The medical device industry, already facing hurdles in the device approval (510 k) process that threatens their revenues by delaying market entry for new devices, is now facing an even larger barrier: A 2.3% excise tax on the medical device industry, which is scheduled to take effect in 2013.
According to Diana Furchtgott-Roth and Harold Furchtgott-Roth, in their new study entitled "Employment Effects of the New Excise Tax on the Medical Device Industry", released this month, this excise tax is a threat to jobs in the U.S. medical device industry, as device makers may choose to close plants in the U.S. and relocate manufacturing to foreign countries. The tax also threatens the competitiveness of U.S. device makers, allowing foreign device makers to enter the U.S. market and take market share from U.S. device makers, thus retarding growth of U.S. companies, predict the report's authors. The authors are partner and president, respectively, at economic consulting firm Furchtgott-Roth Economic Enterprises. PlasticsToday has asked the authors to identify the sponsor(s) of the study.
The study finds that the tax, implemented to help pay for the costs of the healthcare program, "could reduce employment in the industry by cutting back on demand for medical devices and by encouraging American firms to shift production overseas."
Some of the findings of the study include:
- In 2009, the medical device industry provided jobs to more than 409,000 employees, who earned more than $33 billion dollars in compensation.
- The tax could result in job losses in excess of 43,000 and employment compensation losses in excess of $3.5 billion.
- The tax will especially harm states with large employment in the medical device.
- The new 2.3% excise tax will roughly double the device industry's total tax bill and raise the average effective corporate income tax rate to one of the highest effective tax rates faced by any industry in the world. The tax will be paid by all medical device firms, whether or not they have income, which could be especially harmful to companies that innovate and tend to suffer losses in the first years or when investing in R&D for a new product, but would still be required to pay the tax.
- Under the tax, U.S. manufacturer will be more likely to close plants in the United States and replace them with plants in foreign countries.
- Foreign manufacturers will improve their competitiveness relative to American firms, and U.S. leadership in this industry could be threatened.
- The Joint Tax Committee estimates that the tax will raise $20 billion in revenues over the period 2013-2019, a cost to device companies and the American consumer. The economic impact of the tax on wages and output will be significantly higher.
According to the study, the medical device manufacturing industry contributes to the economy of every state, and with revenues that exceed $116 billion annually it is one of the healthier segments of American manufacturing. The total wholesale value of medical devices was approximately $155 billion in 2009.
Collectively, the industry employed more than 409,000 employees in 2009, with California's medical device industry alone accounting for more than 76,000 of those, the largest share of the medical device manufacturing industry. Other states with a large labor force (more than 10,000 employees) in the medical device industry include Florida, Illinois, Indiana, Massachusetts, Minnesota, New Jersey, New York, Ohio, Pennsylvania, Texas, and Wisconsin. Total labor compensation per employee in the industry is more than $81,000 annually, making these jobs "an important component of these states' economies, and form a segment of the growing advanced manufacturing sector.
Medical device manufacturing is a major source of exports for the United States, with the industry exporting more than $32 billion in the first 11 months of 2010. Roughly one-third of medical devices manufactured in the U.S. are exported, "an unusually high proportion for an American industry," noted the report.
The U.S. also imports medical devices from around the world. During the first 11 months of 2010, the U.S. imported more than $30 billion worth of devices. Major sources of supply include Mexico, Ireland, China, Germany, and Japan. "For most segments of manufacturing, American imports substantially exceed exports," said the report. "Medical devices are a rare exception with the U.S. consistently enjoying a favorable balance of trade."
Stephen Ubl, president and CEO of the Advanced Medical Technology Association (AdvaMed), commenting on this study, said, "This study comes at a critical time as Washington focuses on job creation, which everyone agrees is key to reigniting our economy. As the Administration and Congress work to address this issue, it's important for them to understand the device tax is counter-productive to economic growth and the shared aim of putting more Americans to work."
According to AdvaMed, in 2006, medical device manufacturers reported taxable income of $13.7 billion and paid $3.1 billion in corporate taxes. The new tax would add $2.67 billion a year in new taxes. "The new tax burden could force companies that would otherwise never leave the U.S. to make difficult choices based on stark economic reality," said Ubl.
"The new 2.3% tax will create an obvious disadvantage to American firms working to create jobs, hitting smallest companies the hardest," commented Harold Furchtgott-Roth, President, Furchtgott-Roth Economic Enterprises.