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Medical device makers: Jan. 1 tax could cost jobs

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BOSTON (AP) — Medical device makers in Massachusetts and elsewhere are warning of potential job losses and other consequences as the industry's hopes of avoiding a 2.3 percent excise tax fade amid the stalled fiscal cliff negotiations.

The tax, scheduled to take effect on Jan. 1, is expected to raise $20 billion over 10 years. It's one of several taxes imposed on segments of the health care industry to help pay for President Barack Obama's health care overhaul.

Lobbyists for medical device makers say implementation of the tax could jeopardize about 43,000 jobs nationwide in a $64.7 billion industry. They say companies have shed about 6,000 jobs in the past year, some in anticipation of the tax, while others might scuttle expansion plans or cut back on research that can lead to medical breakthroughs.

"It's been a year of uncertainty, and now we are looking at this tax coming at us," said Thomas Sommer, president of the Massachusetts Medical Device Industry Council. "And until it really goes into effect we are not going to know where the reductions in other areas are going to come."

The industry has been trying for much of the past year to persuade Congress to repeal or at least delay the tax, and it still clings to the slim hope that a postponement could be attached to any fiscal cliff deal that might be reached in Washington in the coming days.

In Massachusetts, the nation's second-largest medical device producer behind California, the repeal effort has been embraced by Democrats who are otherwise avid backers of the federal health care law.

U.S. Sen. John Kerry and Sen.-elect Elizabeth Warren were among 17 Democratic senators or senators-elect who signed a letter earlier this month asking Senate Majority Leader Harry Reid to support a delay in the tax. Opposition to the tax was a rare area of agreement between Warren and Republican U.S. Sen. Scott Brown, who opposes the federal health care law, during their recent campaign.

U.S. Reps. Niki Tsongas and William Keating were among Massachusetts House Democrats who backed a Republican-sponsored bill to repeal the medical tax device in June. Democratic Gov. Deval Patrick has also lobbied the White House to hold off on the tax.

Annual sales of medical devices made by Massachusetts companies are about $13 billion and medical devices are the top exported commodity out of the state, Sommer said.

Medical device companies employ nearly 24,000 people in Massachusetts, who earn an average salary of $66,787, according to research by the Advanced Medical Technology Association, a national industry group.

Defenders of the tax say it is perfectly reasonable to ask industries that stand to benefit from the federal health care law to help shoulder the costs of implementing it. That was the precisely the argument Obama made in June when he pledged to veto the House bill if it reached his desk. The White House said medical device makers and industries like it stand to gain 30 million potential new customers who would have access to health insurance under the Affordable Care Act.

John McDonough, a professor at Harvard University's School of Public Health, said the law was designed to be fully paid for and not add to the federal debt.

"Every other segment of the health care industry has said yes, we understand this is important ... and we need to be part of the solution in financing this as opposed to raising the taxes of everyday Americans or adding the cost of this law to the federal debt," McDonough said.

"And it's really only the medical device industry that has said no," he added.

The industry, meanwhile, disputes the notion that the health care law will be a boon for business.

According to Sommer, the heaviest users of medical devices are older Americans already covered by Medicare, not younger people who will gain insurance under the law.

"They are not using coronary stents. They are not having their hips replaced, or their knees replaced," Sommer said. "They're not having the large number of procedures that older people do."

Industry officials add there is no evidence the 2006 universal health care law in Massachusetts, which served as a model for the national plan, led to an increase in sales in the Bay State.

"For us, this isn't a health care policy issue ... this is fundamentally an issue of corporate taxation," said J.C. Scott, chief lobbyist for the Advanced Medical Technology Association. "If Congress intends to have a conversation around corporate tax reform, we think this should be a central component."


 RICARDO ALONSO-ZALDIVAR,Associated Press

WASHINGTON (AP) — New taxes are coming Jan. 1 to help finance President Barack Obama's health care overhaul. Most people may not notice. But they will pay attention if Congress decides to start taxing employer-sponsored health insurance, one option in play if lawmakers can ever agree on a budget deal to reduce federal deficits.

The tax hikes already on the books, taking effect in 2013, fall mainly on people who make lots of money and on the health care industry. But about half of Americans benefit from the tax-free status of employer health insurance. Workers pay no income or payroll taxes on what their employer contributes for health insurance, and in most cases on their own share of premiums as well.

It's the single biggest tax break the government allows, outstripping the mortgage interest deduction, the deduction for charitable giving and other better-known benefits. If the value of job-based health insurance were taxed like regular income, it would raise nearly $150 billion in 2013, according to congressional estimates. By comparison, wiping away the mortgage interest deduction would bring in only about $90 billion.

"If you are looking to raise revenue to pay for tax reform, that is the biggest pot of money of all," said Martin Sullivan, chief economist with Tax Analysts, a nonpartisan publisher of tax information.

It's hard to see how lawmakers can avoid touching health insurance if they want to eliminate loopholes and curtail deductions so as to raise revenue and lower tax rates. Congress probably wouldn't do away with the health care tax break, but limit it in some form. Such limits could be keyed to the cost of a particular health insurance plan, the income level of taxpayers or a combination.

Many economists think some kind of limit would be a good thing because it would force consumers to watch costs, and that could help keep health care spending in check. Obama's health law took a tentative step toward limits by imposing a tax on high-value health insurance plans. But that doesn't start until 2018.

Next spring will be three years since Congress passed the health care overhaul but, because of a long phase-in, many of the taxes to finance the plan are only now coming into effect. Medicare spending cuts that help pay for covering the uninsured have started to take effect, but they also are staggered. The law's main benefit, coverage for 30 million uninsured people, will take a little longer. It doesn't start until Jan. 1, 2014.

The biggest tax hike from the health care law has a bit of mystery to it. The legislation calls it a "Medicare contribution," but none of the revenue will go to the Medicare trust fund. Instead, it's funneled into the government's general fund, which does pay the lion's share of Medicare outpatient and prescription costs, but also covers most other things the government does.

The new tax is a 3.8 percent levy on investment income that applies to individuals making more than $200,000 or married couples above $250,000. Projected to raise $123 billion from 2013-2019, it comes on top of other taxes on investment income. While it does apply to profits from home sales, the vast majority of sellers will not have to worry since another law allows individuals to shield up to $250,000 in gains on their home from taxation. (Married couples can exclude up to $500,000 in home sale gains.)

Investors have already been taking steps to avoid the tax, selling assets this year before it takes effect. The impact of the investment tax will be compounded if Obama and Republicans can't stave off the automatic tax increases coming next year if there's no budget agreement.

High earners will face another new tax under the health care law Jan. 1. It's an additional Medicare payroll tax of 0.9 percent on wage income above $200,000 for an individual or $250,000 for couples. This one does go to the Medicare trust fund.

Donald Marron, director of the nonpartisan Tax Policy Center, says the health care law's tax increases are medium-sized by historical standards. The center, a joint project of the Brookings Institution and the Urban Institute, provides in-depth analyses on tax issues.

They also foreshadow the current debate about raising taxes on people with high incomes. "These were an example of the president winning, and raising taxes on upper-income people," said Marron. "They are going to happen."

Other health care law tax increases taking effect Jan. 1:

— A 2.3 percent sales tax on medical devices used by hospitals and doctors. Industry is trying to delay or repeal the tax, saying it will lead to a loss of jobs. Several economists say manufacturers should be able to pass on most of the cost.

— A limit on the amount employees can contribute to tax-free flexible spending accounts for medical expenses. It's set at $2,500 for 2013, and indexed thereafter for inflation.

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