PoliGraph: Paulsen tax claim is defensible

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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.

The Evidence

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.

The Verdict

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.

SOURCES

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

Employment Effects of the New Excise Tax on the Medical Device Industry, by Diana Furchtgott-Roth and Harold Furchtgott-Roth, September 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

  • http://www.mnpolticalroundtable.com Minnesota Central

    DISAGREE.

    While the headline – Paulsen’s Tax Claim is Defensible – is accurate, the ruling should be “Inconsequential”, not “Accurate”.

    Let’s put this in context … no politicians on either side of the aisle want to be accused of being job killers, AdvaMed and its members have framed the push to repeal the device tax as a jobs and economic growth issue … and the central argument that AdvaMed’s Representative Paulsen claimed that this had to be repealed because of potential loss of jobs … taxes was a minor consideration. Remember when ObamaCare was originally enacted, Wanda Moebius, vice president of policy communications for the Advanced Medical Technology Assn. (AdvaMed), said. “While no tax is ideal, as passed in the House reconciliation legislation the device tax is now estimated at $20 billion, begins in 2013, is deductible from corporate taxes and is structured as a predictable excise tax.

    [Note : the tax dollars is over ten years … or essentially about $2 billion a year and represents the entire industry]

    Remember that AdvaMed’s Representative Paulsen talked about jobs, but not many people read the report.

    If so, then this statement should have caused a pause :

    It is impossible to predict exactly where losses in the medical device industry would occur as a result of the excise tax.”

    Yet, they “suggest” a few possibilities:

    Table 9 describes : “The tax would likely increase the after-tax prices to American consumers between .02% and 2.1% with most price increases around 1%.

    Medical device demand would decline between $0.67 and $6.7 billion annually.

    Industry employment should decline between 2,300 and 23,000.”

    Read that again … it clearly states that as an EXCISE tax, most manufacturers will do just like is done with automobile tires — pass the tax onto the user. What’s wrong with that … if I do not need a knee replacement, I don’t pay … if I need a stint for my heart, I pay — but because of ObamaCare, I now have coverage.

    The report goes on to speculate a number of other scenarios including leading all the U.S. industry employment would decline between 125,052 and 146,218 if there was a 30% drop in business … not likely with MORE citizens being covered. Yet, for some unknown reason, the authors of the report conclude :

    Under reasonable assumptions, the tax could result in job losses in excess of 43,000 and employment compensation losses in excess of $3.5 billion.”

    It’s the “reasonable assumptions” statement that needs to have a PoliGraph analysis.

    Another area for review should be what funding source Republican Representative Paulsen or his Party Managers chose to offset the revenue loss. The EXCISE tax was a real tax … it was “predictable” … for every replacement hip, the tax would be paid by the Manufacturer … instead the GOP offered an offset based on recovery of dollars by recouping over-paid health insurance tax credits granted to families.

    Here’s the background : to receive real-time assistance, the tax credits are paid in advance based on prior-year income. However, if the household’s income increases later in the year, they are responsible for repaying some or all of the tax credits through a process called “true-up.” ObamaCare limits true-up repayments to encourage participation and avoid penalizing individuals and families whose circumstances change mid-year. The GOP offset eliminates these limits — requiring these families to repay everything even when they got tax credits they were eligible for at the time.

    Remember the House Republicans want to cut IRS staff, so compliance review may not be a priority and the premise would be that these families have improved their financial situations such that they no longer are deserving of the tax credit and after-the-fact will return those monies to the US Treasury … this offset has gone from “predictable” to “very unpredictable”.

    The Joint Committee on Taxation estimates that the GOP offset of eliminating the cap on repayments would result in 350,000 fewer individuals receiving health coverage.

    The entire Minnesota delegation voted for Corporate Welfare but at least Betty McCollum explained her reasoning :

    “This Tea Party Republican-controlled House has voted over and over again to eliminate health reform’s protections and benefits, denying millions of Americans access to lifesaving care, including medical devices. The Republican goal is to kill health care reform; my goal is to strengthen it.

    Today, I will vote to send this bill to the Senate, where I know a responsible offset can be found. My two Minnesota Senators are committed to repealing this tax, and they will find an offset that does no harm. Eliminate this tax and strengthen health care for all Americans, that’s my goal.”

