Tax Analysts Blog

Democrats Getting What They Deserve on Medical Device Tax

Posted on Nov 11, 2014

Apparently, the medical device tax (MDT) is one of America’s biggest problems. Incoming Senate Majority Leader Mitch McConnell, R-Ky., has made its repeal one of his top priorities. Device manufacturers are prepping for a victory celebration after bankrolling a multiyear campaign that seems ready to bear fruit. Even Wall Street is getting ready, with analysts noting the upside for device manufacturers.

It’s a lot of excitement for a little tax to bear. And this is definitely a little tax. Created to help pay for Obamacare, it’s imposed at a rate of just 2.3 percent on the sale price of medical devices. Official estimates peg its 10-year revenue yield at just $29 billion -- chump change in Washington terms. And so far, the tax seems to be underperforming at even that modest goal.

Of course, sometimes small taxes can have big effects. And that’s certainly been the argument coming from device manufacturers. “The U.S. leads the world in medical technology,” notes AdvaMed,. “But the device tax threatens that leadership because it will put an additional burden on medical device innovators already struggling under the weight of America’s uncompetitive tax system.” In fact, AdvaMed says the tax has already prompted the elimination of 14,000 jobs (and prevented the creation of another 19,000).

Lawmakers don’t like to hear about lost jobs, which is why support for repealing the MDT is running strong on Capitol Hill. Opposition to the tax crosses party lines but follows state boundaries; lawmakers from states with important device manufacturers -- like California, Massachusetts, and Minnesota -- tend to be especially hostile, regardless of their views on Obamacare more generally.

Despite all the high-profile hand-wringing, the MDT doesn’t seem to be much of a mortal threat. According to a recent report from the Congressional Research Service, the levy seems unlikely to cost a lot, either in terms of jobs or profits. Indeed, the CRS projected “fairly minor effects,” with output and employment falling by no more than 0.2 percent.

Defenders of the MDT have given the CRS report -- or at least parts of it -- a lot of play in the media. In particular, they’ve been quick to underscore the report’s skeptical comments about the dangers of retaining the MDT. But they haven’t had much to say about the CRS’s broader assessment of the tax.

“Viewed from the perspective of traditional economic and tax theory, the tax is challenging to justify,” the CRS said. Excise taxes are best used for narrow and exceptional purposes: to discourage undesirable activities (think tobacco taxes and smoking) or to link revenue with associated spending (taxes and road construction being the classic example). “These justifications do not apply, other than weakly, to the medical device case,” the CRS concluded. Plus, the tax appears to be expensive and difficult to collect, at least relative to its revenue yield.

The CRS is right -- the MDT is not a particularly good tax. It was just a convenient one. Congress created it because the device industry seemed like an easy target -- and perhaps a fair one, since manufacturers stood to gain from expanded healthcare coverage. But those lawmakers thought wrong. The battle over the MDT demonstrates the danger of using narrow taxes to pay for broad programs.

Generally speaking, broad taxes seem most likely to engender broad opposition. Wary lawmakers understandably avoid saddling millions of voters with any sort of new levy.

But narrow taxes have their own issues. In particular, they tend to create motivated opponents. And if those opponents have deep pockets, then look out.

More importantly, narrow taxes leave spending programs vulnerable. As I wrote last year :

      Narrow levies -- especially ones that seem to target certain individuals and industries -- leave nascent social programs chronically vulnerable. Opponents can hobble these programs by attacking their funding base. In the case of the ACA, Republicans will probably continue to fail in their ham-fisted attempts to repeal the program all at once. But they could very well succeed in killing it slowly, chipping away at its funding and using the resulting shortfalls to justify cuts in benefits and coverage.

That’s what’s happening right now. Repealing the MDT won’t do much to harm Obamacare. But it will open the door to further piecemeal attacks. And eventually, the numbers will start to add up.

If Democrats eventually face a funding crisis for Obamacare, they have only themselves to blame. After all, they should have known better. It was a Democrat, Franklin Roosevelt, who conclusively established that broad spending programs deserve broad taxes.

That’s why pretty much every working American pays Social Security taxes -- and why Social Security is not on the chopping block today.

Read Comments (2)

david brunoriNov 11, 2014

Joe, The MDT is a terrible tax, Every tax that singles out a product, practice,
or person is a bad tax. Too often the only justification for these types of
taxes is that "we need the money." That is what pimps and con men say.

Special taxes should be levied in rare circumstances and only to address
identifiable externalities.

And you are right about Social Security. All worthwhile public services should
be paid by broad based taxes.

edmund dantesNov 11, 2014

"And so far, the tax seems to be underperforming at even that modest goal."

No surprise there, when you tax something you get less of it. But just try to
explain that to a tax-and-spend Democrat.

I will be happy to see that tax go.

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