Medical Device Tax Tricks

Medical device(Image: Medical device via Shutterstock)You might be hearing that some Democrats are “willing to make a deal” involving the “small” ($40 billion) medical device tax. It’s a good idea to know what is going on — especially the “offset” some are talking about.

1) The tax is on the windfall that the ACA is going to give to this industry. GE – notorious non-payer of taxes – will be a prime beneficiary of this break should it occur. The tax amounts to $40 billion, so repealing it is a $40 billion giveaway to a few companies.

2) They have to make up that $40 billion somewhere. The proposed offset is something called “pension smoothing.” Here is how it works.

  • Companies will be allowed to under-contribute to their pension plans for 5 years.
  • This means these companies will have higher profits (pension contributions are tax-deductible) so they will pay more taxes.
  • After 5 years they are supposed to make up for the under-contributing. Which means any revenue gained by the govt in the first 5 years goes away. It also means that these companies will have further underfunded their pensions and will be coming to the government for relief, etc.

I wrote “further underfunded” because pension funds are allowed to use an unrealistically high estimate of future returns on their pension investments, so many pension funds are underfunded already.

See also GOP Senators Revive Fake Offset for Medical Device Tax by Chye-Ching Huang at the Center for Budget and Policy Priorities’ Off the Charts blog.

Note – If any “deal” occurs it validates the strategy of hostage-taking. If this ”deal” occurs it shows that an industry was able to get a tax break as a payoff to end the government shutdown, thereby triggering other industries to compete to be beneficiaries future hostage ransoms. As Ezra Klein writes,

In order to move past the shutdown, the GOP must believe it will get something it actually wants out of the negotiations. This is the thing its members are beginning to believe they actually might get.

But, of course, if they do get something out of this they will, of course, keep doing it. (Note that Democrats have already agreed to give Republicans 100% of the spending cuts they have demanded in the continuing resolution.)