Stymied in their efforts to fully repeal the Affordable Care Act (ACA), Republican leaders in Congress continue their efforts to undermine the law by starving it of funding.
Today, the Senate Finance Committee will consider legislation that would repeal some of the tax changes enacted to pay for the ACA. Republican lawmakers have indicated their interest in repealing the tax on medical devices since before it took effect in 2013, a position that is perhaps related to an ongoing lobbying spree by the medical device industry. Their efforts have generated some bipartisan support due to claims the tax hurts small business. But if their repeal efforts reflect a desire to protect medical device companies from the $2 to $3 billion a year the tax has been forecast to raise, then congressional tax writers should keep in mind that big, profitable medical device corporations have likely avoided more than 30 times that amount in federal income taxes by shifting their U.S. profits offshore.
Enacted as part of the 2009 Affordable Care Act, the medical device tax is a 2.3 percent excise on the sale of most medical devices sold in the United States. It applies both to U.S.-based companies and to their foreign competitors on sales within the United States. Congress enacted it, in part, to help fund expanded access to health care. The underlying rationale is that the medical device industry would reap substantial financial benefits from more consumers accessing health care through ACA and could, in turn, take on a small tax.
The 15 biggest U.S.-based medical device companies, as measured by 2014 revenues, will likely pay some of the tax. These companies have another thing in common: they have all chosen to shelter some of their profits from U.S. tax by declaring them to be “permanently reinvested” in foreign countries (see table). The companies, which include General Electric, Johnson& Johnson, 3M, Baxter and Abbott Laboratories, collectively disclosed $257 billion in permanently reinvested foreign profits at the end of their most recent fiscal years.
Corporations that declare their profits to be permanently reinvested abroad don’t have to report any deferred federal income tax on those profits to their shareholders. And these companies typically flout rules requiring them to estimate how much U.S. income tax they would owe if and when these profits become taxable in the United States. Just 57 companies in the Fortune 500 disclose the tax rate they would pay on these profits.
Two of these 15 device companies report their likely tax rate on repatriated profits, but the other 13 do not. If the 13 non-disclosing U.S. device makers paid income tax at the same 29 percent tax rate disclosed by the 57 companies included in our recent report, their resulting federal tax bill would be $69 billion. Added to the $4.5 billion tax bill collectively disclosed by the 2 device companies on this list, the 15 medical device companies profiled here may be avoiding almost $74 billion in federal income taxes on profits that they hold (at least on paper) offshore. It is possible that these companies have avoided even more tax than is calculated here.
President Barack Obama has proposed a half-measure that would subject the permanently reinvested earnings of U.S.-based multinational corporations to a one-time 14 percent tax. But there is little legislative momentum behind efforts to ensure that these companies’ offshore cash is taxed at the regular 35 percent corporate income tax rate, as it should be. The result is that the 15 companies profiled here will likely continue to avoid roughly $74 billion in federal income taxes on their offshore cash.
The medical device tax, by contrast, has been forecast to raise less than $30 billion over the next ten years. Many of the biggest medical device makers are foreign-based corporations, so these 15 companies will pay only a fraction of the $2-3 billion annual yield of the medical device tax. As long as these companies continue to avoid paying taxes on their offshore stash, it’s hard to see why Congress should prioritize repealing the medical device tax.