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The Affordable Care Act imposes a tax on medical devices; the idea is to levy new fees on various medical industries and, through the law’s expansion of Medicaid and federal tax credits, it would help low- to moderate-income people buy private insurance. The medical device tax has become very unpopular; it seems to have garnered bipartisan disdain and there is substantial support for its repeal. In fact, it was the focus of intense negotiations during the recent government shutdown.
The medical industry faces an uphill battle because opponents need to find a way to replace the approximately $30 billion in revenue that the 2.3% tax on device purchases is supposed to raise over the next 10 years. The 2.3% excise tax is on the sale of any taxable medical device by the manufacturer or importer of the device starting in 2013. The tax does not apply to eyeglasses, contact lenses, hearing aids, wheelchairs, or any other medical device that the public generally buys at retail for individual use. Sales for further manufacture or for export are also tax-exempt. The Internal Revenue Service (IRS) published proposed regulations in February 2012 and final regulations in December providing detailed guidance on how the tax will be applied. The IRS has also issued interim guidance for determining the price of a taxable device and providing transition relief from penalties for failure to pay the tax. If the tax is repealed, Congress will have to find another source of revenue to replace $30 billion, an almost insurmountable task.
The medical device industry has fought this provision and has continued to oppose it, even after its cost was scaled back to about half of the original proposal. The Joint Committee on Taxation indicated that repealing the tax would undercut health reform in at least two ways. Pay-as-you-go procedures would require Congress to offset the cost of repeal by increasing other taxes or reducing spending; one likely target would be the provisions of the Affordable Care Act (ACA) that expand health coverage to 27 million more Americans. Also, repealing the tax would encourage efforts to repeal other revenue-raising provisions of the ACA, which in turn would either require still more painful offsets or increase the budget deficit (if Congress failed to offset the cost).
Sen. Amy Klobuchar (D-MN), whose state is home to many medical device makers, indicated that repealing the tax will be part of negotiations to forge a budget agreement and part of the debate over how to restructure the tax code. With the next round of debt ceiling negotiations approaching, the medical device tax may again be the subject of much debate.