Tax Analysts Blog

The Medical Device Excise Tax Derails Extenders

Posted on May 19, 2014

From a policy perspective, the extenders may not be all that important. Many of the expiring or expired tax provisions are poorly tailored to accomplish their purported goals. House Ways and Means Committee Chair Dave Camp and then-Senate Finance Committee Chair Max Baucus wanted to strip most of them out of the code entirely, only adding back in the few that had widespread support (like the research credit). But as bad as these temporary tax incentives might be, is it really worth scuttling an extenders package over the medical device excise tax?

That question can be asked of both Republicans and Democrats. Senate Majority Leader Harry Reid refused to allow Republican amendments to an extenders package last week that would have extended virtually all expiring and expired tax provisions. The proposal was not offset, so there were no pay-fors to argue over, and it passed several procedural votes by wide margins. But Republicans warned that if they weren’t able to propose amendments, they would not allow a cloture vote, and that’s exactly what happened. So extenders are left in limbo, with vague promises from Senate Finance Committee Chair Ron Wyden and ranking minority member Orrin Hatch about working out a compromise on amendments.

Why the big fuss over amendments? At issue is the medical device tax. Republicans would like to propose a repeal of this unpopular levy. They have been trying to append repealing language to legislation all year, but Reid has prevented it. A significant number of Democrats would vote for repeal of the excise tax, especially in an election year when many of them are vulnerable. So Reid knows that if a Republican amendment comes up for a vote, it is likely to pass. That has him resorting to dictatorial procedural rules to prevent it. He is desperately trying to prevent his own caucus from combining with Republicans to eliminate a small part of Obamacare.

It’s fair to ask why. As mentioned above, the medical device excise tax is extremely unpopular in Congress. A straight vote would result in large majorities in both Houses voting for its repeal. It doesn’t raise a ton of revenue ($30 billion over 10 years). The policy justification is specious (it’s essentially an excess profits tax targeted to only a small slice of the healthcare sector that was expected to benefit from the expansion of insurance coverage). It’s also part of a healthcare reform effort that hasn’t exactly helped Democratic senators with their reelection efforts. Letting Republicans kill the tax (or, perhaps, pushing the blame to President Obama and his veto power) seems a small price to pay to push extenders through on a bipartisan basis.

Perhaps Reid is convinced by all the scholarship suggesting that the excise tax is fair. Jane Gravelle of the Congressional Research Service has shown that the tax is not harming medical device manufacturing profits – manufacturers are simply pushing the burden on to consumers. The Center on Budget and Policy Priorities has dismissed the claims that the tax would force jobs overseas. The medical device industry is hugely profitable and the tax is relatively small, so Reid and his colleagues would be justified in asking it to pay a small share of the cost of healthcare reform. Reid has not been good about defining his own logic, only attacking the GOP for wanting to offer non-germane amendments (and if that was prevented, the entire healthcare law would never have been able to pass the Senate in the first place).

Why is the GOP so eager to scrap the tax, to the point that it would scuttle an extenders package that has taken a long time to see the light of day in the current Congress? The answer comes down to politics. As usual, Republicans want to take any opportunity they can to embarrass Democrats over Obamacare. They want to tie some Democratic senators to the unpopular levy through a direct vote. And successfully repealing even a small part of healthcare reform makes it easier to argue for broader repeal efforts later (this, more than anything, probably explains Reid’s position).

Extenders aren’t great tax policy. There’s a good case to be made that the economy and the tax code would be helped if they could simply expire permanently. But the medical device excise tax isn’t much better. For both parties to hold extenders legislation hostage over a small, poorly designed tax that was part of the hodgepodge efforts to pay for an ill-constructed healthcare law is the height of partisan lunacy in Washington.

Read Comments (1)

edmund dantesMay 19, 2014

"The medical device industry is hugely profitable and the tax is relatively
small"

Relative to what, exactly? The tax is 2.3% of the sales price, it's not a tax
of 2.3% on net profit. If a particular device has a profit margin of, say,
20%, that amounts to an 11.5% additional tax on the profit.

To pass the cost on to consumers, the firm must raise the price by much more
than 2.3% to maintain the same profit margin. That drives up health care costs
even faster. And then there's the nontrivial cost of compliance.

Who in their right minds thinks we need a sin tax on medical devices, as we
have on tobacco and alcohol? You put excise taxes on things you want to
discourage, because it works. If you want to recapture "excess profits" then
you need to tax the profits, not the gross. But then excess profits taxes have
their own sorry history of failure.

The medical device tax will be repealed, the only questions are when and how
many Democratic defeats will it take?

Having said that, I agree with you that all the extenders should be allowed to
expire. If a tax provision is not worth having permanently, it's not worth
having at all. Making these provisions temporary is a terrible policy done in
service of justifying future tax increases (to pay for the extenders yet
again).

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