Taxing Life-Saving Medical Devices

A healthy segment of the manufacturing industry could be devastated.

According to a September 2011 paper for the Manhattan Institute, the effects of a new excise tax on the medical device industry will be disastrous.

The study deals with a provision of the president's massive health care overhaul law that levies an excise tax on the medical device industry. The tax will take effect at the start of 2013. This tax, the study finds, will shrink employment in the industry by cutting demand for medical devices and by “encouraging American firms to shift production overseas." In effect a double whammy to the Obama administration's goal of creating more jobs and keeping employment from moving to other countries.

The paper was written by Diana Furchtgott-Roth and Harold Furchtgott-Roth. She is a senior fellow at the Manhattan Institute and former chief economist of the U.S. Labor Department. He is president of Furchtgott-Roth Economic Enterprises and former commissioner of the Federal Communication Commission, as well as a former congressional economist.

This tax, one of many taxes in the ObamaCare law, is an excise tax on medical device manufacturers. It is deceptive. While small in amount—2.3 percent—the levy is taken from the revenue line, not the bottom line, magnifying its impact. According to the Advanced Medical Technology Association (AdvaMed), medical device makers reported taxable income of $13.7 billion in 2006 and paid $3.1 billion in corporate taxes. When the new tax goes into effect, the tax burden will roughly double and "raise the average effective corporate income tax rate to one of the the world," the Furchtgott-Roth said.

The devices include such items as coronary stents, X-ray machines, in vitro diagnostic substances, MRIs, artificial joints, surgical equipment, and a variety of other medical technologies.

The tax would be especially burdensome to companies that create novel technologies. “The new tax could force companies that would otherwise never leave the U.S. to make difficult choices based on stark economic realty,” said Stephen J. Ubl, president and CEO of AdvaMed. He said it’s "important for the Administration and Congress to understand the device tax is counterproductive to economic growth and ... putting more Americans to work.”

Under the provision, eyeglasses, contact lenses, and hearing aids -- items sold at retail -- are exempt from the new excise tax. It’s just the more vital and life-prolonging devices and apparatuses that are to be taxed.

The Manhattan Institute study said, “In 2009. the medical device industry provided well-paying jobs to more than 409,000 employees, who earned more than $33 billion in labor compensation. Under reasonable assumptions, the tax could result in job losses in excess 43,000 and employment compensation losses in excess of $3.5 billion."

States with large employment in the medical device industry will be especially hard hit, from California to Florida. The tax will be particularly harmful to companies that “innovate and tend to suffer loses in the first years or when investing in research and development for a new product but would still be required to pay the tax,” the study said.

With the tax, manufacturers in this country “will be more likely to close plants in the United States and replace them with plants in foreign countries....U.S. leadership in this industry could be threatened.”

The excise tax “will substantially harm the American consumer, the medical device manufacturing industry, and workers in that industry.” The new tax will be applied “to all sales of a product before other forms of state and local taxes are applied.” The government has used excise taxes on gasoline to help build roads and applied “sin” taxes to alcohol and tobacco which the government was seeking to discourage. But this excise tax on medical devices is unique in that it is designed solely to raise revenue.

The industry is one of the healthier segments of manufacturing. Medical devices are distributed through wholesale distribution networks, the study explains, “which likely add an additional 34% or $39 billion to the value of medical devices.”

The study said, “Excise taxes are known to be inefficient.” They “not only distort economic decisions, but they affect all firms, whether they are profitable or not." A company losing money will still owe the tax. A company might have a large market share, but no profits, in the years when research and development occurs. “Thus, the market share tax could be an unintentional tax on innovation.”

If 15 percent of the production of the industry “were to migrate offshore as a result of the excise tax, U.S. industry employment would decline between 63,000 and 85,000 while employment compensation” would drop between “$5 billion nd $7 billion,” the study said.

Unfortunately, as these findings indicate, the human toll of ObamaCare will be felt in more areas than one.