House Votes to Repeal Medical Device Tax

June 22, 2015

Thursday, the House voted to repeal the medical device tax, a 2.3 percent excise tax on the sales price of medical devices. Unlike previous pushes in the House that were strictly divided by party lines, the successful vote passed with bi-partisan support and now moves on to the Senate.

In terms of policy, the repeal would have a positive impact on consumers and the medical industry. My colleague Kyle Pomerleau has written previously on some on the negative impacts that tax creates, including, first and foremost, the burden to the consumer. Pomerleau is not the only one to recognize this concern; the Congressional Research Service conducted a report on the Medical Device Tax. Their analysis suggests that most of the tax will fall on consumer prices, and not on profits of medical device companies. More on that report here.

The purpose of the tax is to raise approximately $3.2 billion dollars in revenue per year for the next ten years – but that’s not happening. The tax has been found to collect 23 percent less revenue than initial estimates. Collections for the Medical Device Tax are particularly difficult considering the complexity of the code.

Proponents of the tax argue that a repeal of the tax would be something akin to cronyism. The tax specifically hits the medical industry, so a repeal would signal caving to special interests. Repealing the tax, however, does not equate to creation of a special credit or exemption. Rather, the tax itself is levied on a specific industry and is directly opposed to the principles of good tax policy. When the repeal went before Ways and Means earlier this month, our own Alan Cole had this to say:

The point of the broad-base low-rates principle is that if everyone pays, taxes can actually fund some serious projects without being too burdensome. In contrast, if one relies only on a small set of unlucky taxpayers to shoulder a large burden, the weight is much more difficult to carry.

A tax should have a broad base and low rates to promote growth. The Medical Device Tax does the exact opposite. It targets a very narrow base within an industry, and becomes narrower still through complex credits and exemptions.

The Medical Device Tax falls heavily on consumers, slows growth, and conflicts with the most universal principle of sound tax policy. If the Medical Device Tax were to be repealed, it would be a move in the direction of good tax policy.

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