Despite the significant progress made last year in reforming the U.S. tax code, there are still a number of meaningful tax improvements left for Congress to address. The first is repealing the medical device tax.
Part of the Affordable Care Act, the medical device tax applies a 2.3 percent tax to device sales. Although the tax is currently suspended, the Joint Committee on Taxation estimated that it would have generated $3.2 billion in revenue in 2018.
While this isn’t a huge figure in the grand scheme of things, this tax violates the major principles of good policy: fairness, simplicity, and transparency. Evidence is also mounting that the tax is leading to job losses and reduced research spending. The House of Representatives plans to vote on legislation to repeal the medical device tax this week, and this would certainly be a positive development for those supporting good policy.
The tax ends up raising prices for consumers, who bear the brunt of it but don’t see this line item on any bills they pay. Ideally, taxpayers ought to know what taxes they’re paying so that they can make more informed decisions about how the federal government should spend its resources.
The tax applies to sales, not profits, so it disproportionately impacts smaller firms. It also hurts smaller businesses because of its complexity. Medical device companies are often vertically integrated, meaning they both produce and distribute goods. This integration means they must create an artificial, wholesale price before the sale to collect the device tax. The complex distribution channels within the rest of the healthcare industry also make this tax much more difficult to manage than other excise taxes.
Because the tax was in effect for several years, we have empirical analysis to back up these claims. A new study by Dr. Daeyong Lee at Iowa State University analyzes the years when the tax was in effect and found that the medical device tax lowered research and development spending by $34 million in 2013 alone. Lee also estimates the tax may have lowered device sales by a total of $188 million from 2013-2015. Furthermore, another study indicates that the tax cost the medical device industry nearly 22,000 jobs.
On the flip side, repealing the tax would result in those jobs returning to the industry within a few short years.
Congress has taken a few small steps to mitigate the tax’s impact. The tax has been suspended twice, both in 2016 and in 2018, but this bad policy ought to be repealed permanently.
The tax disproportionately hurts smaller businesses, is complex to administer, harms the medical device industry, and saddles consumers with additional hidden costs. Repealing the tax would give the medical device industry much-needed certainty and add to the policy success of the Tax Cuts and Jobs Act.
Nicole Kaeding (@NKaeding) is the director of special projects. Alec Fornwalt (@AlecFornwalt) is a policy analyst at the Tax Foundation.