    I am not an expert on Global Taxes, so AdvaMed’s Representative Paulsen may be correct … but it’s still only a 2.3% EXCISE tax (by comparison, I believe other Excises taxes are higher) … and let us remember the 10% tanning bed tax … what’s happened with that … 75% of tanning bed operators report that they have seen any decrease in business … and considering the medical communities advising people not to use tanning beds, tells me that that tax had no impact.

    Thus the assertion that if someone needs a heart stint, they will probably opt to have the surgery and pay the meager 2.3% tax on the device (remember that the tax does not apply to the doctor or hospital stay.)

    Further, Devices imported for use in the U.S. are subject to the tax; devices made in the U.S. and exported for use abroad are not subject to the tax … thus there is an incentive for US producers to manufacture devices in the US as opposed to other countries.

    The medical device industry is a very profitable industry. The Top Ten companies that manufacture medical devices had total, company-wide net profits on all of their lines of business of $42 billion in 2010 and $48 billion in 2011.

    This is Corporate Power … and all the Minnesota delegation sold out.

  • John Eckberg

    Repealing the Medical Device Excise Tax

    I am John Eckberg, the media relations director for Cook Group, parent of Cook Medical. Cook Medical is the world’s largest privately owned medical device company. Based in Bloomington, IN, we employ about 10,000 worldwide with 7,500 people who work in the United States. It is important to review some elements of this debate and point out the flawed thinking and rationale that many tax supporters project.

    The Patient Protection and Affordable Care Act (ACA) includes a new 2.3% tax on the U.S. sale of medical devices beginning in 2013. The tax was included to raise an estimated $29 billion in revenue to partially offset the cost of the new, $1 trillion health program – or just 2 percent of the cost of the program. The 2.3 percent tax is imposed on revenue, not profits, so that the tax will be imposed on companies whether their balance sheets have profits or losses. This particular financing measure has been repealed by a strong bi-partisan majority of the House (270-146) and is now awaiting action by the Senate. If allowed to stand, it will have a terrible impact on patient access to life-saving therapies, American jobs, and medical innovation in the United States.

    Despite tremendous Congressional and industry support for repeal, there is some resistance to opening up the ACA for any reason. Some make claims that are inaccurate and do not reflect existing realities about the impact of the device tax. I would like to set the record straight with facts – not opinion.

    The Tax Will Shift Employment Offshore

    Claim: The new tax will not shift employment offshore because the tax does not create an incentive to move production overseas.

    Reality: Even without going into effect until 2013, the device excise tax has already caused companies to lay-off workers, grow device manufacturing jobs outside the U.S., reduce investment in research and development, and eliminate capital investment in new U.S. facilities.

    The device excise tax applies to the sale of medical devices in the U.S. This is on top of a federal tax rate that can crest at 35 percent and state and local taxes. Combining these U.S. taxes with a slow and cumbersome approval process, the excise tax adds tremendous disincentive to companies wanting to stay in the U.S. and compete in the global marketplace. Compare Ireland’s tax of 12.5 percent of profit and Canada’s national tax of about 15 percent of profit for most companies to the existing U.S. tax rate of 35 percent that many companies face. Tack on the new federal tax of 2.3 percent of sales, which equals about a tax of 15 percent on profit for most companies, and U.S. manufacturers in 2013 will pay a tax of about 50 percent for every dollar earned. Companies operating outside the United States will be at a distinct competitive advantage having to pay taxes starting from a significantly lower base. It’s disingenuous to say that that level of taxation will not lead companies to locate new factories and research and development arms outside of the U.S. Foreign manufactures have a clear price advantage by paying a tax bill that can be half what a comparable U.S. firm will pay.

    Academic claims that the tax will not have an impact on U.S. jobs is naïve and does not match reality. Medical device companies have signaled a warning for several months now. Here are just a few examples:

    • Stryker Corporation announced a layoff of 1,000 workers due to the tax.

    • Boston Scientific, a $35+ million research and development center built in Ireland instead of North America;

    • Zimmer to lay off 450 and take a $50 million charge against earnings;

    • Boston-Scientific is girding for a $100+ million charge to earnings in 2013.

    • Cook Medical has shelved plans to build a medical device factory annually in the U.S., a factory just like the plant opened in 2010 on the site of a former tractor factory in Canton, Illinois.

    The ACA Creates No Windfall for the Device Industry

    Claim: The ACA will insure millions of people and therefore device companies will benefit from new business through the sale of more devices.

    Reality: Reducing the number of uninsured will not increase the number of patients seeking medical devices.

