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CAPITOL PERSPECTIVES column LIFESCIENCELEADER.COM JUNE 2014 10 By J. McManus DYSFUNCTIONAL TAX POLICY HARMING LIFE SCIENCE INNOVATION AND JOBS J O H N M c M A N U S The McManus Group Dysfunctional Tax Policy Harming Life Science Innovation And Jobs t is now undeniable that federal tax policy has as big an impact on innovation in healthcare as any other healthcare policy that impacts Medicare, Medicaid, or com- mercial insurance coverage and reim- bursement. Two examples now gaining increasing attention in Washington make that abundantly clear: 1 the excise tax on medical devices 2 the corporate tax law known as "inversion," which enables an American company to reincorporate into a lower- taxed foreign country. MEDICAL DEVICE TAX COSTING JOBS AND RESEARCH Congress enacted a 2.3 percent excise tax on medical devices as a $28 bil- lion scheme to extract revenue out of that industry in order to help fund Obamacare. The argument at the time was that the medical device industry would benefit from all the new covered lives that Obamacare would produce, so it should do its part by helping to finance the program. That logic was flawed because most of the device business is for seniors, which Medicare already covered. Moreover, after the Supreme Court made the I Medicaid expansion optional, nearly half of the states refused to cover those low-income, uninsured adults. And a recent McKinsey study found that about three-fourths of the people enrolled in the new health exchange previously had coverage. Because the device tax is an excise tax on gross revenue, it is far more perni- cious than an income tax and grows more expensive over time. Imagine a small device company – which dominate the industry – with $20 million in rev- enue and a 5 percent profit of $1 million. Assuming it had a 25 percent corporate tax rate, it would pay $250,000 in income tax. The 2.3 percent excise tax on revenue requires it to pay an additional $460,000 tax, which balloons its federal tax by 184 percent! The results are even more dire for com- panies that are not yet making a profit. A recent survey by the Medical Device Manufacturers Association of its mem- bers found that 64 percent work at com- panies that are not yet profitable, but are generating revenue and, therefore, subject to the tax. One CEO complained, "The device tax takes our profit to a loss." How are device companies respond- ing to this new burden? Job layoffs and reduced research and development: That same survey found that two- thirds of companies were reducing or halting job creation or relocating out- side of the U.S. as a direct result of the device tax. More troubling, nearly half of the companies reported reducing R&D; to pay for the tax, 18 percent, on average. A more comprehensive survey under- taken by Advamed found that in the first year of the tax's implementation (2013), 14,000 workers in the device industry were laid off, and 30 percent of compa- nies had decreased R&D.; The Republican-controlled House has voted numerous times to repeal the medical device tax, but the Democratic- controlled Senate has not permitted a vote on the bill. Majority Leader Reid (D-NV) has employed a parliamentary tactic known as "filling the amendment tree," which denies the Senate from vot- ing on the device tax repeal or any other issue that is not already incorporated in the underlying bill. However, pressure is building by Senate Republicans to permit a vote on a two- year suspension of the tax as part of the must-pass tax extender package. If the Democratic leadership allows the Senate to work its will, it could be a baby step to earning back its reputation as the most (Written May 15, 2014) 0 6 1 4 _ C P . i n d d 1 0614_CP.indd 1 5 / 2 1 / 2 0 1 4 1 1 : 5 0 : 4 6 A M 5/21/2014 11:50:46 AM