Schafer: Killing tax on devices won't bring back jobs

One of the most reviled taxes in recent memory, the medical device excise tax, seems to be near the end of its short life.

Enacted as part of the Affordable Care Act, it's been under fire from the start. And the consensus seems to be that getting rid of the tax is one tweak to the health reform law that can get done in Washington.

It's not easy to predict the day of repeal, but it is easy to predict what will happen to the big medical device makers once the tax is gone. And that's mostly nothing.

Forget what you may have read. There's no reason to expect a burst of hiring. There will be no surge of research and development on those new lifesaving devices the industry's lobbyists made sure we've all heard about.

Those tax savings will be going to the bottom line. Maybe they will be used to buy back stock and boost reported earnings-per-share even more.

That isn't the industry's message, of course. But in fairness, it would be tough to rally bipartisan support for more stock buybacks.

The trade group AdvaMed is instead urging repeal to "save 43,000 American jobs" and "billions for investments in tomorrow's treatments and cures." There's a chance the leaders of this group even believe such rhetoric.

The nonpartisan Congressional Research Service sensibly concluded earlier this month that it remains "challenging to justify."

There is evidence that the big players in the industry tried to offset the tax by reducing payroll and other costs once it was implemented in 2013. The Congressional Research Service, however, concluded output and employment in the industry fell by no more than two-tenths of 1 percent due to the tax.

But here's the interesting thing: When the tax goes away even those jobs aren't coming back, at least not at the companies with the biggest payrolls.

For a clue on how these big companies will act, it may be useful to go back 10 years and look at what happened after passage of the American Jobs Creation Act of 2004.

One of the major provisions of this law was a tax holiday on corporate profits abroad that were subject to additional U.S. taxes when brought back home.

These companies were explicitly required to invest the money in research and development and other productive activities, as lawmakers appeared to have bought the arguments of the lobbyists. That's why this tax bill routinely got called a jobs bill. One study even forecast a gain of 660,000 jobs in 2005 and 2006.

That turned out to be wildly optimistic.

The drug giant Pfizer had the single largest share of repatriated profits, bringing home about $37 billion. Pfizer then went on to cut about 10,000 U.S. jobs in 2005 and 2006. Hewlett-Packard Co. said it was going to repatriate $14.5 billion the same summer the company announced plans to cut 14,500 jobs and freeze the pension plan. And so on.

Instead of hiring, most of the companies bought back stock.

This one-year tax holiday was a boon to tax policy researchers, and none of their studies concluded the tax holiday achieved what Congress intended. There was even an intriguing little study that concluded big companies earned a return of 22,000 percent on the money they spent lobbying Congress for the tax holiday. That sure beats investing in research and development.

So it wasn't even about saving on taxes. In effect, all Congress did was give up tax revenue to make it easier for companies to meet the earnings-per-share estimates of securities analysts.

And now the Street's expectations for the medical device industry are already shifting up, even though Washington politicians are only talking about killing the device tax.

Medical device companies, including Minnesota stalwarts Medtronic and St. Jude Medical, should see profits rise 1 percent to 5 percent a year with the end of the device tax, according to the Wall Street firm Sanford C. Bernstein & Co.

Analysts understand how business really works.

St. Jude Medical was one of the companies that reduced costs in 2012 just before the tax went into effect, taking out about 300 jobs. Getting more efficient in the face of a new tax is just one reason St. Jude's management team is so well-regarded among investors.

The guess here is that this whole dynamic of earnings expectations and return on investment never comes up when Congress debates the device tax. What looks to be important in Washington is that an unpopular tax can get killed with bipartisan support during an era of political gridlock.

Of course, the initiative to the kill the tax is bipartisan principally because the medical device industry tends to be clustered in states with Democratic lawmakers, like our own Sens. Al Franken and Amy Klobuchar.

It's good politics. So good that when either senator urges for repeal, you can bet we won't hear about anyone getting his old job back at St. Jude Medical.