Paulsen warns medical device makers could leave if new tax not lifted

WASHINGTON — Rep. Erik Paulsen today called for the repeal of new fees on medical device manufacturers after some in other states suggested they might pack up factories and move operations to another country if the new taxes aren’t lifted.

Medical device manufacturing is one of the largest manufacturing industries in Minnesota, and some of the state’s most lucrative exports. Many of those firms are located in Paulsen’s 3rd District.

Under the health reform law, approved this week, medical devices would be subject to a 2.9 percent sales tax. The reconciliation bill moves that down to 2.3 percent and begins it in 2013. It’s expected to raise about $20 billion over the next 10 years. The tax doesn’t apply to basic medical supplies like eyeglasses, bandages and hearing aids.

It could have been higher. The original draft of the Senate’s legislation had the fees at $40 million over 10 years. A group of senators, including Amy Klobuchar and Al Franken, had pushed to remove that fee entirely though in the end they had to settle for what’s in the reconciliation bill now.

Klobuchar said she was proud of being able to reduce the tax by $20 billion, which she called a “big deal for Minnesota.”

“Minnesota is one of the largest medical device alleys in the country, with tens of thousands of jobs in the sector,” Paulsen said in a statement. “We can’t afford lost jobs or stifled innovation, which is why I tried to remove this tax before the health care bill was voted on last weekend.

“Jobs should be priority number one in Congress,” Paulsen said. “Despite multiple warnings about the negative impact of a tax on the tools of modern technology, the tax was passed anyway — and the results are already looking quite troublesome.”

According to a report in the Boston Herald, some of the largest manufacturers in Massachusetts may now be looking to move. And Gov. Deval Patrick, a personal friend of President Obama, has pledged to help do something about the new law.

“This bill is a jobs killer,” said Ernie Whiton, chief financial officer of Chelmsford’s Zoll Medical Corp., which employs about 650 people in Massachusetts. Many of those employees work in Zoll’s local manufacturing facility making heart defibrillators.

“We could be forced to (move) manufacturing overseas if we can’t pass along these costs to our customers,” said Whiton.

The threat — echoed by others in the critical Massachusetts industry — had the governor vowing to intervene to block the sales tax impact.

“I am obviously concerned about the medical device burden here on the commonwealth, which has a very robust industry around medical devices,” Patrick said yesterday.

Steven Cragle, senior director for Medtronic, a medical device manufacturer in Fridley, said relocation is not on the radar for them. “No, that is not a reaction or an opportunity that we’re looking at,” he said.

Cragle said his firm “would certainly prefer” a 2.3 percent tax than a 2.9 percent tax. And it’s a vast improvement over the doubled rate it could have been.

“Relative to some of these proposals in the past, this is certainly an improvement,” Cragle said. “That said, we still have concerns about the impact that the tax will have on innovation and on the industry’s overall global competitiveness.”

Paulsen attempted to put an amendment into the health care bill before the House passed it that would have eliminated the tax, but it (and every other amendment offered) was refused by the House Rules Committee.

Senate Republicans have offered several amendments during the current “Vote-a-rama” session in the Senate to eliminate the medical device tax either in whole or for select groups (like the military’s Tricare program). Each was tabled (effectively killed) with the support of both Minnesota senators.

As we said Wednesday, those amendments are designed to be tough votes for Democratic lawmakers.

Note: This report has been updated to include comments from Cragle and Klobuchar.

You can also learn about all our free newsletter options.

Comments (13)

  1. Submitted by Jeremy Powers on 03/25/2010 - 12:09 pm.

    Do you really want a pacemaker made in Thailand?

  2. Submitted by Dan Landherr on 03/25/2010 - 12:34 pm.

    I don’t understand the line of reasoning here. According to the article the tax has been implemented as a sales tax, meaning no matter where the device is produced the tax will be assessed if the device is SOLD in the USA. This means US and foreign companies are on equal footing. The medical device industry is already moving manufacturing overseas due to higher taxes on business inventory in the USA than they are in other locations. If a business can save money by going overseas they probably will. I just don’t see how a sales tax will accelerate that trend. I doubt the company will stop selling devices in the USA.

  3. Submitted by Paul Scott on 03/25/2010 - 01:23 pm.

    The device makers are really charming, aren’t they — telling us how many lives they save while simultaneously threatening us with economic retaliation if they should be subject to a new tax. Klobuchar and Franken gave them too much assistance as it was.

    It would be easier to take their grievances more seriously if they did not pay their CEOs millions of dollars a year. This is an industry which has the singular protection allowed to no other industry in our society — they cannot be sued for faulty products. They should be glad to a part of a solution to our health care crisis, instead of turning into the latest industry to sell out American workers at the first threat to their bottom line.

