House Votes to Repeal New Medical Device Tax in Obamacare

June 11, 2012

Last Thursday the House voted 270 to 146 to repeal the 2.3 percent excise tax on the sale of medical devices, a finance provision in Obama’s health care reform bill that is set to kick in on January 1 of next year. Representative Sander Levin of Michigan, senior Democrat on the Ways and Means Committee, claimed that if the tax cut “were to become law, it would unravel health care reform.”

The tax is projected to raise $29 billion in new revenue over the next ten years. To put this in perspective, the federal government spends $9.9 billion per day. If this forgone revenue is to “unravel” Obamacare, then the law stands on very shaky fiscal ground.

To avoid this “unraveling,” Republicans propose to pay for this revenue loss by allowing the government to recover overpayments on healthcare exchange subsidies for low and middle-income Americans who experience an increase in income. This policy would be a step in the direction of horizontal equity, because current law would treat people of similar means in different ways.

For example, let’s imagine that I happen to barely qualify for health insurance support, and you do not. Then, I earn a raise so that my income becomes equal to yours. I would continue to benefit from my support subsidy for that year, and you would continue to be on your own. This becomes an inequitable treatment of two similarly situated citizens. The Republican plan would allow the government to recover the overpayments made to me. While this would introduce a new administrative burden, the bill is projected to reduce the deficit by $6.7 billion over the next 10 years, according to Tax Notes (subscription required).

The larger concern from a tax policy perspective is why the medical device industry has been specifically targeted, reportedly just because it stands to gain from healthcare reform. This is an odd basis for tax policy, as excise taxes are typically imposed to correct perceived negative externalities (tobacco taxes) or allocate the costs of providing government services (gasoline taxes). In the case of healthcare reform, many others also stand to gain. Many hospitals remain tax-exempt, and the exclusion of employer contributions for medical insurance premiums and medical care register as the largest tax expenditure in the federal budget.

The medical device industry is obviously opposed to the new tax, and some have claimed that it will impose extreme burdens on the industry. While it is fundamentally inequitable to force one specialized industry to bear a unique tax, much of the burden of tax would likely be passed on by the medical device to consumers through higher hospital bills and higher insurance premiums.

Though Republicans were joined by 37 Democrats in support of the repeal, it is unlikely to pass the Senate, and President Obama has already stated that he will veto it. Of course, this debate could be rendered null and void in the coming days if the Supreme Court overturns the Patient Protection and Affordable Care Act.

More on Obamacare here.

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