Pharmaceutical companies pay significantly less in taxes than any other U.S. industrial sector despite charging higher prices for drugs in this country than overseas, according to a new congressional study.
The study comes as Congress prepares to again confront the cost of drugs, responding to complaints that medicine is cheaper in Canada and Mexico and that Medicare does not cover the cost of most drugs for seniors.
Drugmakers paid an effective U.S. tax rate of 16.2 percent from 1993 to 1996, according to the nonpartisan Congressional Research Service. By comparison, all other major industries, including mining, construction, services, retail and agriculture, pay an average tax rate of 27.3 percent.
American consumers also pay more for the same drugs than people in much of the developed world. For example, prices for five common prescription drugs in the congressional district of Rep. Fortney "Pete" Stark (D-Calif.) are twice as high as they are in Canada and Mexico.
"It is totally unfair for U.S. taxpayers to subsidize drug companies to develop products, and then have those new, lifesaving products sold for a cheaper price in rich foreign nations," said Stark, senior Democrat on the House Ways and Means health subcommittee, who requested the study.
A White House budget official, Daniel N. Mendelson, said the pharmaceutical industry's higher profits and lower taxes could lead to price controls, although he said there are no plans to propose such a solution.
But prescription drugs are sure to be in the political cross hairs when Congress reconvenes in January.
Although drugs are an essential tool of medicine, Medicare does not cover them for patients outside a hospital. And drug companies oppose adding a Medicare drug benefit, arguing that it could lead to price controls.
Many Democrats, including Stark and President Clinton, are pushing for a universal prescription drug benefit for Medicare recipients, while many Republicans are backing a private-sector alternative focused mainly on the poorest elderly.
Stark also is drafting legislation to deny tax credits to companies that charge more in the United States than in other countries.
Mendelson said the administration's proposals have not gone beyond the Medicare benefit, but said it is his personal view that "if we fail to enact it, there will be pressure on the price side. There's a lot of pressure building up. Seniors are a group that is strong politically."
Drug companies are a force in campaign fund-raising, contributing $13.1 million in the 1998 election cycle to House and Senate candidates, according to the Center for Responsive Politics, a campaign finance watchdog group. Pfizer Inc. was the top donor with $1.13 million, followed by Bristol-Myers Squibb at about $820,000 and Eli Lilly & Co. at $787,000.
The overall health industry, of which drug companies are a part, contributed $58.8 million in unregulated "soft money" to both political parties during the 1998 election. And drugmakers spent $71 million to lobby Congress that year.
The Congressional Research Service study shows that the pharmaceutical industry in 1996 was able to reduce its tax bill by almost $3.8 billion through a variety of legal credits. That is 50 percent less than the industry's tax before the credits were applied to $24.8 billion in taxable income.
Meanwhile, after-tax profits for drug companies as a percentage of sales averaged 17 percent from 1994 to 1998, compared with 5 percent for all other industries.
Foremost among the tax breaks is the research and development tax credit, which pays 20 percent of qualified research costs. Congress just renewed the credit for five more years and extended it to Puerto Rico.
Other tax provisions that benefit drug companies, the study found, are a credit intended to offset foreign taxes, another for companies located in Puerto Rico that ends in 2006, one for drugs developed for rare diseases and a research expenses deduction.
For the pharmaceutical industry, these tax breaks are an investment in better, longer lives. In 1999, the industry expects to spend some $24 billion on R&D and estimates that a single drug can cost $500 million to bring to market.
"We've earned those tax savings," said Jeff Trewhitt, spokesman for the Pharmaceutical Research and Manufacturers of America. "We are one of the most innovative, productive industries in this country. You see millions of patients benefiting from this research."
As for the higher U.S. drug costs, Trewhitt said many developed nations have strict price controls and government mandates, which the industry contends do not help poorer people but can slow down drug availability.
He noted that only one out of five drugs ultimately wins approval for sale, driving up the cost. "The real kicker is that until the end of the process, you don't know whether you're going to have a product or not," Trewhitt said.