Congressional Research Service refutes device tax claims, puts tax foes in a bind

WASHINGTON – Projections from the oft-cited Congressional Research Service say the medical device industry will pass most of the cost of a politically embattled tax on to consumers.

The 2.3 percent sales tax on medical devices, which the government started collecting in 2013, will cost device makers very few jobs and research dollars, the research service — known as CRS — said in a detailed report it recently updated.

The latest version of the 2014 report came just days after Republican Rep. Erik Paulsen of med-tech-rich Minnesota introduced a bill to kill the tax and just days before Democratic Sens. Amy Klobuchar and Al Franken of Minnesota signed on to a device tax repeal bill in the Senate.

As the attempt to end the tax moves forward, most of the Minnesota delegation and hundreds of others in Congress who favor repeal face a conundrum.

"With this study on the table, it's a tough political bind," said Don Kettl, dean of the University of Maryland's School of Public Policy. "The CRS is highly respected and ruthlessly nonpartisan. They don't go looking for fights to pick."

They clearly have found one with their treatise "The Medical Device Excise Tax: Economic Analysis."

House and Senate members regularly use CRS data to justify their legislative positions. But when it comes to the medical device tax, which is expected to raise $29 billion over 10 years, CRS has shot down almost every charge made by opponents.

CRS refutes the claim that employers will take jobs offshore to avoid the tax, since "both domestically manufactured and imported medical devices are subject to the excise tax."

The report's conclusions that devicemakers will raise prices to cover the tax could even lead some to ask whether device makers should lower prices if the tax goes away.

The med-tech industry has spent millions of dollars lobbying to repeal the device tax since it passed Congress as part of the Affordable Care Act in 2010. The industry has gone to great lengths to discredit the CRS report as an intellectual exercise with no basis in the day-to-day realities of the medical device business.

"Characterizing it as a report is a stretch," said Shaye Mandle, CEO of LifeScience Alley, a trade group representing hundreds of Minnesota med-tech companies. "There is no defensible data to dispute anything. Clearly, whoever's writing this doesn't know the medical device industry."

Mandle believes the device tax will be repealed this year. He said that he and others in the device industry "are obviously talking to members of the House and Senate" to reinforce points that the CRS report disputes.

AdvaMed insists that "the idea that the tax can easily be passed on in the form of price increases is simply wrong" because hospitals and other major purchasers will contest them. The tax hurts small med-tech companies that are not yet profitable because it is on gross revenues, AdvaMed says, and for companies that do earn money, the 2.3 percent tax on revenue amounts to "one dollar in every three of industry profits."

The projected loss of just 1,200 jobs by CRS is equally ill-conceived and contradicted by what has already happened, the trade group adds. A survey of AdvaMed members "reflected 14,000 direct job losses and 19,000 more in foregone hiring," AdvaMed President Steve Ubl said.

"I don't know if they [CRS] talked to any medical device companies," Ubl said. "We are reaching out to members of Congress to rebut the study."

Daniel Starks, CEO of Minnesota-based St. Jude Medical Inc., noted in a statement to the Star Tribune that "as long as the medical device tax is in place, St. Jude Medical will need to continually evaluate all areas of our business to find at least $50 million annually to pay for the tax. If the medical device tax is repealed, it will allow us to create jobs, build infrastructure and expand our investment in innovation."

Emergo, a leading consultancy that annually surveys hundreds of U.S. device company executives, found that last year 14 percent of its survey respondents cut jobs because of the device tax, while 29 percent raised prices to compensate and 57 percent did nothing.

Device prices at the University of Minnesota health system grew "here and there" over the past three years, a spokeswoman said, but purchasing officials at the U could not say if this was due to the device tax.

Supporters of the medical device tax point to continuing strong profits and research spending in the device industry among both large and small companies.

Still, supporters of the tax also recognize that even if the CRS projections are sound, they guarantee nothing when 250 members of the House already have signed on to repeal the tax and 79 members of the Senate voted for a nonbinding budget resolution recommending repeal in 2013.

"It's the usual political situation," said Paul Van de Water of the Center for Budget and Policy Priorities. "Minnesota, Indiana and Massachusetts seem to be the lead states where the industry has influence. Politicians from those states strongly push repeal, and their colleagues don't want to take them on."

Paulsen, whose district includes many med-tech businesses, has led the charge against the tax in the House. He was not available for an interview with the Star Tribune. Instead, he issued a statement that dismissed the CRS findings in favor of anecdotal evidence.

Neither Klobuchar nor Franken directly addressed a Star Tribune request for comment on the CRS analysis. Both issued statements reiterating support for repealing the device levy.

Klobuchar called it "an additional tax on manufacturing, innovation, and research at a time when we need manufacturing to be strong."

Franken said he supports "repealing the tax with a responsible offset because it discourages investment in the industry, creates added barriers for smaller manufactures and start-up companies, and poses a real risk to long-term economic growth."

Like Van de Water, Kettl believes the biggest stumbling block to repeal will be finding another source of revenue or new savings to offset the loss of device tax revenues.

A revenue fix that everyone can agree on will be elusive, Kettl predicted. Groups who want to repeal the tax as a first step to dismantle the Affordable Care Act also face a chilly reception from the White House, where President Obama has in the past threatened to veto a repeal bill.

Meanwhile, CRS, which is by reputation politically agnostic, has not backed down. The January version of its device tax report is as strong as ever. It continues to question some of the logic of the tax. "The connection between the taxes and benefits … is very loose compared to the link between gasoline taxes and highway construction or taxes on firearms and ammunition and wildlife preservation," the report says.

But it also points out that half of all medical devices are exempt from the tax, that the tax itself is a small percentage of the sales price relative to other sales taxes and that the deduction of device tax payments from overall income drives down the effective tax rate from 2.3 percent to 1.4 percent for "profitable firms." Raising device prices, CRS added, could offset the medical device tax burden on corporations almost completely.

The medical device tax may eventually be repealed, said the University of Maryland's Kettl. But the report will cast a cloud over any legislative action.

"CRS, after all, works for Congress," Kettl explained. "Sometimes the staff produces inconvenient findings."