This is why the medical device tax is in so much trouble

October 14, 2013

I got an e-mail a few minutes ago from John Eckberg, the media relations director at Cook Medical, the nation’s largest privately owned medical device company.


Eckberg was plugging a map showing the locations of companies and employees who want the medical device tax repealed.  "We at Cook Medical created this map from 8,300 signatures at www.no2point3.com, plotting their locations on the map," he wrote.

What these maps show is that it wasn’t lobbyists who convinced leaders to repeal this tax!  No, it was a horde of medical device company executives beating a path to Senators’ doors (how otherwise to explain two Senators from Colorado, Washington, Oregon and elsewhere – Sheldon Whitehouse for goodness sake, Elizabeth Warren by golly) that led to the political imperative to repeal this tax? That’s the truth.

He's right. The lobbyists helped, of course. But the reason the lobbying effort has been so successful is that there are a lot of medical device companies in this country, and they're spread out across a lot of states and a lot of cities, and that's given them pull with a lot of different members of Congress.

The other reason the medical device tax is weak is it hits a very specific, very organized industry that can mount a very aggressive, and reasonably persuasive, campaign against it. Eckberg attached a document filled with hundreds of testimonials from CEOs and ordinary workers at medical device firms. It's worth reproducing some of them because this is what members of Congress are hearing all day.

Here's Kevin Mosher of DFINE in San Jose, Calif.:

We are a start up medical device company, and began selling product in May 2008. We will finish with approximately $30 million in revenues by end of year 2012, and will be profitable within a year. We have gone from 0 - 163 employees. The device tax would have cost us an addl $2 million to fund the company to this point because it is a top line tax. That $2 million represents precious, vital capital for a formative company in hiring employees and building the business to last.

Micah Stott from Arizona:

Army Veteran, Bronze Star recipient, changed careers to medical device and was laid off 8 months into career because positions were eliminated to try to remain profitable. Moved to Phoenix for this job, three children and wife is 9 months pregnant with fourth child. Trying to find work in this economy but other companies also laid off employees so there are less positions available.

Michael Shaffer from Vendition Partners in Atlanta:

We have lower net margins than competitors solely due to the our choice to keep prices competitive while keeping 100% of sourcing and production domestic. To put that in perspective, for one of the products we’ll be releasing for 2013 my domestic cost per unit to do this runs in the high $40s per unit. My total cost in having it manufactured offshore, including logistics, runs about $18 per piece. That cost goes even lower if production runs become larger. By doing nothing but moving my production offshore we immediately see around a 65% savings per unit - which becomes all margin.

 

We had made the decision to forego the additional profit in order to preserve and expand jobs domestically and do our part in getting the economy working again, small as that may be. With this new tax we are faced with 2.3% on gross sales of the products. So for a product we’re sell- ing for $90 that is $2.07 additional cost for every unit. If our margin on that piece after production costs, shipping to client, commissions to sales force, etc...is running about 26% currently it would be about $23.40 on the sale. $2.07 is a 9% tax on our net margins. For one of our products it’s 38%. If we move production of that same product overseas we save in the ballpark of $30 per unit in per unit costs. That is still a 100+% increase in profits post excise tax.

Andre DiMino of ADM Tronics in New Jersey:

I have a small medical device manufacturing company here in NJ. We are struggling to keep good manufacturing jobs here in NJ and the US. The new Medical Device Excise Tax being imposed on Jan. 1, 2013 will be a DEVASTATING blow to our company. Since it is based on gross revenues, and our profits are already so squeezed by foreign competition, this tax is a SEVERE hardship - especially to a small company like ours. It also decimates potential investment in new technologies we are developing. I have several patents on new medical devices, which could bring more jobs to NJ and the US, but investors are fleeing the medical device area because of the unfavorable conditions we are facing, like this new tax. PLEASE, Senator, help me, my employees and our families by repealing this new, unfair and burdensome tax. It is already a struggle to keep our company going as a manufacturer in NJ and the US - this new tax could be the death knell for us!

The point isn't that these testimonials should be read uncritically. No industry wants to be taxed. No company has an incentive to say, "Well, I'd prefer you don't tax us, but in truth, it probably won't matter that much."

Rather, the point is that the medical device tax isn't just in trouble because the medical device industry is rich. After all, rich people are rich, but no one is seriously talking about repealing Obamacare's tax increases on them. Rather, the medical device tax hits a geographically diverse, highly organized and reasonably sympathetic industry that's able to make a set of arguments (offshoring, job creation, innovation) that legislators find compelling.

And these arguments, on some level, are compelling. I don't think the medical device tax will have a devastating effect on the medical device industry. But if you were designing optimal tax policy you'd never design a medical device tax. It will cost some jobs. It will force some firms to go under and others to offshore jobs. It would be much better to tax something broad that we want less of, like carbon or high-speed financial transactions, then something narrow that we want more of, like medical device companies.

Those aren't swaps Congress is considering, of course. But they make the right point, which is that the question with repealing the medical device tax isn't so much "yes or no," but "what replaces it, if anything?"

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Ezra Klein · October 14, 2013