New Hope Dawns for Device Tax Repeal

Dave Camp and Max Baucus are going on a road trip.

The Congressional leaders are pairing up for a national tour to promote a proposed revamp of the U.S. tax code, last revised in 1986. Both men have been reaching across party lines for the last two years to craft a tax reform bill that would keep American companies from moving operations overseas. On July 8, the dynamic duo launched their “Simpler Taxes for America Tour” in St. Paul, Minn., with a visit to multinational conglomerate 3M and McDonald’s hamburger bun maker Baldinger Bakery.

“Over the past two years we’ve heard from hundreds of experts on how to fix the tax code to make it simpler for families and spark a more prosperous economy,” a news release announcing the tour stated. “We want even more input and want to hear directly from the American people.”

3M welcomed the two legislators at its “Innovation Center” with a high-tech multimedia presentation that highlighted its mission and some of its products, according to Minnesota Public Radio News. The 84-year-old company makes thousands of items, from automotive sandpaper and drinking water replacement filters to surgical tape, waterproof bandages, stethoscopes and eye patches.

During a question-and-answer session, 3M workers told the lawmakers that high U.S. corporate taxes impair companies’ ability to compete globally. Camp—the House Ways and Means Committee chairman—agreed and noted the tax code desperately needs modernizing. “We’re out of step,” the Michigan Republican said. “We are the highest statutory rate in the world and we are the only country in the world left with our particular type of international tax system…We have to understand that the environment has changed.”

Indeed it has, but the U.S. tax code remains painfully out-of-date: The top corporate tax rate is 35 percent and climbs to 39 percent when combined with state and local levies; most other industrialized nations use a territorial-type setup and have lower tax rates as well. That imbalance has prompted many multinational corporations to circumvent the American system by setting up foreign-chartered subsidiaries that reinvest profits overseas. A U.S. Senate subcommittee estimates American companies hold $1.7 trillion overseas of earnings from operations.

Determining a fair levy for multinationals is one of the biggest challenges of tax reform because international tax is a complicated element of the Internal Revenue Code, practitioners contend. But it is important enough to large companies (such as 3M), Procter & Gamble Co. and Alcoa Inc. that leaders of those firms have told Congress they are willing to give up corporate tax deductions in order to achieve a more competitive international tax system and lower corporate tax rates.

Tax policy leaders have said they will take a “blank slate” approach to reform legislation, removing all tax expenditures from the code and adding in only those that make the grade. Medtech industry executives are hoping the strategy will kill the 2.3 percent medical device excise tax that took effect Jan. 1 and has triggered both layoffs and spending cuts at many of the sector’s largest companies.

“MDMA looks forward to working with the Chairmen to reform the tax code, including putting an end to the medical device tax,” Medical Device Manufacturers Association President/CEO Mark Leahey said in a prepared statement. “Repealing the medical device tax is a great example where there is strong bipartisan support to end a policy that thwarts innovation and job creation. The medical device tax is stymieing American manufacturing, and we need to remove this roadblock for today’s entrepreneurs.”

Medtech groups have discussed larger corporate tax reform as an approach to repealing the tax on U.S. sales of all medical devices. Manufacturers have attempted to distance their efforts to repeal the device tax from issues of healthcare reform, opting instead to frame their concerns as a matter of corporate tax laws, a move that has helped the industry gain vital support from Democrats. The tactic, however, has failed to sway U.S. Senate Majority Leader Harry Reid (D-Nev.) and Baucus (D-Mont.), chair of the Senate Finance Committee—two of the most influential Democrats in Congress and perhaps the staunchest supporters of the device tax.

Yet medical technology executives refuse to give up hope.

“As they begin their Tax Reform Tour in the Minneapolis-St. Paul, Minnesota area, it is important to note the medical technology industry supports over 35,000 jobs in the state and more than two million jobs nationally,” Advanced Medical Technology Association President/CEO Stephen Ubl said. “In reforming the tax code to make U.S. business more competitive, repealing the medical device tax is a critical first step to protecting these jobs and ensuring a level playing field for Minnesota and the U.S. in the global economy.

“America’s current corporate tax structure is a key factor contributing to the decline of the competitiveness of the American medical technology industry,” Ubl continued. “U.S. corporate tax rates are the highest in the world. The U.S. has failed to match competitor nations in positive tax incentives to attract knowledge-based, high-value manufacturing industries like medical technology. The U.S. tax code provides few incentives to invest in the pre-profit start-up companies that are the backbone of the innovation system.”