CCAGW to Senate Health Tax Task Force: Repeal the Medical Device Tax | Council For Citizens Against Government Waste

CCAGW to Senate Health Tax Task Force: Repeal the Medical Device Tax

June 13, 2019

The Honorable Patrick Toomey
The Honorable Robert Casey
The Honorable Michael Enzi
The Honorable Mark Warner
Senate Finance Committee
Health Tax Task Force
219 Dirksen Senate Office Building
Washington, D.C.  20510

Dear Senators Toomey, Casey, Enzi, and Warner,

The Council for Citizens Against Government Waste (CCAGW) appreciates the Senate Finance Committee assembling six task forces to find long-term solutions to 42 temporary tax provisions that have expired or are due to expire by December 31, 2019.  Lower taxes help to spur long-term growth of and encourages investment in U.S. businesses across the country.

Since the implementation of the Patient Protection and Affordable Care Act (ACA), CCAGW has called for the repeal of the medical device tax, an extremely harmful measure that adds a 2.5 percent excise tax on the sale of a qualified device.  According to the Tax Foundation, between 2013 and 2015 when the medical device tax was in effect, the industry saw a decrease in research and development spending of $34 million and a loss of approximately 21,800 jobs.

Congress suspended the tax in 2016 and AdvaMed, a medical device trade association, reported that 70 percent of device companies increased their hiring; 73 percent stated the climate improved for raising capital; and average research and development funding increased by19 percent.  In fiscal years 2018 and 2019 alone, Congress’s suspension saved the industry $3.8 billion.  However, the continued uncertainty surrounding the excise tax will hurt long-term investment and job creation, particularly as the next suspension deadline approaches.  With a little more than six months to go, the industry is facing a $20 billion tax increase over 10 years if the tax is not permanently repealed by December 31, 2019.

Because the tax is based on a company’s sales rather than profits, it is particularly destructive to smaller firms that tend to be the most innovative yet the most fiscally tenuous because they may not yet be profitable.  The complexity of the tax is also problematic.  The Tax Foundation noted that the “tax’s retail exemption also creates confusion for medical device firms.  The statute gives the U.S. Treasury Secretary broad authority to exempt items from the tax, which creates compliance issues for firms.  For instance, the Internal Revenue Service has issued guidance on the sales of medical device kits, which contain both taxable and nontaxable items.”

Furthermore, while it is not a direct tax on American consumers and taxpayers, they ultimately pay for it in several ways.  Device companies might be able to pass along some of the increased costs through higher prices for providers and payors, including Medicare and Medicaid.  But, the medical device industry is very competitive, so many companies may not be able to increase their prices and must instead reduce research and development or the number of their employees.  In this case, the consumer pays with the loss of innovation.  Usually, it is a combination of these adverse results.

Repealing the medical device tax has had bipartisan support since its inception.  CCAGW hopes that your task force will recommend repealing this innovation-killing tax and that the Senate and House of Representatives will agree it is time to do so.

Sincerely,

Tom Schatz
President, CCAGW

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