Renewed Hope (Again) for Device Tax Repea

Dave Camp

Max Baucus

Dave Camp and Max Baucus are going on a road trip. The Congressional leaders are pairing up for a national tour to promote a proposed revamp of the U.S. tax code, last revised in 1986. Both men have been reaching across party lines for the last two years to craft a tax reform bill that would keep American companies from moving operations overseas. On July 8, the dynamic duo launched their “Simpler Taxes for America Tour” in St. Paul, Minn., with a visit to multinational conglomerate 3M and McDonald’s hamburger bun maker Baldinger Bakery.



“Over the past two years we’ve heard from hundreds of experts on how to fix the tax code to make it simpler for families and spark a more prosperous economy,” a news release announcing the tour stated. “We want even more input and want to hear directly from the American people.”

3M welcomed the two legislators at its “Innovation Center” with a high-tech multimedia presentation that highlighted its mission and some of its products, according to Minnesota Public Radio News. The 84-year-old company makes thousands of items, from automotive sandpaper and drinking water replacement filters to surgical tape, waterproof bandages, stethoscopes and eye patches.

During a question-and-answer session, 3M workers told the lawmakers that high U.S. corporate taxes impair companies’ ability to compete globally. Camp—the House Ways and Means Committee chairman—agreed and noted the tax code desperately needs modernizing. “We’re out of step,” the Michigan Republican said. “We are the highest statutory rate in the world and we are the only country in the world left with our particular type of international tax system … We have to understand that the environment has changed.”

Indeed it has, but the U.S. tax code remains painfully out of date: The top corporate tax rate is 35 percent and climbs to 39 percent when combined with state and local levies; most other industrialized nations use a territorial-type setup and have lower tax rates as well. That imbalance has prompted many multinational corporations to circumvent the American system by setting up foreign-chartered subsidiaries that reinvest profits overseas. A U.S. Senate subcommittee estimates American companies hold $1.7 trillion overseas of earnings from operations.

Determining a fair levy for multinationals is one of the biggest challenges of tax reform because international tax is a complicated element of the Internal Revenue Code, practitioners contend. But it is important enough to large companies such as 3M, Procter & Gamble Co. and Alcoa Inc. that leaders of those firms have told Congress they are willing to give up corporate tax deductions in order to achieve a more competitive international tax system and lower corporate tax rates.

Reform Brings Relief?
Tax policy leaders have said they will take a “blank slate” approach to reform legislation, removing all tax expenditures from the code and adding in only those that make the grade. Medtech industry executives are hoping the strategy will kill the 2.3 percent medical device excise tax that took effect Jan. 1 and has triggered both layoffs and spending cuts at many of the sector’s largest firms.

“MDMA looks forward to working with the chairmen to reform the tax code, including putting an end to the medical device tax,” Medical Device Manufacturers Association President and CEO Mark Leahey said in a prepared statement. “Repealing the medical device tax is a great example where there is strong bipartisan support to end a policy that thwarts innovation and job creation. The medical device tax is stymieing American manufacturing, and we need to remove this roadblock for today’s entrepreneurs.”

Medtech groups have discussed larger corporate tax reform as an approach to repealing the tax on U.S. sales of all medical devices. Manufacturers have attempted to distance their efforts to repeal the device tax from issues of healthcare reform, opting instead to frame their concerns as a matter of corporate tax laws, a move that has helped the industry gain vital support from Democrats. The tactic, however, has failed to sway U.S. Senate Majority Leader Harry Reid (D-Nev.) and Baucus (D-Mont.), chair of the Senate Finance Committee—two of the most influential Democrats in Congress and perhaps the staunchest supporters of the device tax.

Yet medical technology executives refuse to give up hope.

“As they begin their Tax Reform Tour in the Minneapolis-St. Paul, Minnesota area, it is important to note the medical technology industry supports over 35,000 jobs in the state and more than two million jobs nationally,” Advanced Medical Technology Association President and CEO Stephen Ubl said in prepared remarks. “In reforming the tax code to make U.S. business more competitive, repealing the medical device tax is a critical first step to protecting these jobs and ensuring a level playing field for Minnesota and the U.S. in the global economy.

