BILL ANALYSIS �
AJR 17
Page A
Date of Hearing: June 10, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AJR 17 (Patterson) - As Introduced: April 8, 2013
Majority vote.
SUBJECT : Federal tax: medical devices: repeal
SUMMARY : Urges the President and Congress of the United States
(U.S.) to repeal the excise tax on medical devices to protect
the medical device industry and its consumers.
EXISTING FEDERAL LAW:
1)Imposes an excise tax on the sale of certain medical devises.
[Internal Revenue Code (IRC) Section 4191].
2)Specifies that the excise tax is 2.3% of the price for which
the taxable medical device is sold.
EXISTING STATE LAW does not conform to IRC Section 4191 and does
not impose an excise tax on sales of medical devices.
FISCAL EFFECT : Unknown
COMMENTS:
1)The Author's Statement . The author states that, "The federal
excise tax on medical devices will have crippling effects on
the medical device industry and its consumers and the effort
to repeal the tax has received bipartisan support in Congress
- including support from any legislators who support the
Affordable Care Act itself.
"California is home to over 1,200 medical device companies that
employ over 100,007 Californians. Since California makes up
over 20% of the nation's medical device industry, the tax
disproportionately affects our state. Companies throughout
the state and nation have already announced anticipated
layoffs and setbacks in research and development efforts as a
result of the lost revenue from this tax.
AJR 17
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"In addition to the imminent loss of jobs in California, the
excise tax on medical devices will result in increased costs
for our state's most vulnerable population - the sick and the
elderly.
"It is essential that we urge Congress to repeal this tax so
that our state can continue to be the leader in the research
and development of medical technology and so that California's
economy and citizens do not suffer."
2)An Excise Tax on Medical Devices. The Affordable Care Act
(ACA) imposes a 2.3% excise tax on the sale of any taxable
medical device by the manufacturer or importer of the device.
The tax applies to sales that take place after December 31,
2012. Certain medical devices are exempt from this excise
tax: eyeglasses, contact lenses, and hearing aids. There is
also an exemption for any other medical device that is
purchased by the general public at retail for individual use.
Furthermore, a manufacturer or importer of a taxable medical
device may, in certain circumstances, sell a taxable medical
device tax-free for use by the purchaser for further
manufacture (or for resale by the purchaser to a second
purchaser for further manufacture), or for export (or for
resale for export). But, in order to make such a tax-free
sale, both parties to the sale must be registered with the
Internal Revenue Service.
3)Should the Excise Tax Be Repealed ? While some argue that the
medical device tax, like any other excise tax, is harmful and
creates distortions in the medical device industry,<1> other
researchers believe that "the arguments against the tax don't
withstand scrutiny."<2>
Thus, the Tax Foundation report states that the medical device
excise tax will increase the cost of the products on which it
is levied and will adversely affect innovation, employment,
and competition "in the same way the windfall profits tax of
the 1980s depressed domestic oil production." While
manufacturers will try to pass the tax onto consumers in the
form of higher prices, the "market power of hospitals could
---------------------------
<1> Tax Foundation, The ACA Medical Device Tax: Bad Policy in
Need of Repeal, April 9, 2013, No. 364.
<2> Center on Budget and Policy Priorities, Excise Tax on
Medical Devices Should Not Be Repealed (Industry Lobbyists
Distort Tax's Impact), March 11, 2013.
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undercut the ability of device manufacturers to pass on much
of the cost of this tax in the long run." (Tax Foundation
report, p. 3). Furthermore, it is argued that the medical
device tax comes with compliance costs, which will place an
additional, disproportionate administrative burden on smaller
firms. Finally, the report concludes that this tax will
result in higher health care costs, which undermines the
objective of the ACA, targets one industry, and makes it
overall bad tax policy.
The Center on Budget and Policy Priorities (CBBP), however,
believes that, from the tax policy perspective, the medical
device tax is sound. It does not single out the medical
device industry for unfair treatment, will not cause
manufacturers to shift production overseas, and will have
little effect on innovation in the medical device industry.
In fact, the CBBP report states that the "health reform may,
on balance, benefit the medical device industry and boost its
sales." The report reasons that the ACA, by extending health
coverage to 27 million more Americans, or by nearly 10%, will
increase the demand for medical devices and, consequently, the
revenue of device manufacturers.
4)The Congressional Action . On March 21, 2013, the U.S. Senate
voted 79 to 20 to pass a non-binding budget amendment to the
Fiscal Year 2014 Budget Resolution encouraging the repeal of
the ACA's medical device excise tax (the "Hatch-Klobuchar
Amendment"). Last year, the House passed H.R. 436, which
would have repealed the tax, and similar bills have been
introduced in Congress this year as well.
It should be noted that the Hatch-Klobuchar amendment required
that the revenue loss be completely offset with new
undetermined revenues. The Joint Committee on Taxation
estimates that repealing this excise tax would cost $29
billion over the 2013-2022 period. (Description of H.R. 436,
The "Protect Medical Innovation Act of 2011," Publication
JXC-45-12, May 29, 2012). Thus, if the medical device tax
were actually repealed, Congress would have been required to
increase other taxes or reducing spending. However, the vote
on the Hatch-Klobuchar amendment was non-binding and has no
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effect on existing law.<3> In other words, Congress declined
to change the existing law and, instead, opted to vote on a
non-binding amendment. Given that the Congress has stopped
short of repealing the medical device tax, this Committee may
wish to consider whether AJR 17, which urges the repeal
without offering an alternative funding source to replace the
lost revenues, is an appropriate response to the congressional
actions. This resolution simply points out an issue with
which the Congress is keenly aware, but makes no mention of
how the revenue loss from the repeal would be offset.
REGISTERED SUPPORT / OPPOSITION :
Support
California Healthcare Institute
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
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<3> In the words of Dean Zerbe, "the vote [on the
Hatch-Klobuchar Amendment] was in essence - "yes I'd like to
replace this stupid tax by raising some unknown tax on unknown
persons at an unknown time." (Dean Zerbe, Medical Device tax:
Stop Dreaming and Start Planning, Forbes, April 9, 2013).