The Job-Killing Medical Device Tax

From NCPA

Americans consume nearly $100 billion dollars' worth of medical devices annually. Medical devices include simple things, such as cotton swabs, as well as complex instruments, such as pacemakers and artificial joints. Beginning in 2013, a 2.3 percent tax will be imposed on the manufacture and importation of medical devices in an attempt to offset a portion of the $1 trillion cost of the Patient Protection and Affordable Care Act. Though seemingly small, if this tax is implemented it will destroy jobs and stifle innovation, says Devon M. Herrick, a senior fellow with the National Center for Policy Analysis.

The 2.3 percent tax will be imposed on revenue, not profits. This means the tax will be paid even on devices sold at a loss. Further, the increased tax burden represents a significant portion of the profit margin on each dollar of medical device sales:

• In 2006 the medical device industry paid corporate income taxes of $3.1 billion on taxable income of $13.7 billion.
• The medical device tax would add approximately $3 billion annually to the taxes paid by medical device firms -- a 100 percent increase.

Medical device firms in the United States are relatively small -- about 95 percent have annual sales of less than $100 million. Over the 2013 to 2019 period, these firms would pay a projected $20 billion in additional taxes -- imposing one of the highest effective corporate tax rates in the world.

The medical device tax will result in the loss of high-paying manufacturing jobs. Indeed, firms have already begun preparing for the tax by reducing payrolls:

• In November 2011, device maker Stryker Corporation announced its intention to layoff 1,000 workers in order to cut costs in advance of the tax.
• Another firm, Covidien Plc, announced the layoff of 200 U.S. workers and plans to offshore production to Mexico and Costa Rica.
• The Lewin Group estimates the tax will prompt the loss of more than 43,000 jobs across the medical device industry.

The medical device tax will ultimately increase national health expenditures. Health care providers, hospitals, doctors and patients, as well as insurers, will bear much of the additional cost of the tax.

Source: Devon M. Herrick, "The Job-Killing Medical Device Tax," National Center for Policy Analysis, February 6, 2012.