The 2.3 percent medical device tax violates sound tax principles and negatively affects various segments of the healthcare industry, according to a new report released Thursday, Oct. 11, by the San Francisco, California-based Pacific Research Institute.
“In recognition of the medical device tax’s many flaws, Congress has twice implemented a moratorium that suspended the tax. While the moratorium is a welcome reprieve from the tax’s pernicious effects, it is only temporary,” wrote Wayne H. Winegarden, PhD, the author of the study. “Ideally, Congress should repeal this tax to eliminate the uncertainty surrounding its possible re-imposition.”
In July, the House of Representatives voted to repeal the tax, which was implemented as part of the Affordable Care Act. Many industry leaders, including The Medical Imaging & Technology Alliance (MITA), have opposed the tax. As of October, the measure in under consideration in the Senate, according to the report.
Winegarden laid out ways the device tax violates core tax principles.
1. Tax neutrality
At its core, this principle means taxes should not choose winners and losers, according to Winegarden. He added that “tax neutrality is important because economic growth is best promoted when investors undertake projects based on their economic merits, not based on minimizing their tax liabilities.”
The tax is created in a way that only taxes certain sets of medical devices, Winegarden noted, which creates incentives for manufacturers to identify loopholes and exemptions to beat out their competitors. Some device makers will be able to absorb the costs or recoup lost revenue, while others may not—forcing them to lose money.
2. Tax simplicity
Taxes should be as easy as possible to comply with and simple for the government to administer, Winegarden wrote. Complex taxes create confusion and are proven to be costly for the government to administer while also disproportionately hindering smaller industry taxpayers.
For example, the fundamental complexity of processing and paying these taxes forces firms to expend additional resources to assure compliance. For smaller medical device firms, he noted, an extra person dedicated to the tax department “likely” means one less scientist in the research and development lab. Bigger companies have more resources and may re-allocate or easily hire an individual.
3. Tax consistency
“When taxes are applied consistently, taxpayers know, with certainty, how their actions will impact their future tax liabilities,” Winegarden wrote.
Conversely, inconsistent taxing allows Congress to make unpredictable changes that can materially affect a business. This also creates random economic beneficiaries based on the tax laws and not the economic merits, according to the report.
4. Tax transparency
Winegarden argues that tax transparency is needed for both legitimacy and to ensure other desired tax principles to not crumble over time. If a tax is transparent it is less likely to undergo constant change and less vulnerable for individuals or industries to carve out loopholes for their benefit.
The medical device tax violates this by hiding within the cost of products—obscured from the consumer, Winegarden noted.
“Eliminating the medical device tax will help encourage medical innovation and improve the quality of care provided by the U.S. health system,” he concluded.