NCPA - National Center for Policy Analysis

Medical Device Tax Not Producing Projected Revenue

August 26, 2014

One of the many new taxes in the Affordable Care Act is the Medical Device Tax, a 2.3 percent excise tax on medical device sales. Before the law was implemented, the Internal Revenue Service (IRS) estimated that it would take in $1.2 billion from the new tax in 2013. But according to a report from the Treasury Inspector General for Tax Administration (TIGTA), the government took in just $913.4 million, 23 percent less than the IRS had expected.

Kyle Pomerleau, an economist at the Tax Foundation, explains what the tax covers: pacemakers and defibrillators, for example, are taxed, while eyeglasses and other direct consumer purchases are not. That might seem simple, but the tax is actually quite complicated:

  • The tax includes a number of exemptions and safe harbors, making applicability confusing for businesses and manufacturers.
  • According to the TIGTA report, errors were made on both sides of the tax returns -- by businesses as well as by the IRS itself.
  • The report found $41.6 million in overpayments and $76.2 million in underpayments last year.
  • The IRS penalized 219 businesses for allegedly underpaying the device tax when, in fact, they had made proper payments. Most of these penalties have been reversed at this point.

Pomerleau sees the device tax as textbook bad tax policy, as taxes should be simple and carry low compliance and administrative costs.

NCPA Senior Fellow John Graham responded to the Inspector General report on the NCPA Health Policy Blog: "One thing is for sure, Obamacare relies on tax revenue that is far riskier and volatile than its framers anticipated. Hopefully this will make the repeal of this universally reviled tax easier to accomplish."

Source: Kyle Pomerleau, "The Obamacare Medical Device Tax is Not Working as Planned," Tax Foundation, August 21, 2014; John R. Graham, "Medical-Device Excise Tax Revenues 24 Percent Short of Target," NCPA Health Policy Blog, August 21, 2014.


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