“America’s current corporate tax structure is a key factor contributing to the decline of the competitiveness of the American medical technology industry,” Ubl continued. “U.S. corporate tax rates are the highest in the world. The U.S. has failed to match competitor nations in positive tax incentives to attract knowledge-based, high-value manufacturing industries like medical technology. The U.S. tax code provides few incentives to invest in the pre-profit start-up companies that are the backbone of the innovation system.”

The Cost of the Tax: Billions of Reasons for Repeal
When U.S. Sen. Max Baucus (D-Mont.), chair of the Senate Finance Committee, and U.S. Rep. Dave Camp (R-Mich.), who is chairman of the House Ways and Means Committee as well as the Joint Committee on Taxation, announced their intention to tour the United States drumming up support for a renovation of the U.S. tax system, medical device advocacy organizations eagerly voiced their approval.

“MDMA applauds Chairman Baucus and Chairman Camp for their bipartisan work to reform the tax code in a manner that enhances American competitiveness, promotes innovation and strengthens our economy,” said Mark Leahey, president and CEO of the Medical Device Manufacturers Association. “Quick action on this important issue will unleash medical technology innovation, spur improved patient care and build a stronger economy.”

MDMA, together with the Medical Imaging & Technology Alliance (MITA) and the Advanced Medical Technology Association (AdvaMed), published an estimation of how much the medical device tax has cost companies thus far this year. According to the associations’ statement, as of July 15, 2013, “medical device manufacturers have now paid an estimated $1 billion to the Internal Revenue Service for the medical device excise tax.”

“The $1 billion threshold is frightening, as every dollar spent paying for this medical device tax threatens medical innovation and American jobs,” said Gail Rodriguez, executive director of MITA. “MITA is pleased to see bipartisan support for repeal of the tax building in both the House and the Senate, but Congress cannot wait any longer to repeal this burdensome tax and protect jobs and essential R&D funding.”

“Repealing the device tax has strong bipartisan support and is the first step to corporate tax reform. Medical technology companies across the country are struggling to remain competitive and this tax makes their effort to grow, innovate and invest in the future that much harder,” said Stephen J. Ubl, president and CEO of AdvaMed.

“Each day that goes by with the medical device tax in effect is a major roadblock for patient care, job creation and innovation,” added Leahey. “This issue is a shining example where there is overwhelming bipartisan support in both chambers of Congress to right a wrong, and MDMA continues to work with all stakeholders to get a repeal of this onerous policy across the finish line.”

According to AdvaMed, device manufacturers end up having to pay an average of $194 million per month to the IRS under the 2.3 percent tax. Payments are due semimonthly. Among the affected, claims AdvaMed, are 2 million employees nationwide. The industry reportedly generates approximately $25 billion in payroll, pays out salaries that are 40 percent higher than the national average ($58,000 vs. $42,000) and invests nearly $10 billion in research and development annually.
Bipartisan majorities in the U.S. House of Representatives and U.S. Senate have supported a repeal of the device tax. In March, a bipartisan coalition of 79 senators voted to adopt an amendment to the Fiscal Year 2014 Senate Budget Resolution to repeal the levy. In the House, Reps. Erik Paulsen (R-Minn.) and Ron Kind (D-Wis.) introduced the “Protect Medical Innovation Act,” which has garnered 253 co-sponsors, including 34 Democrats, since its debut.

The Tax Foundation, a non-partisan organization that provides research and analysis on federal and state tax policy, stated in April that the medical device tax was “bad tax policy.”

“The tax, like any excise tax, will increase the cost of the product on which it is levied,”said an article released by the foundation in April. “This calls into question the logic of this excise tax and its purpose in the Affordable Care Act (ACA). If it does in fact raise consumer prices, which seems likely, it contradicts the original purpose of the ACA, which was to lower healthcare prices. The tax is complex and opaque, while targeting just one industry, making it overall bad tax policy that should be repealed.”

Despite the tireless work lawmakers have done thus far to try to repeal or at least soften the blow of the device tax, there still has not been a satisfactory solution found for replacing the funding gap losing the tax would leave in the Affordable Care Act.

“Since the medical device industry was not instrumental in coming up with this tax, I think it feels very strongly that it need not get involved with the business of government and identifying an offset for the tax,” Tom Sommer, president of the Massachusetts Medical Device Industry Council, told MPO earlier this year. “It’s really the job of the lawmakers to come up with an appropriate budgetary offset.”