4 Reasons the Medical Device Tax is Bad Policy

September 27, 2013

Earlier this week, Republicans continued their push for a repeal of the Affordable Care Act’s medical device tax, a 2.3 percent excise tax on taxable medical devices, which is supposed to raise approximately $3.2 billion each year.

Republicans in the Senate are planning on attaching a repeal of the tax on the continuing resolution that is supposed to raise the debt ceiling and keep the government from shutting down.

Although I cannot speak to the politics of putting this repeal in the continuing resolution, from a policy perspective, a repeal of the medical device tax would be positive. There are several problems with this tax that make it not worth the $3.2 billion it raises each year.

1. It will increase costs to the consumer

Although Obamacare is supposed to reduce the cost of medical care for Americans, device manufacturers in the short run will attempt to pass the cost of the tax to consumers, increasing the cost of medical care for Americans.

2. Places a heavy burden on the medical device industry

Since this levy is a tax on sales, and not profits, medical device manufacturers could end up paying more in taxes than they make in profits. As a result, this tax will stifle innovation and could reduce employment in the industry by up to 45,000 jobs.

3. Exceedingly complex

Like any tax, the medical device tax comes with additional costs due to compliance. However, the medical device tax is especially complex, requiring companies to calculate sales prices upon which to apply the tax. The IRS has even admitted that “the medical device industry will likely face some implementation issues” when the tax goes into effect.

4. Not Transparent

Good tax policy should be transparent. In other words, people should know how much they are paying in taxes, so they know the true cost of government. The medical device tax, because it is an excise tax, is hidden in the cost of the devices. As a result, hospitals and consumers do not know how much of, or whether they are paying the tax.

The ACA is a very large and expensive law. If it is here to stay, supporters are right: it needs to be funded. However, supporters also need to recognize that the medical device tax is not the best way to fund the program. The medical device tax should be repealed and if other funding is needed, broad-based taxes should be used instead.

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