Point of View

Medical device tax bad for business, jobs

March 14, 2014 

We are proud of the leading role that hospitals, universities and companies play in making North Carolina a hotbed of innovation, bringing high quality health care not only to the state but also to the nation and the world.

One of the key contributors to a vibrant health care community is the medical technology industry, which is responsible for developing a steady stream of innovative products that save lives and increase productivity in health care and generate good, high-paying jobs in North Carolina.

In North Carolina, the medical technology sector directly employs more than 24,000 people, supports nearly 80,000 jobs across the supply chain and contributes $4.6 billion to our state’s economy. The medical device excise tax is a 2.3 percent federal tax on domestic sales of medical devices over and above the existing federal corporate tax rate on business. This tax requires device manufacturers to pay the Internal Revenue Service, in aggregate, an estimated average of $194 million per month. These payments are creating a daunting hurdle for both established manufacturers and startups.

Unsurprisingly, the tax has attracted intense opposition from both Democrats and Republicans. In March 2013, the U.S. Senate voted overwhelmingly to repeal the tax, with 79 voting in favor and only 20 voting against. The following September, Sen. Kay Hagan (D-N.C.) became the 36th co-sponsor of S232, a bill to repeal the medical device tax. She joined five other Democratic co-sponsors and 31 Republicans including Sen. Richard Burr (R-N.C.).

The tax has had far-reaching, devastating effects on the U.S. economy. While some corporations have voiced concern that the device tax will “impact the ability … to invest in R&D, grow operations and in the case of startup and emerging operations, to continue operating without raising more capital or increasing time to market,” others have been forced to lay off thousands of people in direct response to the tax.

A recent survey examining the first-year impact of the medical device tax found that it has led to employment reductions of approximately 14,000 industry workers and foregone hiring of 19,000 workers. According to the survey, the total impact of the tax on industry employment has been approximately 33,000 jobs.

As an employer with more than 3,600 employees in North Carolina, I can attest to the harmful effect of this burdensome tax. Payments to the IRS have prevented us from investing in everything ranging from research and development to jobs.

Equally worrisome is the effect the device tax is having on North Carolina’s small businesses that play such a critical role in our state and local economies. In proportion to their larger counterparts, small- and medium-sized companies are less likely to report substantial sales in international markets, which are exempt from the tax.

Some claim that the device companies will receive a “windfall” due to the expansion of health care under the Affordable Care Act. However, evidence from implementing the “Romneycare” plan in Massachusetts in 2007 – which was, in many respects, a blueprint for the development of the Affordable Care Act – demonstrates that this idea of a “windfall” is false. For example, according to data from the National Electrical Manufacturers Association, the sale of medical imaging equipment in Massachusetts dropped more significantly than in the rest of the country after “Romneycare” (beyond the impact of the recession) and has yet to recover.

Evidence that the medical device tax is bad policy can be found across the country and in our own backyard. The elected leaders in North Carolina who have spoken out against the device tax should be commended, but more is needed. There are bipartisan efforts underway in both the House and the Senate to get this ill-conceived tax off the books. We need Congress to go beyond saying they support repeal of this onerous tax. It’s time to roll up our sleeves and find a bipartisan solution.

Gregory Sorensen, M.D., is chief executive officer of Siemens Healthcare North America.

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