Out, Damned Tax

Taxes. Next to religion and politics, the subject of taxes has to be the third rail of most polite conversation. The impending medical device excise tax has occupied more than its fair share of coverage in this space since it was proposed and then passed as part of 2010’s healthcare reform legislation.

Well, here it comes again.

In his State of the Union address on Jan. 24, President Obama spent a lot of his speech addressing a “renewal” in the power of domestic manufacturing. This, of course, is a familiar tune for the medical device industry. It’s a song medtech professionals are happy to sing because they know that this very American industry has been responsible for incredible innovation, revenue growth and job creation over the years—gains that many have considered threatened or weakened during the course of the last few years due to a lackluster economy, uncertainty about the impact of healthcare reform, a shaky regulatory environment, and, of course, this looming tax.

“We will not go back to an economy weakened by outsourcing (I hope the president really means offshoring), bad debt and phony financial profits,” he said. “Tonight, I want to speak about how we move forward and lay out a blueprint for an economy that’s built to last, an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values. That blueprint begins with American manufacturing.”

The president asked U.S. corporate leaders to consider what they could do to bring jobs back to the United States and promised that their country “would do whatever we can” to help them succeed.

One avenue he cited to achieve this would be to remove tax breaks “for moving jobs and profits overseas.” Companies that choose to stay in America get hit with one of the highest tax rates in the world, he said, adding: “It makes no sense, and everyone knows it.” He recommended that multinational companies should have to pay a basic minimum tax, and every penny should go toward lowering taxes for firms that stay in the United States and hire here.

It’s hard to argue with that—Republican or Democrat.

“After all, innovation is what America has always been about. Most new jobs are created in startups and small businesses. So let’s pass an agenda that helps them to succeed. Tear down regulations that prevent aspiring entrepreneurs from getting the financing to grow,” the president continued. “Expand tax relief to small businesses that are raising wages and creating good jobs. Both parties agree on these ideas. So put them in a bill, and get it on my desk this year.”

No arguing with that either. But, hey, wait a second. What about—yup, you guessed it—the medical device tax set to go into effect next year? Surely the impact of a 2.3 percent tax charged
directly to medical device manufacturers based on the gross sale price of each product (representing $20 billion in revenues in ten years) isn’t consistent with the rhetoric in the president’s speech. The tax could lower employment in the industry by reducing demand for medical devices due to higher prices. Four out of five U.S. medical device companies have 50 or fewer employees, and 98 percent have fewer than 500. Not to mention, the manufacturing footprint the president wants to bolster would suffer, industry claims. Steve Ferguson, chairman of Cook Group, said the tax already is having an impact on his company’s plans.

“For a company like ours, which pays 35 percent of our net earnings in federal corporate taxes and another 4 to 5 percent in state and local corporate taxes, the excise tax translates to another payment that will consume 15 percent more of our earnings,” he said during Indiana University’s Health Forum on medical technologies. “This creates tremendous pressure for us to move manufacturing to Europe and other parts of the world.” Cook Medical had plans to open new facilities throughout the United States, but has postponed them indefinitely due to the tax, Ferguson said.

Rep. Erik Paulsen, a Republican from Minnesota’s 3rd District, a member of the House Committee on Ways and Means, and co-chair of the Congressional Medical Technology Caucus, was quick to comment on the annual address to Congress.

“In his speech, the president expressed the need to encourage more domestic manufacturing and keep jobs here in America. The first place he should look is medical device manufacturing, which provides more than 35,000 jobs in Minnesota alone,” Paulsen wrote in his response. “This American success story has come under assault from our own government and unelected bureaucratic agencies. As a result, American jobs are being forced overseas. We need to repeal the president’s new tax on medical devices and modernize the FDA, so we can keep innovation, manufacturing, and jobs here in the United States.”

Unfortunately, so far, despite continued calls from industry and lawmakers for its repeal—including a petition signed by more than 400 device companies and professionals sent to both houses of Congress last summer—there’s been little or no movement in
efforts to strike the tax.

Mr. President, if you truly want to give one of this country’s most innovative businesses the opportunity to continue to grow and prosper here at home, isn’t it time to revisit this issue?

Christopher Delporte
Editorial Director, Medical Devices