  4. Submitted by dan buechler on 03/25/2010 - 03:01 pm.

    I thought Republicans liked sales taxes and or fees (for service) anything as long as it is not a tax on earned and unearned income and Daddy’s estate tax. Whats an honest person to do, oh my!

  5. Submitted by Paul Brandon on 03/25/2010 - 03:43 pm.

    First of all — how much money has Paulsen received from medical device manufacturers in his district? He’s dancing with the ones what brung him.

    Second — some businesses are already ‘insourcing’: bringing manufacturing back onshore as they discover that total costs don’t justify the labor savings.
    Businesses like medical device manufacture are very research-dependent; Paulsen’s clients are dependent on medical research done in the TC area. It’s unlikely that they would find it profitable to more their manufacturing offshore — the disconnect would result in even more recalls (which cost money)!

  6. Submitted by Thomas Swift on 03/25/2010 - 04:29 pm.

    Let’s take this mess apart a bit and look at it on the table.

    Medical insurance is too expensive.

    Some people can’t afford medical insurance.

    Insurance companies say their rates are dictated by the cost of medical services, which include devices, equipment, pharmaceuticals, salaries, research and more.

    Leftists see an opening for government intervention.

    They craft a law that makes lack of insurance a crime.

    To keep them out of jail (their votes are needed), leftists subsidize low income people with a tax on medical devices and by cutting the amount by which they are already subsidizing the elderly.

    (BTW, those elderly have been pre-paying for their subsidized coverage for 40 years, and rightly have the expectation that their investment will be honored, but that’s just too bad.)

    Medical device manufacturers pass their new tax on to the medical service providers that buy them.
    Medical service providers charge the insurance companies higher rates.

    Insurance companies charge people more for their coverage….but medical insurance is already too expensive. Leftists look for more sources of funding to keep the Ponzi scheme afloat while they expand it.

    This is text book leftist lunacy, folks. Expect sane Americans to take to the streets this summer demanding the crazy people be removed from office.

  7. Submitted by Paul Scott on 03/25/2010 - 05:36 pm.

    Well, you’ve really connected all the dots there. Our great scheme has been exposed. But where is the trilateral commission?

  8. Submitted by John Roach on 03/25/2010 - 11:07 pm.

    …and the hyperbole continues unabated.

    When the mandate is fully effective in 2016 if you do not have insurance and are below the Federal tax-filing threshold, you are exempt. You do not have to buy and there is no penalty.

    If you are not exempt and you do not buy insurance, in 2016 you will pay a surcharge of $695 or 2.5 percent of income, whichever is higher, up to a maximum of $2085 for a family. If you don’t pay………..nothing happens. The law specifically prohibits any sanctions for noncompliance.

    The demand for class 2 and class 3 medical devices is quite inelastic. A 2.3 percent sales tax will have no effect on sales of these devices.

    This wailing is reminiscent of the conservative think tankers and GOPers who howled that the end of the world was near when Clinton raised taxes. We then had the largest post war economic expansion ever, and ended that decade with a Federal budget in surplus.

    Regarding people taking to the streets, I think it is much more likely that “sane Americans” will start demanding that the “crazy people” be removed from the fantasy based propaganda networks that the right has built. Once they are gone, their victims can begin the long road to recovering their own grip on reality.

  9. Submitted by Thomas Swift on 03/26/2010 - 09:34 am.

    “If you don’t pay………..nothing happens
    The law specifically prohibits any sanctions for noncompliance.”

    Yes John; initially this is an opportunity for us to tell the IRS to “stuff it”.

    How long do you figure that’s going to last?

  10. Submitted by Richard Schulze on 03/27/2010 - 03:38 pm.

    Mr. Swift forgot about the parts about dogs sleeping with cats, the wailing, the bleating, and the gnashing of teeth. Oh, and the blood, frogs, lice, flies, livestock death, boils, hail, locusts, darkness, etc..

  11. Submitted by Dave Thompson on 03/29/2010 - 01:37 pm.

    I’m with Dan Landherr on this one. This looks like another attempt by a Republican politician to mislead the public as to what the law actually says.

  12. Submitted by William Pappas on 03/29/2010 - 10:21 pm.

    With 40 million new potential customers now able to buy medical devices with their new health insurance the businesses that make them will increase sales. Since that increase was made possible by the generosity of taxpayers it is only fitting that the device makers share in the tax a little bit. I predict those device makers will have to crank up production to keep up with this slight increase in demand. How tragic for them.

  13. Submitted by David on 03/30/2010 - 01:18 pm.

    This article appears to ignore the fact that device manufacturing jobs have been moving overseas (and to Mexico) steadily for the last 10 years or so. Can’t really blame the tax for something that is already happening / has happened.

Leave a Reply