Strange Political Devices – Editorial in Wall Street Journal

Conservatives betray their principles by opposing repeal of the tax on medical devices.

October 13, 2013

The budget talks moved to the Senate on the weekend after President Obama rejected the latest offer from House Republicans. Democrats are smelling blood amid the latest polls, and one of their political goals is getting the GOP to ease the sequester caps. We address the sequester in the editorial below, but some conservatives have become so politically disoriented by this debate that they are now opposing tax cuts too.

The issue is the tax on medical devices that is one of the smaller funding sources for ObamaCare. There’s bipartisan sentiment for repealing it, but some conservatives are now saying no. Repeal would amount to “corporate cronyism,” said Michael Needham of the Heritage Action political committee in an interview in these pages over the weekend. His reasoning, which will amuse many liberals, is that “with all the pain and suffering that ObamaCare has inflicted on the country, to get out of this fight and only repeal a tax that affects just one industry is pretty laughable.”

Mull that one over. The Heritage Foundation pitches itself to donors as a think tank that supports economic growth and small government. But now the foundation’s political arm claims that eliminating a destructive $29 billion tax on a job-creating American industry is no different than a subsidy for Solyndra or a Wall Street bailout. This is a long way from Ronald Reagan and Jack Kemp, who understood that eliminating a punitive tax is not the same as providing a tax subsidy.

The devices tax, which passed in 2010 and started to be collected this year, is essentially a levy on arterial stents, imaging machines, artificial joints and other devices that extend American lifespans or improve the quality of life. It’s true that some of the device companies are large multinationals that have shareholders and employ a K Street lobbyist or two in addition to thousands of scientists and researchers. But we have reached a strange pass when conservatives start denigrating private business success, especially in life sciences technology where the U.S. leads the world.

As remedial education for the Beltway-centric, the 2.3% devices tax applies to sales revenue, not profit. This means that it hurts small and entrepreneurial companies with narrower margins more than it does corporate giants like Medtronic and Johnson & Johnson. Some 80% of device makers employ 50 or fewer workers, and they now have to pay $2.30 on every $100 of revenue even if they make no profit.

Most of these devices are also sold through multiyear contracts to large consortiums of hospitals and physician groups, which makes it hard for device companies to raise prices immediately in response to the tax. This means that in the first few years the tax will have to be paid with funds that would go to other business purposes. The companies will have less money for research and development, hiring, clinical trials, manufacturing and everything else that conservatives claim to support.

Some of Mr. Needham’s allies include columnists who say the GOP shouldn’t care about the device tax because it must focus on families. But since when do conservatives believe that supporting American innovation is incompatible with helping middle-class families? Too many on the right are climbing aboard a false populism that fails to appreciate that about 400,000 Americans work for device companies, and that every American may benefit from one of their inventions. The only real way to raise middle-class incomes is with capitalist innovation that lifts the U.S. economy.

Gregory Sorenson of Siemens Healthcare recently told us that if it were not for the tax, his U.S. division would be hiring hundreds of more R&D workers and that the tax amounts to about a quarter of the industry’s R&D budget. Boston Scientific has laid off 2,400 people n two waves since 2011 or about 10% of its work force, while the Michigan-based orthopedic maker Stryker seems to have limited the damage to 5%. A May 2013 Massachusetts Medical Device Industry Council survey reports that 40% of its companies are cutting R&D spending. We could go on.

Some conservatives who understand the economics of all this still oppose repealing the tax on grounds that it will weaken the coalition for repealing all of ObamaCare. That’s wrong because the device makers aren’t lobbying to repeal all of the law, only the tax. They also won’t suddenly turn into advocates for the law if the tax is repealed.

We want ObamaCare repealed as much as anyone, but that shouldn’t mean refusing to help make the law less destructive to the U.S. economy and job creation. Repealing ObamaCare won’t be any easier if America’s device makers move offshore. A think tank that really believes that repealing a punitive tax on business is “corporate cronyism” isn’t conservative and it certainly isn’t thinking.

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