The Medical Device Excise Tax: Economic Analysis (CRS Report for Congress)
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| Release Date |
Revised June 18, 2015 |
| Report Number |
R43342 |
| Report Type |
Report |
| Authors |
Jane G. Gravelle, Senior Specialist in Economic Policy; Sean Lowry, Analyst in Public Finance |
| Source Agency |
Congressional Research Service |
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Summary:
The 2.3% medical device tax imposed by the Affordable Care Act (ACA; P.L. 111-148) in 2010
was one of a number of additional revenue-raising provisions to finance health reform. This tax,
which took effect in January 2013, is projected to collect approximately $30.6 billion over the
next 10 fiscal years (FY2016-FY2025), resulting in $24.4 billion of net revenue raised, after
accounting for offsets from other taxes.
Some have called for a repeal of the medical device tax since enactment in 2010. Repeal of the
tax has become such a high priority for some Members of Congress that it was one of the
provisions discussed in the October 2013 negotiations over ending the federal government
shutdown and increases in the federal debt ceiling. In the 114th Congress, the Medical Device
Access and Innovation Protection Act (S. 149) would repeal the medical device tax retroactively
to the first year of implementation in 2013. On June 18, 2015, the House passed the Protect
Medical Innovation Act of 2015 (H.R. 160), which would repeal the tax in quarters after the date
of the bill’s enactment.
The major justification offered for the medical device tax is its revenue, which helps offset the
cost of the ACA. Although the tax is relatively small, no revenue replacement has been proposed
and it may be difficult to find. There is also a concern among some that eliminating the medical
device tax would lead to proposals to eliminate similar fees and taxes on other industries, the sum
of which, including the device tax, initially totaled $165 billion over 10 years. The tax was
justified partly because the medical device industry was among the commercial interests that
stood to benefit from unanticipated profits as more individuals enroll in health care insurance,
post-ACA.
Viewed from the perspective of traditional economic and tax theory, however, the tax is
challenging to justify. In general, tax policy is more efficient when differential excise taxes are
not imposed. It is generally more efficient to raise revenue from a broad tax base. Therefore
excise taxes are usually based on specific objectives such as discouraging undesirable activities
(e.g., tobacco taxes) or funding closely related government spending (e.g., gasoline taxes to
finance highway construction). These justifications do not apply, other than weakly, to the
medical device case. The tax also imposes administrative and compliance costs that may be
disproportionate to revenue.
Opponents of the tax claim that the medical device tax could have significant, negative
consequences for the U.S. medical device industry and on jobs. The estimates in this report
suggest fairly minor effects, with output and employment in the industry falling by no more than
two-tenths of 1%. This limited effect is due to the small tax rate, the exemption of approximately
half of output, and the relatively insensitive demand for health services.
The analysis suggests that most of the tax will fall on consumer prices, and not on profits of
medical device companies. The effect on the price of health care, however, will most likely be
negligible because of the small size of the tax and small share of health care spending attributable
to medical devices.
