A debate in Washington over a new tax on medical devices has put Minnesota front and center.
The tax, which is part of the new health care law, would affect the state’s sizable medical device industry. And the person leading an effort to repeal the tax is 3rd Congressional District Republican Rep. Erik Paulsen.
Paulsen says the tax is simply bad for business.
“Suddenly, our medical-device industry will face one of the highest tax rates of any industry in the world,” Paulsen wrote in a June 6, 2012, Star Tribune opinion piece.
It depends how you define tax rates, but there is a case to be made that Paulsen’s claim is in the ballpark.
Paulsen is referring to a 2.3 percent tax on most medical device sales embedded in the new health care law. If the tax is allowed to go into effect in 2013, it would create $29 billion in new revenue for the federal government over 10 years – or a rough average of $3 billion every year, according to the congressional Joint Committee on Taxation.
The cash is meant to help pay for the new health care law.
Paulsen’s claim that the device industry will face one of highest tax rates in the world comes from a widely circulated report commissioned in 2011 by the device industry.
The report was meant to highlight how the device tax could affect the industry, and predicted that market demand for devices could decline by as much as $6.7 billion annually. (Two separate analyses, one by Bloomberg Government and another by the left-leaning Center for Budget and Policy Priorities, have questioned the accuracy of the industry report.)
In 2006, the medical device industry reported taxable income of $13.7 billion and paid $3.1 billion in corporate taxes, according to the industry report. That’s a roughly 23 percent effective tax rate – right around the 25 percent average for all industries, according to a recent study by the Tax Foundation, a D.C.-based think-tank that tends to take a conservative view on taxes.
Add the additional $3 billion burden of the new device tax on top of that, and the industry would pay more like $6 billion in taxes or a roughly 45 percent tax rate – well over the industry-wide average.
The report’s authors are making something of an apples-to-oranges comparison. “Effective tax rates” typically refer to corporate taxes – not excise taxes such as the device tax – paid on profits, said William McBride, an economist with the Tax Foundation, though Paulsen doesn’t specify “effective tax rate” in his op-ed.
“It’s not the standard practice to talk about all sorts of taxes as an effective tax rate because effective tax rates generally refer to corporate taxes on profits as a share of profits,” McBride said. “But their point is very legitimate. By being hit by a special excise tax that no other industry pays, they are paying exceptionally high tax rate. Whether they call it an effective tax rate as a share of income or not is a secondary matter.”
While it’s uncommon for economists to look at all taxes when measuring effective tax rates, McBride added that including industry excise taxes, for instance, does increase the corporate tax rate for all businesses.
Roberton Williams, a senior fellow at the Washington D.C.-based Tax Policy Center, agrees that Paulsen’s approach isn’t traditional, but is a good way to get an overall idea of what the new tax burden would be on the industry.
“You want to take into account all the taxes you pay” when assessing tax burden, Williams said. “But what they shouldn’t say is that this will give them the highest corporate tax in the world.”
He also pointed out that the industry will likely be able to pass along the cost of the tax increase to consumers because it’s unlikely patient demand for devices, particularly life-saving, devices will decline dramatically. Supporters of the tax say that the health insurance law would mean tens of millions more Americans would have health insurance, and that would increase demand for medical devices.
Paulsen’s point that the health care law would greatly increase taxes on the medical device industry is valid.
Some would quibble with how the tax is calculated and exactly how it ranks with other industries. But experts agree medical device companies would face higher taxes – it’s just a matter of how much.
It’s still unclear exactly how the medical device tax will affect the industry, but because Paulsen’s claim is defensible, it leans toward accurate.
The Star Tribune, Device tax, if not stopped, will stifle, by Rep. Erik Paulsen, June 6, 2012
The Tax Foundation, Beyond the Headlines: What Do Corporations Pay in Income Tax?, by William McBride, Sept. 2011
The Tax Foundation, Government Takes a Greater Share than Shareholders, by William McBride, Nov. 2, 2011
Bloomberg Government: Medical Device Industry Overstates Tax Impact, by Christopher Flavelle, Feb. 9, 2012 (subscription only)
Roberton Williams, senior fellow, Tax Policy Center, June 12, 2012
Will McBride, economist, Tax Foundation, June 12, 2012
Matt Caminiti, analyst, Bloomberg Government, June 12, 2012