A Tax Increase Worth Sacrificing
The U.S. is approaching budgetary Armageddon, with House Republicans demanding a one-year delay in implementing President Barack Obama’s health-care-reform law in exchange for continuing to fund the federal government.
Democrats, not to mention Obama, are unlikely to bite on that. Yet there is one piece of Obamacare that Democrats might be willing to cede that could win over enough Republicans to avert a government shutdown tonight, when federal spending authority expires.
The potential bargaining chip is an obscure 2.3 percent medical-device tax, which Congress adopted in 2010 as part of the formula to fund the Affordable Care Act. The tax would raise about $30 billion during the next decade from the sale of wheelchairs, syringes, imaging machines, hospital beds, artificial limbs and thousands of other devices. The House has voted 248-174 to repeal the tax, and there's almost no support for it in the Senate.
Ending the tax is a terrible idea. But if it’s all that stands between keeping the government functioning and a disastrous shutdown, then for heavens’ sake, repeal the tax! The extent of opposition implies that the tax’s repeal could find favor as the elusive quid pro quo.
The $116 billion medical-device industry has been using exaggerations and junk studies to lobby Congress to repeal the tax, which took effect on Jan. 1, almost from the day Obama signed the Affordable Care Act.
Dropping the tax, however, would undermine the implicit bargain in the law: In exchange for millions of new customers, health-care companies agreed to fund the cost. Repeal would open the gates to other health sectors seeking to renege on that deal.
That isn’t stopping Republicans and even a handful of liberal Senate Democrats, including Elizabeth Warren of Massachusetts and Amy Klobuchar of Minnesota, who want to repeal the tax. Both have large device manufacturers in their states.
The Senate already voted 79-20 in January to ditch the sales tax, but the vote was part of a symbolic show of hands after an extensive lobbying campaign. The industry claims, for example, that the tax will hurt small businesses. But this doesn’t ring true. A handful of large companies account for most of the industry’s revenue. The 10 largest medical-device makers account for about 86 percent of sales and therefore will pay 86 percent of the tax.
The industry also says the tax will harm innovation as device makers stint on research to pay the levy. This is unlikely. The health-care-reform law promotes innovation by calling for more cost-effective ways of delivering care. Government pressure to shrink health-care costs will probably force greater use of technologies made by the device industry to lower costs.
The device industry, however, argues that the tax will push jobs overseas as manufacturers try to get around the levy. That’s nonsense: The tax covers all devices sold in the U.S., no matter where they are made. Devices sold outside the U.S. aren't taxed. The tax creates exactly zero incentive to move jobs offshore.
The industry also claims that the tax raises prices and therefore will crimp sales by as much as $6.7 billion. This, too, is fatuous. As any health-care economist will tell you, the medical market doesn’t behave like other markets. When prices go up, demand falls by only a fraction because most medical consumers aren’t price-sensitive.
But if ending a $3 billion-a-year tax persuades both parties to compromise over a spending bill (Obama should insist on a debt-ceiling increase, too), then by all means, ditch it.
Congress would have to find $30 billion in offsetting tax increases or spending cuts, but that’s a lot easier, and less costly, than furloughing 800,000 workers, shutting down the government and reopening it again.
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)