    Most of our medical technologies are either used today by patients in emergency situations or by elderly patients who are already insured by Medicare. There will be no windfall for our industry just because more, non-elderly patients have access to insurance. Here’s why: In the emergency room today, patients receive our technologies regardless of whether they have health insurance or not. These devices that are used in this setting include drainage catheters, tracheostomy tubes, intubation devices and myriad of other devices to maintain life. Federal law requires that all patients in need of emergency services be treated regardless of their ability to pay or whether they have health coverage. The ACA does not change this paradigm. Further, the Administration has stated that the demographic group that will most benefit under the ACA are the non-elderly. Young people tend not to be in need of stenting or other vascular or organ repairs for aging related conditions. Most of the patients that use our products are elderly and today they are either treated in the emergency room without regard to health insurance or covered by Medicare that already reimburses hospitals for medical devices. This analysis is borne out in Massachusetts, which has a similar universal health care approach. Internal analysis shows that medical device sales did not increase beyond the increase expected prior to enactment of the Massachusetts new health law.

    Devastating Impact on Medical Innovation

    Claim: Tax will have little effect on medical innovation.

    Reality: The device excise tax will have a real and serious impact on medical innovation in the United States as research, development and manufacturing move overseas as a result of the existing tax and regulatory systems in this country.

    While the medical technology industry has helped to fuel the U.S. economy in recent years, its position as a global leader may erode over the next decade. This will no doubt affect: 1) the ability of Americans to access future break-through medical advancements; and, 2) the growth of U.S. jobs. In the future, China, India and Brazil will experience the strongest gains in developing next-generation products. Without changes to U.S. policies, gains may lead to an exodus of capital, jobs and research away from the U.S. toward these growing markets. (Source: “Medical Technology Innovation Scorecard: The Race for Global Leadership,” PwC, January 2011.)

    The economics of this highly competitive sector are not static and several policies have driven American medical device companies to seek clinical data and launch new products outside of the United States. The new, 2.3 percent excise tax on the selling price of a device will leave companies no choice but to reduce research and development and capital investment in the U.S. It will lead companies to migrate to lower cost tax jurisdictions and tax start-up companies, whether those firms have profits or not.

    The new tax will force companies to limit research budgets to test new products and ideas – the lifeblood of growing device companies. When these resources are curtailed, patients pay the price with more limited medical treatment and a reduced chance of survival. In addition, the tax will limit capital investment in new facilities. Boston-Scientific projects a $100+ million annual hit to earnings from the tax. Cook estimates it will cost $20 million a year – about what we had planned to invest annually in new factories across the Midwest, factories such as the plant that opened two years ago in Canton, Ill., or the expanded plants opened three years ago in Spencer, IN. Wages from those jobs ripple through and strengthen the local community.

    Conclusion

    This new device excise tax will deny patients access to life-saving medical technologies because companies will be forced to move jobs and research facilities overseas. It is fool-hardy to believe that U.S. companies will be able to compete globally when their competitors do not face the tax and regulatory burdens here in the United States. We are already seeing the impact of the medical device tax and this is just the beginning if this tax is not repealed. Americans deserve access to these breakthrough technologies. Patients deserve hope – not new taxes on companies that provide that hope.

  • http://www.greatdiv.com Charlie Quimby

    These projections of between 2,300 and 23,000 jobs are useless.

    In the tanning bed case, there was a lot of uproar about the tax in advance, but the impact once it was put in place seems to be marginal. And that’s in an industry full of small, undercapitalized providers of a highly discretionary service.

    I’d be interested in seeing other, similar cases, where an excise tax actually was put in place and employment clearly declined.

  • David Mindeman

    Please get this right. You cannot take a sales tax and add it to income tax and pretend you have a total tax rate.

    Adding $3 billion from this SALES tax and combine it with actual income taxes (from profits) and then coming up with a total 45% tax rate is just plain…

    LUDICROUS.

    Does anyone check the fact checkers?

  • Dave Mindeman

    I work in a pharmacy and we deal with an “excise tax” which funds MNCare. The 2% tax on goods is really passed on to the health care consumer. When we do inventory we add a 2% value. When insurance carriers calculate their formula, the cost of goods gets the additional 2%. The Medical device industry will see the 2.3% tax as a wash and it will not cost them anything. Considering the price increases that they tack on year after year, no one will even notice that additional. 2.3%

    When you have a study funded by the industry that benefits, be suspicious of the results.