I note right up front that my comments below on the medical device excise tax are pure speculation on my part, a kind of thought experiment rather than a hard prediction of the future.
If you believe in “rational actors” on economic choices (a whole other discussion), then it would make no sense for the Government to tax firms into bankruptcy and thereby lose the tax on those lost sales. So if the outcry from the medical device industry causes the Government to tweak the excise tax, then what might change?
I maintain that no one can know the future with certainty, including outcomes if the Medical Device Excise Tax goes into effect as currently planned. I’m tossing out five possibilities below, and intend to come back to posts on the excise tax in the future after the dust settles.
1. Repeal of the Tax
This seems the most unlikely future to me in large part because it would mean that the anticipated $20B tax revenues would need to be replaced by some other means. It would also mean the loss of face to supporters which is a tough thing to do in general, and particularly in politics.
2. Reduction of the Tax
Moving the tax from 2.3% to 1.3%, for example, would create less of a financial impact on firms, especially those for which the tax could mean consumption of profits needed to remain in business. Such a reduction, however, could be viewed by all parties as an acceptable compromise. The planners would still be faced with a substantial revenue gap, but perhaps could make the argument that by lowering tax more businesses would remain or enter the market.
3. Reduction of the Tax with Expansion of the Base
Moving the tax from 2.3% to 1.3% and adding medical devices that are sold in retail for individual use (currently exempted from the excise tax). This, too, may be viewed as an acceptable compromise, in part because retail device manufacturers may be able to pass the tax through to a significant number of retail buyers.
4. Capping the Tax
Similar to the ACA-defined fees paid on certain branded pharmaceutical sales that are limited to companies with annual revenues over $5 million (http://www.gpo.gov/fdsys/pkg/FR-2011-08-18/pdf/2011-21011.pdf). Such a compromise may be acceptable provided the case can be made that tax revenues lost by exempt firms would not create a significant gap in the $20B target.
5. No Change in the Excise Tax
This could be the easiest route for legislators — to simply do nothing for the time being and see what happens next year after the tax comes into full effect.