Governors slam reform-related tax on medical device companies

September 23, 2009

Five Republican governors have joined the opposition to a proposed $4 billion per year excise tax on medical device companies included in a Senate Finance Committee healthcare reform bill.

Five Republican governors have joined the opposition to a proposed $4 billion per year excise tax on medical device companies included in a Senate Finance Committee healthcare reform bill.

In a letter to committee chair Max Baucus (D-MT), Governors Mitch Daniels (IN), Jim Gibbons (NV), Gary Herbert (UT), Tim Pawlenty (MN), and Arnold Schwarzenegger (CA) cited economic concerns for removing the proposed tax from the legislation. They noted that the medical device industry, which includes imaging device manufacturing, employs 360,000 U.S. workers earning $21.5 billion in wages and accounting for $123 billion in exports from the U.S. annually.

The tax would apply to some 80,000 products-including toothbrushes, eyeglasses, artificial heart valves, and advanced diagnostic equipment-they wrote. The firms generate about $131 billion in sales annually. The tax would capture an estimated 3.1% of sales revenue to achieve the legislation's goal of generating $40 billion over 10 years. The surcharge would be roughly equivalent to a 10% to 30% tax on corporate earnings, depending on a company's financial performance, according to the governors.

"Such a rate would dramatically increase the overall effective tax rate on manufacturers, making the United States the highest tax jurisdiction in the world in which to produce medical technology," the governors wrote.

The state executives predicted the tax would lead to less spending on equipment research and development, physician education, and manufacturing infrastructure. They said one manufacturer estimated the surcharge could result in more than $300 million in added taxes, a figure equivalent to 5500 jobs.

"Many of these are high-paying basic science and engineering jobs that must be preserved and increased for a sector that provides an important economic engine for our country and states," they wrote.

Each payroll dollar from the device manufacturers generates an additional $1.12 in payroll from associated business in the company's state, according to the governors.

The governors also argued that the proposed excise tax would contribute to healthcare cost inflation. They cite industry data indicating that prices for devices and diagnostics have increased at one-fourth the rate of other medical prices and at half the rate of the consumer price index.

The governors' letter strongly reflects language in a separate letter to Baucus and Sen. Charles Grassley, the finance committee's ranking Republican member, from AdvaMed, a medical device industry lobbying group.

AdvaMed based its opposition to the proposed surcharge on the likelihood of increased costs that it said would be passed along to consumers, physician practices, hospitals, and patients. It also argued that when coupled with other proposed cuts under consideration, the tax would result in a "double hit to some sectors, such as the imaging industry."