Policymakers Should Not Resuscitate the Medical Device Tax

December 17, 2019

Lawmakers on Capitol Hill are working to avoid a funding lapse on Friday evening and address several tax provisions set to expire at the end of the calendar year. Among the proposals under consideration is the repeal of the medical device excise tax, an Affordable Care Act (ACA) pay-for which violates all four principles of sound tax policy: neutrality, simplicity, stability, and transparency.

The tax has been suspended twice but is set to go into effect on January 1. Poorly designed and harmful to both medical manufacturers and health-care consumers, Congress should take the opportunity to repeal the tax once and for all. The time has come to place a “Do Not Resuscitate” order on the medical device tax.  

Background

In order to finance the costs of the ACA, Congress levied a 2.3 percent excise tax on medical devices in 2010. Excise taxes are designed to mitigate a behavior or reduce certain externalities. For example, the government may place an excise tax on vaping products in order to discourage the practice and reduce vaping-related deaths.

Yet, the medical device tax specifically taxes the sale of medical equipment, hardly what the government would want to discourage producing. After its debut in 2013, Congress decided that the tax was overly broad and exempted medical devices not “intended for humans” (i.e., animals) and over-the-counter purchases like eyeglasses, contact lenses, and hearing aids.

The tax became so politically unpalatable that Congress issued a moratorium on it for tax years 2016 and 2017. Following precedent again in January 2018, Congress extended the original suspension for tax years 2018 and 2019. This most recent suspension will expire on December 31 if lawmakers take no action.

Justifying the Medical Device Tax

A major impetus behind the implementation of the medical device tax was the projected revenue. The Congressional Research Service (CRS) estimated in 2015 that the tax would collect “approximately $38 billion of excise tax revenues over the next 10 years [2015-2025], resulting in $29 billion of net revenues, after accounting for offsets from other taxes.” Further, proponents argued at the time that the tax was fitting since health-care device manufacturers stood to gain from the increase in health-care participation and demand for health-care services resulting from passage of the ACA.

Flaws of the Medical Device Tax

The medical device tax suffers from a number of flaws. Among the most glaring, it taxes a narrow base at unequal rates. A more efficient tax would target a broader base with lower rates and include fewer exceptions. Because it is an excise tax, which has the effect of reducing an activity or behavior, the tax results in less production of medical device equipment. In the first year of its implementation (2013), the medical device tax lowered development spending by $34 million on average per company studied. Further, research and development (R&D) spending also declined in 2013.

In addition to the forgone research and development, the cost of the tax is passed from medical device providers to health-care centers that in turn pass the costs onto the public.

Turning to the principles of sound tax policy, the medical device tax fails on all counts. First, the tax violates neutrality. Rather than treating all medical equipment equally, the tax exempts veterinary and over-the-counter equipment but retains medical imaging machines like MRIs and CAT scanners. Hence, the tax favors devices used by the veterinarian over the radiologist.

The tax increases complexity by providing another layer of tax on top of taxes already levied, including corporate income, personal income, and payroll taxes. Medical device producers are required to spend more time learning which devices qualify for the tax and which do not. This in turn impacts investment decisions and services rendered by medical professionals.

The medical device tax also erodes revenue stability, since it shrinks the very base it seeks to tax. Simultaneously, the suspension of the tax reduces the revenue necessary to fund provisions created by the ACA. Every year the excise tax is suspended is another year the government must borrow instead of recouping revenue from the medical device tax. Even so, the medical device tax should not be reinstated to pursue forgone revenue. Congress has every ability to repeal the tax and pursue a more stable and less distortive revenue source.

The tax is also not transparent. While proponents argued it would primarily be paid by medical device producers, the tax is actually passed onto consumers without their knowledge.

Conclusion

As lawmakers prepare to leave town for the Christmas holidays, they still have the opportunity to fix an inefficiently structured revenue source. The tax violates sound tax policy principles and the costs fall on producers and consumers in unproductive and inefficient ways.

Repealing the tax would rid the code of one economic distortion, reducing the tax burden on medical device producers and the health-care consumers who use them.

Was this page helpful to you?

No

Thank You!

The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?

Contribute to the Tax Foundation

Related Articles