Medical Device Taxes

Last week, the Senate voted to repeal a controversial tax found within the Affordable Care Act, or Obamacare. The tax was a 2.3% levy on medical devices, which, once in effect, is expected to generate almost $30 billion in tax dollars. The tax would hit nearly every medical device imaginable—pacemakers, syringes, CT scanning machines, and even the burgeoning field of medical apps for your smartphone. The tax was instituted by supporters of Obamacare in order to offset the massive costs of the program.

The House has also been concerned with this looming tax on medical devices. Last week, The House Energy and Commerce Committee held hearings on the impact that these taxes and regulations will have on mobile apps and its role in the medical community. The committee found a great deal of concern with classifying mobile phones as medical devices under the regulation and control of Obamacare, as Chairman Fred Upton said:

“Arbitrarily applying the definition of ‘medical device’ and the medical device tax to the wireless world could prove disastrous and grind this innovation cycle to a halt. We certainly want to ensure patient safety, but the approach we take must be a smart one.”

There are hundreds of new apps in the marketplace that are doing incredible things within the medical community. Entrepreneurs are creating apps that can detect skin cancer, conduct ultrasounds, and can even convert smartphones into an electrocardiogram recorder. These innovations are extremely important to the economy. Not only do they spur job growth and contribute revenue to the economy, but they are helping to drive innovation in the medical field, hoping to drive healthcare costs down through cheap yet safe, effective devices.

Undoubtedly, like most new taxes, the medical device tax would be a disaster for the economy.  As any student who’s taken an even remedial course in economics can tell you, taxation only discourages the use of the item being taxed, which in turn discourages companies from working to improve and innovate. The medical device sector is a growing sector of the economy. It’s estimated that the market will grow to $440 billion by 2018, growing at a rate of 4.4% per year. Of course, the market will only continue to grow as baby boomers continue to age. The medical device industry currently accounts for 474,000 jobs. Alternatively, if the tax is allowed to remain in place, it’s estimated that over 47,000 jobs could be lost as a result of the tax. Slapping a penalty on such a valuable market seems shortsighted.

The tax is also a huge burden on small businesses. According to a report from the American Action Forum, small to medium sized businesses account for over 91% of all medical device companies. As we talk about often at the American Consumer Institute, across the board taxes hurt smaller businesses the most. Large companies can often hire lawyers and accountants to side-step taxes, or else they’re large enough to take the hit that comes with a new tax. For many small businesses, with profit margins razor thin, that’s simply not an option. When these new taxes and regulations are imposed, business is hurt and investment dries up. According the same report from American Action Forum, venture capital investment in medical device companies is down 50% since 2011—right about the time the new tax was passed.

The Senate vote was a non-binding agreement, meaning we’re far from out of the woods. Democrats are currently looking for an alternative source of funding, meaning a tax somewhere else. The House has yet to take up any measures. If Congress is at all concerned about small businesses, jobs and innovation, they should resist any new forms of taxation, and work to repeal this tax before it has a chance of being implemented.

Zack Christenson writes on digital tech issues for the American Consumer Institute

 

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