This content is provided by the Americans for Tax Reform Foundation.
Starting January 1, 2013, Obamacare will impose a 2.3% excise tax on gross receipts in excess of $5 million for domestically-sold medical devices. A narrow band of products which are “generally purchased by the general public at retail for individual use” are exempt from the tax.
A bipartisan outcry has been raised over the device tax, and for good reason. The tax was enacted to help fund the $1.76 trillion in new spending authorized under Obamacare, and it will actively undermine production of and improvement on medical devices which are crucial to patient outcomes.
The device tax is a tax on gross receipts (sales, essentially) instead of a tax on profits, so the tax will be imposed even if a company sells its products at a loss. This one detail ensures that the 2.3% tax is deceptively large: the medical device industry’s tax burden is expected to double because of the Taxmageddon increase; some companies (such as Zoll, which manufactures defibrillators) will see their profit margins shaved by up to 40%.
A recent study found that investment in medical research and development will fall by $2 billion per year because of the device tax—and that is a cautious estimate. R&D dollars drive innovation and innovation lowers costs, so the tax’s adverse effect on investment will keep expensive medical devices from becoming affordable and widely available in the future.
More immediately, the device tax will gouge health consumers for essential products. Taxes on companies often end up hitting consumers as higher prices, and the device tax is no different. The actuary for the Centers for Medicare and Medicaid Services made it plain that Obamacare’s “fees and the [device] tax would generally be passed through to health consumers in the form of higher drug and device prices and higher insurance premiums.” In other words, patients – many in dire need of care – may find crucial medical products out of their reach as a result of the 2.3% tax.
Whatever costs cannot be passed along to patients will be absorbed by the medical device companies, which will lead businesses to cut jobs as they tread water to stay afloat. One study found that, depending on the elasticity of the tax, the medical device industry will be forced to fire between 14,500 and 47,100 workers—up to 10% of the workforce.
Given this parade of horribles, it is no wonder that the tax’s authors created an exemption for common medical products like Band-Aids, eyeglasses, and hearing aids: they don’t want the public to know about the tax, which applies to critical high-dollar devices like pacemakers and prosthetics and will only directly affect a small group of very sick patients. It is important to note, however, that many routine products, like braces, are not exempt, and will hit even healthy households.
Provisions like the medical devices tax are counterproductive to the goals of legitimate healthcare reform, and illustrate the brokenness of labyrinthine tax-and-spend proposals like Obamacare.
10-Year Cost to Taxpayers
Joint Committee on Taxation: $29 billion
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