Obamacare’s Device Tax Grows More Devious

Business is not going well at the Internal Revenue Service.

The agency projected that it would collect $1.2 billion between April and September of last year from Obamacare’s medical device tax, which went into effect at the beginning of 2013. But the tax take was just three-quarters of that.

Implementing the tax has proven nightmarish. Administrative errors, overpayments, and erroneous penalties have grown common. And these snafus are nothing compared to the havoc the device tax is beginning to wreak on the economy and the job market.

So the tax is raising less money than Team TISI -0.32% Obama promised — and causing more destruction. It’s time for Congress to repeal it altogether.

In a report released last month, the Treasury Inspector General for Tax Administration found that just about everything that could go wrong with the medical device tax has. For starters, the 2.3 percent levy on a firm’s gross sales in the United States has been far more complicated than promised.

For instance, the IG found that the IRS “cannot identify” all the companies that owe the device tax.

That’s right. In the four years since Obamacare became law, the IRS hasn’t been able to figure out who actually has to pay the tax.

Many of the forms that companies have submitted have been rife with errors. One set of companies paid $41.6 million too much. Another paid $76 million too little.

The IRS has made its share of mistakes, too. More than 200 companies have been hit with more than $700,000 in wrongful penalties.

Even though the tax is taking in less than expected, it’s still proving a huge burden.

By raising the cost of doing business, the tax is forcing device firms to charge more. That’s dragging on sales.

According to John R. Graham, a senior fellow at the National Center for Policy Analysis, U.S. sales at eight of the ten largest medical device companies are flagging, relative to international markets. GE, for example, reported that second-quarter sales decreased 2 percent in the United States while climbing 2 percent in Europe. Johnson and Johnson’s domestic sales are down 1.5 percent in the first half of this year — and up 1.8 percent globally.

Early studies suggested that the medical device tax would eventually cost the industry 43,000 jobs. According to a survey of its members by industry trade group AdvaMed, the excise tax has cost 33,000 jobs in the first year alone.

Because it’s assessed on sales, even unprofitable companies have to pay it. That’s a hefty blow to the 80 percent of the industry comprised of smaller start-up companies, which may be years away from posting profits.

The tax is also sapping investment in the United States. In the AdvaMed survey, three-quarters of device firms said that they had cut back on capital investments, put off opening new facilities, deferred pay raises, or reduced investments in start-ups.

Bloomington, Indiana-based Cook Medical has stated that it “will no longer be able to expand our manufacturing in the United States.”

Medtronic MDT +0.44%, which has been headquartered in Minnesota for nearly 70 years, will soon be moving its nominal headquarters to Ireland by purchasing Dublin-based Covidien. Medtronic is undertaking this “inversion” in part to reduce its tax liability; Ireland’s corporate tax rate is one-third that of the United States.

The savings from the deal will no doubt help offset the hit from Obamacare’s medical device tax.

Research and development spending is also plunging, thanks to the tax. Utah’s BD Medical has cut spending on R&D partially because of its $55 million tax bill. Indiana-based OrthoPediatrics, a manufacturer of orthopedic devices for children, has cut its product development budget as well, saying, “We’re developing less products than we otherwise would.”

Thirty percent of the device companies surveyed by AdvaMed said that they slashed their research and development budgets in 2013 because of the tax. Fifty percent said they’d do so in the future, if the tax is not repealed.

In a rare bit of foresight, legislators foresaw all these deleterious consequences. Last March, 79 senators — including 34 Democrats — voted for a non-binding resolution calling for repeal the tax. Liberal stalwart Sen. Elizabeth Warren said the tax “disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential [and] pushes companies of all sizes to cut back on research and development for life-saving products.”

The House is similarly on record in opposition to the tax. Unfortunately, the two chambers haven’t worked together to repeal the tax — even though there might well be enough support to override a presidential veto.

They should get back to work. Thus far, the medical device tax has collected less revenue than forecast — even as it’s exerted greater harm on our economy.

It’s tough to design a tax much worse. Congress must repeal it.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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