Employment Effects of the New Excise Tax on the Medical Device Industry

September 13, 2011

One provision of the new health care law is a 2.3 percent excise tax on the medical device industry that will take effect in 2013.  In a new study, Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute, and Harold Furchtgott-Roth, president of Furchtgott-Roth Economic Enterprises, estimate the potential effect of the device tax on employment in the medical device industry.  The study finds that the tax could reduce employment in the industry by cutting back on the demand for medical devices and by encouraging American firms to shift production overseas.

Key findings:

  • In 2009, the medical device industry provided well-paying jobs to more than 409,000 employees, who earned more than $33 billion dollars in labor compensation.
  • Under reasonable assumptions, the tax could result in job losses in excess of 43,000 and employment compensation losses in excess of $3.5 billion.
  • The new 2.3 percent excise tax will roughly double the device industry's total tax bill and raise the average effective corporate income tax rate to one the highest effective tax rates faced by any industry in the world. Moreover, the new tax will be paid both by firms that have net income and those that do not. The tax will be especially harmful to companies that innovate and tend to suffer losses in the first years or when investing in research and development for a new product but would still be required to pay the tax.
  • Under the tax, U.S. manufacturers 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.

Source: Diana Furchtgott-Roth and Harold Furchtgott-Roth, "Employment Effects of the New Excise Tax on the Medical Device Industry," Advanced Medical Technology Association, September 2011.

 

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