Sympathetic Congress has not acted to derail medical device tax

WASHINGTON – As the U.S. Senate and House resolve different plans to cut taxes for American corporations and businesses, the repeal of the medical device tax is missing from the discussion.

Killing the 2.3 percent tax on device sales, a top legislative priority for Minnesota's massive medical technology sector, did not make it into either the Senate or House versions of tax reform.

The absence of device tax repeal from tax reform is yet one more setback for a multimillion-dollar, multiyear lobbying effort by the state's medical device makers and their national peers. It belies the bipartisan efforts of Minnesota's congressional delegation and those of other states to get rid of the tax.

"My CEOs are frustrated," said Scott Whitaker, who runs the Advanced Medical Technology Association (AdvaMed), a powerful medical technology trade group that includes dozens of Minnesota companies. "My industry is frustrated. They are frustrated with the people in Congress who say the right thing when we meet with them. Then, when we leave, they don't do anything about it."

The inability of Congress to deliver a coup de grace to the device tax has become a growing source of ire for device makers that could spill over into the 2018 Senate and House elections.

The industry has fought the device tax since its inclusion in national health care reform in 2010. After a delay to let the device industry prepare, the government collected the tax in 2013, 2014 and 2015. The $5 billion paid to the U.S. treasury was slightly below estimates of what the levy would yield. A Senate and House agreement suspended device tax collection in 2016 and 2017. Without legislative action by year's end, the tax will be levied again beginning Jan. 1.

"We're working with both parties to make sure the tax does not take effect," said Shaye Mandle, chief executive of Medical Alley, the Minnesota trade group that represents hundreds of state med-tech businesses. "Tax reform doesn't appear to be the vehicle."

Critics of the tax complain that it is collected on gross revenue, not profit, a rule that hurts startups and small and medium-size businesses that may not yet be profitable. Device industry lobbyists say the tax has cost thousands of jobs. Citing Commerce Department data, AdvaMed says the device tax led to a reduction of nearly 29,000 medical technology jobs while it was being collected.

Supporters of health care reform say the device tax played only a bit part in industrywide job losses. They point to a 2015 survey by Emergo, a consultancy. It found that more than half of the 685 U.S. med-tech managers who responded had made no significant business changes as a result of the tax.

Earlier this year, device industry lobbyists supported Republican attempts to repeal the entire Affordable Care Act (ACA) because the device tax was included in that repeal. When those attempts failed, the device industry looked to tax reform as a chance for repeal. But Republican leaders of the money committees of the House and Senate, stung by the GOP failure to repeal the ACA, said they wanted to avoid more ACA controversy, Whitaker said.

"They didn't want to deal with the Affordable Care Act in tax reform in any form or fashion," Whitaker said. "They were clear with us about that. So while I wish they would have [included device tax repeal], I'm not surprised that they didn't."

Nevertheless, the Senate eventually repealed the ACA's individual mandate that Americans buy health insurance or pay a penalty as part of its tax reform plan.

There are other vehicles, Mandle said, like including it in a continuing budget resolution to avoid a government shutdown.

Republican Rep. Erik Paulsen of Minnesota has sponsored multiple bills to kill the device tax that drew widespread bipartisan support in the House but foundered in the Senate. Paulsen was not available for an interview, a spokesman said. Paulsen issued a statement to the Star Tribune: "It's very clear that the device tax has killed jobs and harmed innovation in our state, and I will continue working to protect an important Minnesota industry that is producing lifesaving technology for patients."

Asked if Paulsen planned to take legislative steps in the next two weeks to stop the tax from going back into effect, the spokesman said, "Not that I know of, but I'm not sure. He still does have his bill he introduced this year."

Democratic Sens. Amy Klobuchar and Al Franken voted for the device tax as a part of the larger Affordable Care Act in 2010. Since then, both have expressed a desire to kill the tax. Last week, neither senator was available for an interview. (Franken on Thursday announced plans to resign following sexual harassment complaints.) Each issued a statement opposing the device tax, but neither offered specific plans for dealing with it by year's end.

Klobuchar called the device tax "an additional tax on manufacturing, innovation and research at a time when we need manufacturing to be strong. I've introduced legislation that would permanently repeal the medical device tax, and I will continue working to repeal or suspend this tax."

Uncertainty about the future of the tax has left businesses unsettled.

"I've had conversations with members [of Medical Alley] who tell me, 'I have equipment purchases and employment decisions to make,' " Mandle noted.

If the device tax issue bleeds into next year, AdvaMed "will move into [congressional] districts to talk about its impact," Whitaker said. "We're not taking any district off the list. We will look at every place."

People like Paul Van de Water of the Center on Budget and Policy Priorities believe the tax has not been as burdensome as the device industry claims. They also understand that the pressure to kill it remains relentless.

Van de Water favors reinstating the device tax, but he concedes that it might not happen.