Rep. Joe Pitts
Starting in 2014, a bottle of whiskey, a pack of cigarettes, ammunition and a pacemaker will all have something in common: they will all be subject to a federal excise tax.
Typically, excise taxes are levied on products like alcohol and tobacco in order to discourage their use. Raising taxes on cigarettes has certainly helped many former addicts kick what has become an expensive habit.
A simple economic rule is that when you tax something, you get less of it. So why would we want to have fewer pacemakers? A 2.3 percent excise tax on most medical devices was created to pay for new programs in the President’s health care law, one of 17 taxes in the new law. Only devices that most consumers purchase directly, like contact lenses and hearing aids, are exempted. Hip implants, stents, and other devices placed into the body by a doctor will all be subject to the new tax.
However, unlike alcohol or cigarettes, it won’t be the consumer who is charged at a register. The medical device companies will be responsible for paying. This is an important difference because this is a tax on total sales, not on corporate profits.
That means that whether or not a company is turning a profit, they have to pay the tax bill. For companies that might just be scraping by in a tough economy, the tax could put them into bankruptcy. That means fewer medical devices on the market, and fewer choices for patients needing a life-sustaining device.
It also means fewer medical device jobs. In Pennsylvania alone, this is an industry that employs more than 22,000. These are good jobs, paying wages more than 40 percent above average. Many of the products made here are sold around the world. American medical device companies compete globally. Making it harder to do business here, gives an advantage to foreign competitors and leads to the flight of innovation and jobs.
Some American companies have already started preparing for this tax by reducing their workforce. In the fall, Stryker Corporation announced plans to layoff 5 percent of their workforce. They cited the coming $100 million tax bill as one of the reasons for shedding jobs.
It is clear. Taxes have a direct impact on employment.
There are certainly many factors that produced the disappointing jobs report for the month of May. Only 69,000 jobs were created in the U.S. leading to an increased rate of unemployment. This rate of job creation isn’t enough to keep up with young people entering the market, let alone create opportunities for the unemployed.
The medical device tax affects a single industry that represents over 400,000 jobs nationwide. Every American company, including medical device companies, is subject to the federal corporate tax. Right now, the U.S. has the highest corporate tax rate in the world.
In late 2008, Rep. Charlie Rangel (D-NY) was Chairman of the House Ways and Means Committee, the principal tax committee in Congress. He talked about reforming the corporate tax rate to make the U.S. more competitive.
Instead of making tax reform a priority, President Obama worked to create more taxes through his health care reform and by creating a cap and trade program. The focus was on making taxes more complex, not simpler. Charlie Rangel, embroiled in a Congressional investigation of his own failure to pay taxes, failed to move reform even out of his committee.
Instead of long-term reform, the President settled for short-term extensions of current rates. If we don’t extend current law in December, we could end up with the highest tax increase in our nation’s history.
As part of the Republican budget passed in the House, we included a proposal to simplify our tax system by reducing the corporate tax rate, going down to two tax brackets, and eliminating lobbyist loopholes. We could do this without reducing government revenue.
This week, the Ways and Means Committee approved legislation that I am cosponsoring to eliminate the medical device tax. I believe that any serious tax reform needs to stop the federal government from treating pacemakers like whiskey. Job creation in the medical device industry and other industries will continue to be hobbled unless we act this year to create a simpler, fairer tax system.