Another Reminder of the Poor Design of Obamacare’s Medical Device Tax

July 8, 2013

There is an Op-Ed in the Wall Street Journal today by two doctors that highlight the negative effects of the now seven-month-old Obamacare medical device tax. Specifically, they highlight the adverse effects on small, innovative start-ups.

“On January 1st, manufacturers of medical devices in the U.S. were hit with a new 2.3% tax on revenue, one of many sources of money tapped to pay for Obamacare. This tax will likely cut into the profits of large medical-device manufactures, a cost that will almost certainly be passed on to health-care consumers. But its effect on U.S. medical-device startups—the small companies that fuel innovation—may price devastating.

Coincident with the 2.3% tax, venture capital investment in medical devices has all but ceased. Why? Ask yourself two questions: Who would want to invest in a highly regulated, government control industry that faces a unique tax? What startup medical device company can reach the magical break-even point with a tax on its revenue?”

They are spot on with this aspect of the tax.

The base of this tax is revenue, not profits like a corporate income tax. This means that $100 of sales of medical devices is a tax bill of $2.30 regardless of the company’s costs. It could be the case that a business made $100 in sales, but had $100 in labor and research and development costs. Compared to a corporate income tax, which would be zero in this case due to zero profits, this excise tax would cost more than 100 percent of the company’s profits. It is clear that fewer investors will want to enter an industry in which it is now harder to make a profit due to a tax.

However, there is another issue that this article doesn’t address that makes this tax likely worse than they argue.

Firms not only have to pay the $30 billion tax, but they have to devote a substantial amount of resources in complying with the tax. As I have written before, this tax has a number of pricing rules, exceptions and reporting requirements that make this an overly complex ordeal for businesses who are required to pay. Compliance will require the devotion of additional time and resources to complying to this tax rather than researching and developing newer and better life-saving technology and hiring new workers.

As with the tax itself, the compliance burden will disproportionately hit smaller firms. Large firms already have accountants on staff to deal with tax issues. Smaller firms do not.

The two doctors are correct: this tax, like any excise tax, is bad news for the medical device industry and should be one of the first targets for repeal in tax reform.

More on the medical device tax here, here and here.

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