Medical device tax could be suspended for two years in tax deal

WASHINGTON – The U.S. House and Senate are poised to suspend a sales tax on medical devices for two years after intense lobbying on behalf of the medical technology industry that employs tens of thousands of people in Minnesota.

The government began collecting the 2.3 percent tax on device sales in January 2013 to help pay for national health care reform. But a new tax deal announced Wednesday suspends those collections until Dec. 31, 2017.

"This is pretty miraculous," said Shaye Mandle, CEO of LifeScience Alley, Minnesota's med tech trade group. "It's unusual to see a tax that's being collected taken away. Certainly we want this to become permanent."

Mandle says that is especially important in Minnesota, which LifeScience Alley touts as the state with "the most geographically concentrated per capita medical device footprint in the world."

In the United States, Minnesota ranks second to California in the absolute number of residents employed in medical technology with 40,000 workers spread across hundreds of companies including major players like Medtronic, St. Jude Medical and Boston Scientific.

Through trade groups and with individual expenditures, many of these companies have battled the device tax since its inclusion in the Affordable Care Act (ACA) in 2010. The lobbying tab has run to millions of dollars.

The device tax suspension is part of a huge tax package that extends tax breaks for businesses and low-income people and makes dozens of those breaks permanent.

The tax break package is expected to pass the House on Thursday and be considered later by the Senate. It may or may not be rolled into a budget bill that must pass to keep the government running.

"This is a significant breakthrough," said Chris Swonger, government relations chief at Plymouth-based Smiths Medical. "This is a move to reinvest in innovation." The goal now, Swonger added, is "to get suspension over the finish line by week's end."

Among those claiming victory Wednesday were the Advanced Medical Technology Association (better known as AdvaMed), the Medical Imaging & Technology Alliance and the Medical Device Manufacturers Association, which represent many Minnesota companies.

"Suspending the tax will be an important step in addressing the harmful effect it is having on research and development and continued medical progress," said AdvaMed Board Chairman Vincent A. Forlenza. "On behalf of America's medical technology companies, our employees and the patients we serve, we urge Congress to act swiftly on this legislation."

The suspension of the medical device tax "allows us to extend the fight for repeal for another day," Republican Rep. Erik Paulsen said.

Paulsen has offered device tax repeal bills each of the past two years. His latest bill passed the House with a near veto-proof majority but stalled in the Senate because it lacked a politically palatable offset to replace the billions of dollars it provides to support national health care reform. President Obama threatened to veto the Paulsen bill without an alternative revenue source. Now, the device tax could be part of an overall tax reform effort or a refinement of the ACA.

Democratic Sen. Amy Klobuchar has co-sponsored a bill in her chamber to repeal the device tax.

The two-year suspension "is a testament to the problems with the tax," she told the Star Tribune.

It is a tax on gross sales, not profits. Critics, including Klobuchar, argued that it pushed investment in medical technology to other countries.

Device tax opponents also profited from recent analyses by the Congressional Budget Office that the ACA is going to cost $176 billion less to implement over 10 years than had been expected, Klobuchar said. The downward shifting estimate offered wiggle room in negotiations with the White House.

Device tax opponents also teamed with opponents of an ACA tax on overly generous health insurance plans to add leverage to their position, Klobuchar said.

Not everyone was pleased.

Democratic Rep. Betty McCollum said the tax break package "will go straight to the federal credit card."

"We should suspend the medical device tax and extend the child tax credit, but let's be responsible and pay for them," she said. "I do have a problem giving corporations permanent tax cuts that add hundreds of billions of dollars to the federal deficit."

The nonpartisan Committee for a Responsible Federal Budget said the tax break package would add $780 billion to the national debt over 10 years.

"If these tax breaks are worth extending, they are also worth paying for," said Maya MacGuineas, the committee's president.

Still, a something-for-everyone approach curbed criticism.

"The package allows for a two-year suspension of the medical device tax, makes the research and development credit permanent, and extends the bonus depreciation credit, which are huge wins for Minnesota," Republican Rep. Tom Emmer said.

Advocates for low-income citizens at the Minnesota Budget Project welcomed news that improvements to the Earned Income Tax Credit and the Child Tax Credit will likely become permanent.

"These are two of our most important anti-poverty programs," said the project's Ben Horowitz. He said researchers have estimated that the improvements will be worth at least $120 million to 111,000 Minnesota families.

Democratic Rep. Collin Peterson said he is likely to join House Republicans in passing the tax package. He expects the package to get through the Senate either as a free-standing bill or part of the budget omnibus bill the upper chamber will pass.

Democratic Sen. Al Franken said he is studying the package.

"Like any major deal, it's a compromise," Franken said.

Jim Spencer • 202-383-6123