Tax on medical devices causing economic trouble

Published: Thursday, May 10 2012 12:00 a.m. MDT

BLOOMINGTON, Ind. — Bill Hewlett and David Packard, tinkering in a California garage, began what became Hewlett-Packard. Steve Jobs and a friend built a computer in the California garage that became Apple's birthplace. Bill Cook had no garage, so he launched Cook Medical in a spare bedroom in an apartment in this university town. Half a century ago, in flight from Chicago's winters, he settled here and began making cardiovascular catheters and other medical instruments. One thing led to another, as things have a way of doing when the government stays out of the way, and although Cook died last year, Cook Medical, with its subsidiaries, is the world's largest family-owned medical devices company.

In 2010, however, Congress, ravenous for revenues to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenues — which generally amounts to about a 15 percent tax on most manufacturers' profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes. The 2.3 percent tax will be a $20 billion blow to an industry that employs more than 400,000, and $20 billion is almost double the industry's annual investment in research and development.

An axiom of scarcity is understood by people not warped by working for the federal government, which can print money when it wearies of borrowing it. The axiom is: A unit of something — time, energy, money — spent on this cannot be spent on that. So the 2.3 percent tax, unless repealed, will mean not only fewer jobs but also fewer pain-reducing and life-extending inventions — stents, implantable defibrillators, etc. — which have reduced health care costs.

The tax might, however, be repealed. The medical device industry is widely dispersed across the country, so numerous members of Congress have constituencies affected by developments such as these:

Cook Medical is no longer planning to open a U.S. factory a year. Boston Scientific, planning for a more than $100 million charge against earnings in 2013, recently built a $35 million research and development facility in Ireland and is building a $150 million factory in China. (Capital goes where it is welcome and stays where it is well-treated.) Stryker Corp., based in Michigan, blames the tax for 1,000 layoffs. Zimmer, based in Indiana, is laying off 450 and taking a $50 million charge against earnings. Medtronic expects an annual charge against earnings of $175 million. Covidien, now based in Ireland, has cited the tax in explaining 200 layoffs and a decision to move some production to Costa Rica and Mexico.

Already 235 members of the House of Representatives — 227 Republicans and eight Democrats — are co-sponsors of a bill to repeal the tax. Twenty-three Republican senators but no Democratic senators favor repeal. The Democrats who imposed this tax on a single manufacturing sector justified this discrimination by saying Obamacare would be a boon to the medical devices industry because, by expanding insurance coverage, it would stimulate demand for devices. But those insured because of Obamacare will be disproportionately young and not needing, say, artificial knees. And well before Obamacare, the law had long required hospitals to provide devices to the needy who are uninsured.

Unsurprisingly, Sen. Scott Brown, R-Mass., supports repeal of the tax. Surprisingly, so does his opponent, Elizabeth Warren, an impeccably liberal Obamacare enthusiast who notes that in Massachusetts the medical devices industry has 24,000 employees and accounts for 13 percent of the state's exports. Warren is experiencing another episode of New England remorse: "When Congress taxes the sale of a specific product through an excise tax ... it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential."

Well, yes. In 1990, when President George H.W. Bush's recanted his "no new taxes" pledge, he enabled the Democratic-controlled Congress, with a legion of New England liberals in the lead, to impose a 10 percent tax on yachts costing more than $100,000. Yacht sales plunged 70 percent in six months, a third of all yacht building companies — many in New England — stopped production and more than 20,000 workers lost their jobs. In 1993, the tax, although not the damage, was repealed.

Given humanity's fallen condition, almost everyone's tax policy is: "Don't tax you, don't tax me, tax that fellow behind the tree." There are, however, vulnerable wealth-and-job creating businesses behind most trees.

George Will's email address is georgewill@washpost.com.

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