ObamaCare's Dangerous Device Tax

Congressional Democrats got the Congressional Budget Office to score ObamaCare's trillion dollars in new spending as a net deficit reducer by trimming approximately $500 billion in planned spending out of Medicare and by raising the rest in new tax revenue.

But inevitably there are costs to extracting that sort of revenue from the economy. As Ramesh Ponnuru points out in his Bloomberg column, the medical device industry, which faces a major new tax under the law, is already blaming the law for layoffs and decisions to move its operations overseas:

In November, citing the new tax, Stryker Corp. (SYK), whose products include artificial hips and knees, announced that it would let go about 1,000 of its workers. Earlier last year, Covidien Plc (COV), maker of surgical instruments, said it would lay off 200 workers in the U.S. and move production to Costa Rica and Mexico. It, too, cited the tax.

Other companies in the field have announced similar measures -- or plans to expand production overseas but not in the U.S. -- without mentioning the tax. The sluggish economy is clearly part of the explanation, but the medical-devices industry had been a relative bright spot within U.S. manufacturing, losing only 1.1 percent of its employees during 2007-2008 while manufacturing as a whole lost 4.8 percent. A study done for AdvaMed, a trade association for the industry, claims the tax could ultimately cost more than 45,000 jobs.

Medical-device companies employ more than 400,000 Americans. Their wages are higher than the national average. The U.S. is a net exporter of medical devices.

The tax will change these numbers for the worse. It will be levied at 2.3 percent of sales; on average, profits make up less than 4 percent of sales in the industry. The AdvaMed study concludes, "The new 2.3 percent excise tax will roughly double their total tax bill and raise the average effective corporate income tax rate to one of the highest effective tax rates faced by any industry in the world."

Why go after the device industry? The plan was for a big chunk of the law's new revenue to come from various fees and taxes and the health care industry itself on the theory that expanding health insurance coverage to 30-some million people would provide new business to health providers. There's a certain circularity to this argument: Essentially, the idea was to tax health providers in order to pay for millions of new customers for those same health providers. And now it seems that instead of generating extra business for the device industry, ObamaCare may end up slowing it down.

Somehow, though, I doubt that outcome was on the minds of any of the Congress critters who voted to fund ObamaCare using provisions like this. Indeed, the grab-bag of pay fors they relied on to nab a favorable CBO score has proved exceedingly troublesome; the 1099 tax reporting requirement for small businesses, which was designed to raise $17 billion in new revenue, had to be ditched after it became clear that compliance would be a giant pain in the neck.