The Medical Device Tax: House Republicans Are…Right?

October 3, 2013 — 2 Comments
Obama and aides discuss progress on healthcare...

Obama and aides discuss progress on healthcare bill (Photo credit: Wikipedia)

Amid all of the bad ideas floated by House Republicans during the shutdown fight, one seemed to actually be pretty good: repealing the medical device tax.

When Congress enacted the Affordable Care Act in 2010, it included a 2.3% excise tax on the sale of medical devices. As the Center on Budget and Policy Priorities explained in a great primer, the levy applies to a wide range of items, including “surgical gloves, dental instruments, wheelchairs, coronary stents, artificial knees and hips, defibrillators, cardiac pacemakers, irradiation equipment, and advanced imaging technology.” Items bought by consumers — hearing aids, contact lenses, and the like — are not taxable.

The medical device tax was part of a larger package cobbled together to pay for the ACA. As the White House explained last year during a previous effort to repeal the tax:

The medical device industry, like others, will benefit from an additional 30 million potential consumers who will gain health coverage under the Affordable Care Act starting in 2014. This excise tax is one of several designed so that industries that gain from the coverage expansion will help offset the cost.

According to the Joint Committee on Taxation, the device tax will raise $29 billion over the next decade. That’s not huge money in Washington terms, but it’s not small change, either.

It looks to be worth the effort, though. Not because the tax is going to cause great hardship for either manufacturers or consumers. Most industry complaints about the levy — that it costs jobs and stifles innovation — are unconvincing.

Rather, the best reason for scrapping the tax is to protect the ACA from its enemies. Narrow excise taxes — even when somehow correlated with special benefits — are not a good way to fund major social programs. Broad programs deserve broad taxes.

The_Impact_of_the_Medical_Device_Excise_Tax

The impact of the Medical Device Excise Tax upon many small businesses looks to be negative.

Narrow levies — especially ones that seem to target certain individuals and industries — leave nascent social programs chronically vulnerable. Opponents can hobble these programs by attacking their funding base. In the case of the ACA, Republicans will probably continue to fail in their ham-fisted attempts to repeal the program all at once. But they could very well succeed in killing it slowly, chipping away at its funding and using the resulting shortfalls to justify cuts in benefits and coverage.

Today’s defenders of the ACA should do their best to make the program’s funding more transparent. They might take a lesson from Franklin Roosevelt, who understood that a broad-based tax was the best way to protect a broad-based entitlement. “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits,” he explained to a confidant. “With those taxes in there, no damn politician can ever scrap my social security program.”

Ideally, healthcare reform would have been funded the right way from the start. In particular, it should have been paid for using some sort of very broad tax on consumption. (Len Burman, among others, has long championed an earmarked VAT for healthcare.) Such a tax would certainly have been harder to win from Congress than the collection of smaller fees and levies that actually made it into law in 2010.

But an easy win in the short run can become a slow-motion loss in the long run. It’s never to late to start fixing the ACA’s flaws.

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Trackbacks and Pingbacks:

  1. Congressional Research Service Report Sheds Light on Medical Device Tax « The Joy of Tax Law - November 8, 2013

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  2. Shutdown Ends, Tax War Begins Again « The Joy of Tax Law - October 17, 2013

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