Killing the medical device industry

Barack Obama

President Obama speaks about the economy in a visit to Knox College in Galesburg, Ill., on July 24. (Kevin Lamarque/Reuters)

Politicians across the board jabber about job creation, the need for more science, technology, engineering and math (STEM) workers and the importance of our manufacturing base. Yesterday the president proclaimed, “The countries that are passive in the face of a global economy, those countries will lose the competition for good jobs. They will lose the competition for high living standards. That’s why America has to make the investments necessary to promote long-term growth and shared prosperity — rebuilding our manufacturing base, educating our workforce, upgrading our transportation systems, upgrading our information networks.” Swell, so why is he promoting legislation that undermines all that?

In particular, I am thinking about the medical-device tax in Obamacare. Henry Miller at Forbes writes, “The sector employs 400,000 Americans directly and is indirectly responsible for almost 2 million more that supply and support the highly skilled workforce. Most important, its products are essential elements of modern medical care, including everything from CT scanners and pacemakers to blood pressure cuffs and robots used by surgeons.”

But all of that is in jeopardy. The medical-device industry is being ravaged by unwise public policy, including a devastating 2.3 percent excise tax took effect on Jan. 1 as part of Obamacare. This tax, which has already required the payment of more than $1 billion by device manufacturers, is especially pernicious because it is assessed on gross sales, not profits. To put this in perspective, imagine that you’re a manufacturer of medical devices and had a profit of $100,000 on sales of $1 million after all your costs and expenses — everything from materials and labor to research. The excise tax would be $23,000, wiping out almost a quarter of your profits.

This is mind-boggling when you realize, as Miller points out, “it can take from $70 million to $100 million in total sales before these businesses make their first cent of profits. Nevertheless, they would have to pay the excise tax on their revenues.” Moreover,  medical-device companies are generally small businesses (Miller says 80 percent have fewer than 50 employees).

Rather than run around the country giving useless speeches about “rebuilding our
manufacturing base, educating our workforce, upgrading our transportation
systems, upgrading our information networks,” the president should support the large bipartisan majority that wants to dump the medical-device tax.

And if he really wanted to do something to help those and other start-ups, he’d make a deal on tax reform. But that’s getting way ahead of ourselves. At the very least, he should abide by the medical maxim “first, do no harm.”

 

 

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