Congress typically levies excise taxes to discourage harmful behaviors such as smoking, alcohol consumption and gambling. While those may make strategic sense, it’s puzzling when there is a decision to tax a positive behavior — that is, investment in research and development (R&D) to improve patient health. Yet, that’s what happened with the enactment of the medical device tax in 2012.
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Congress typically levies excise taxes to discourage harmful behaviors such as smoking, alcohol consumption and gambling. While those may make strategic sense, it's puzzling when there is a decision to tax a positive behavior — that is, investment in research and development (R&D) to improve patient health. Yet, that's what happened with the enactment of the medical device tax in 2012.
The 2.3 percent excise tax was originally included as part of the Affordable Care Act (ACA) but revenues from the tax have not met projections. Instead of helping pay for ACA subsidies, it had a number of adverse effects — namely threatening the vitality of an economically sound U.S. industry and stifling medical innovation across the spectrum of academic, public and private institutions. Both sides of the aisle recognize the need to correct this course, which is why repeal efforts have growing bipartisan support.
Fortunately, patients, providers and manufacturers were able to breathe a sigh of relief in 2015 when legislation to suspend the tax for two years passed with broad bipartisan support. However, with its suspension set to sunset at the end of 2017, the tax is again looming and threatening to slow down just as innovation has been picking up.
The medical device tax — a tax on gross sales, not profits — threatened small and large companies and nearly devastated an industry that employs more than 400,000 U.S. workers, generating approximately $25 billion in payroll, paying out salaries that are 40 percent more than the national average and investing nearly $10 billion in R&D annually.
In Connecticut, the medical technology industry directly supports an estimated 7,600 jobs and contributes $4.1 billion to the total economic activity. Full repeal of the medical device tax would allow the state's med-tech industry to continue to contribute to our nation's economic strength and global competitiveness.
A recent survey of the largest manufacturers of medical imaging equipment, representing together in excess of 60 percent of the industry's sales, confirms that Congress' suspension of the device tax has allowed them to elevate their operations. In fact, 71 percent of companies are likely to hire more U.S.-based employees as a result.
This investment in human capital delivers diverse skills, knowledge and experience that are important when trying to bring forth the latest medical technology innovation. To date, the industry has created portable imaging equipment for prenatal care that reaches expecting mothers in remote or previously inaccessible areas, where larger, stationary machines could not have gone. It has given us pacemakers that allow our parents and grandparents with heart disease to live longer, richer lives.
Innovations like these can take decades to transition from an interesting idea into a powerful tool. Unfortunately, R&D budgets are viewed as discretionary, even though they are the bedrock of invention, because the fruits they bear do not ripen overnight and are often the first cut when resources are threatened.
It is imperative to encourage the 79 percent of manufacturers that have confirmed that they will likely invest additional resources in R&D, as well as expand the number or scope of investigative clinical activities and partnerships with universities or other providers, as a result of device tax suspension. This investment is essential to validating new technologies, products or applications and bringing them to market quicker to treat patients. But the only way to ensure manufacturers are able to commit resources as planned is to fully repeal the device tax once and for all.
There is no question that this tax is a threat to the medical and economic benefits this industry provides for our country. We must urge Congress to complete what it began with the device tax suspension. The stakes are too high. We can't continue to suffocate an industry whose job is to breathe life into our nation.
Gary D. LeBeau was a Connecticut state senator from 1999-2015 during which time he served as co-chair of the Commerce Committee. He also served as co-chair of the National Council of State Legislators Commerce and Labor Committee from 2010 to 2014 and first chairperson of the state legislature's bipartisan Manufacturing Caucus from 2012-2015.
