accounting for nearly 75% of Alphabet’s total revenue and recent earnings showing that AI improvements directly boosted ad performance, it is clear that ad revenue remains a central driver of the company’s AI investments. By making ad-based revenue streams less profitable, a digital ad tax could prompt media and tech giants to diversify their AI research efforts into more sustainable and less exploitative areas.

Potential drawbacks of digital ad taxes

While digital ad taxes provide a number of benefits, there are also downsides, which we detail below.

1. Potential pass-through costs to advertisers

The digital ads market is a two-sided market where the digital ad platforms serve two sets of customers: advertisers and users. Advertisers want access to targeted audiences to promote their products or services, while users use the platform to access media content, often for free, in exchange for viewing ads. Research shows that the indirect network effect between the two sides can significantly impact the pricing behaviors. For example, advertisers are drawn to platforms with more users because they offer more reach and better-targeting data. Therefore, most platforms are free for users in order to obtain as many users (who are all content viewers) as possible, and then the platforms generate revenue by charging ad fees to advertisers.

DAT can significantly influence the pricing behavior of the media platforms by altering their cost structure. With lower post-tax revenues, media and tech companies may increase ad prices to maintain profit margins. Higher ad prices may especially affect small and medium-sized businesses that rely on targeted, cost-efficient digital ads. For example, the DAT could indirectly hit a local restaurant that advertises on a search engine or social media platform and force it to pay a higher advertising cost than it did previously. In such a case, the tax would fall on small businesses and would fail to incentivize large digital platforms to move away from their traditional business model.

2. Geopolitical resistance

Digital services taxes have been strongly opposed by the Trump administration and the American tech industry on the basis of unfair targeting of major American tech companies like Meta, Alphabet, and more. The version of the One Big Beautiful Bill Act passed by the House would have allowed the U.S. to impose higher taxes on foreign companies, investors, and individuals from countries that the U.S. says are unfair to Americans or American business interests, although this provision was ultimately struck from the final act. As Canada planned to impose a DST on the U.S., Trump announced that he would terminate all discussions on trade with Canada. In response to this challenge, Canada has withdrawn the implementation of a 3% tax on revenues from digital advertising, online marketplaces, social media, and the sale/licensing of user data. Digital ad taxes, a subset of digital services taxes, may also face similar backlash.

3. Higher effective tax burden

Although digital services tax rates may look small, taxing revenues instead of profits can cause high effective tax burdens for companies. An example provided by the Tax Foundation, if a company earns $15 in profits on $100 in revenue and a 3% DST is applied to that revenue, the company would owe $3 in tax. In other words, for this company, a 3% tax on revenue equates to a 20% tax on profits ($3 out of $15). In practice, this structure places a heavier burden on companies with slimmer profit margins, since lower profits lead to higher effective rates.

Conclusion

As digital advertising continues to grow into a trillion-dollar global industry, more discussion has focused on how to regulate its influence. Digital ad taxes represent one approach to rebalancing the incentives that drive digital innovation. Supporters argue that these taxes could reduce the dominance of ad-based business models, encourage more beneficial AI development, and generate public revenues. However, these taxes could also lead to higher costs for advertisers, as well as legal and geopolitical challenges, and potential international trade disputes. While the debate over digital ad taxes is far from settled in many countries, it reflects broader concerns about how digital platforms shape our economy and society. In one way or another, the growing influence of digital advertising will require deliberate regulation to ensure that its impacts align with socially beneficial outcomes.