Posted: March 01, 2013
Colorado innovators weigh impact of contested tax
Tough hike for medical device makersDebra Melani
Although health-reform and fiscal-cliff fallout continues its scattered rain on all Colorado businesses, one large chunk has landed squarely in the front yards of the state’s medical-device companies. Now, with the ink barely dry on the first quarterly IRS payments for a 2.3-percent excise tax that took effect Jan. 1, these high-tech manufacturers are warning that a negative economic rumble could follow.
In 2010, faced with paying for President Obama’s $1 trillion Affordable Care Act, lawmakers approved the tax, expected to raise as much as $29 billion in the next 10 years from the $100-billion-plus medical-device industry. The tax made it through the end-of-year fiscal-cliff congressional session intact, but as ColoradoBiz went to press in mid-February, bipartisan bills calling for repeal of the medical-device tax had been introduced in both the U.S. House and the Senate. At stake, according to those in the field, are thousands of jobs and America’s leading edge in the medical-device marketplace.
“I am absolutely worried,” said April Giles, president and CEO of the Colorado BioScience Association, which has more than 350 members. “I’m worried for our small businesses, because it really limits their ability to get their product out into the market in a way that they can be successful and reinvest those dollars back into innovation.” The excise tax is levied on total revenue of all medical-device companies, regardless of size or profits.
Medical-device companies, responsible for everything from MRIs to hip replacements, are significant players in the national and state economy, working to improve patient care. Colorado employs 27,000 people in the bioscience industry, creating 122,000 direct and indirect jobs. That translates into about $10 billion in payroll, at an average annual salary of $82,000, Giles said. The medical-device sector makes up about half of the state’s bioscience industry and has grown by about 14 percent in the past three years, she said.
Many startup companies cannot afford the extra tax, as getting a product off the ground can take years before profits enter the picture, said Jack Wheeler, who has been in the state’s bioscience industry for 30 years and co-founded MicroPhage in Longmont in 2002. Wheeler has since left the company, currently working with TeraBAT, a Longmont company developing breathalyzer technology that could dramatically speed detection of life-threatening conditions, such as heart attacks.
“For companies with fewer than 50 employees (the majority of medical-device companies), a 2.3 percent tax on revenue could be anywhere from 40 to 60 percent of their income after tax,” Wheeler said. “This is what happened with MicroPhage. They were not making profits, but they still had to pay taxes on sales.” MicroPhage, which developed technology that could detect deadly bacterial infections in hours rather than days, filed for Chapter 11 protection on Dec. 28.
Although Giles suspects a less profound impact on the state’s larger companies, they will still feel the blow, she said. “Our small companies are really driving a lot of innovation right now, and big companies are looking for them to do that for acquisition or partnering. It really does hurt our competitive edge.”
Yet not everyone agrees. Paul Van de Water, senior fellow at the Center on Budget and Policy Priorities in Washington, D.C., downplayed the industry’s concerns. “I have to say that I suspect if the legislation had proposed to raise the exact same amount of money from a medical device tax on profits rather than on revenue, we’d still be hearing all of the same complaints,” Van de Water said. “Does Colorado have a sales tax? I suspect you do, and it’s probably well over 2.3 percent, and it hasn’t caused the demise of the industries affected yet.”
Nationwide cries that the tax is unfair are unfounded, Van de Water said, as it serves as only one of many required contributions from a range of industries to help pay for reform, he said, citing hospitals and insurance companies as examples. In his research, Van de Water found many device manufacturers say that if a product creates a demand, a 2.3-percent cost increase would not have an appreciable effect on their market. The same holds true for investment concerns, he said. “If they come up with something like what they call in the drug industry a “me-too drug,” something that’s only marginally better than what was there before, that’s not the kind of innovation we really care about.”
Even some in the industry consider the uproar inflated and say companies will just have to become more competitive in the new era of health-care reform. “I think it’s the cost of doing business,” said Kevin Smith, CEO of the Colorado Institute for Drug, Device and Diagnostic Development. Especially today, taxpayers are not going to have much sympathy for a lucrative industry being assessed a tax, Smith said. Sure, there will be some cutbacks or re-strategizing in the industry. “That’s because our shareholders demand that profit now. That’s the way capitalism and the free markets work. That’s reality.”
While most in the industry understand they need to contribute to change, Giles said, the question is: At what cost? Colorado companies are already reporting job cuts, investment woes and even troubles with vendors, which are critical to manufacturing-job success, Giles said. “Vendors are concerned about the ripple effect.” Sure, if a product is significant, a company will get it to market, she said. “But there might be fewer jobs behind it, and it will take longer to get there. Patient access to new technology will be slowed.”
Attracting seed money has been a struggle for TeraBAT because of the tax, and at a time when uncertainty has already dramatically affected venture capital in the industry, Wheeler said. “Companies are going to be reducing work force and attempting to increase prices, which is difficult in the medical community right now with the restrictions of cost containment.” He said 7,000 industry jobs nationwide have already been cut in 2012 in anticipation of the tax, citing a figure released by Reuters.
But Van de Water counters that it’s impossible to connect those job losses to the tax. He used an example of another charge the industry is making: that the tax is pushing jobs overseas. “We know that can’t be a result of the device tax, because the tax is structured in such a way that devices made overseas and sold here are subject to the tax, and devices made here and sold overseas are not subject to the tax. We also see device companies producing products that are in high demand adding jobs.”
Giles emphasized that her industry knows it should help pay for reform. “We are from the perspective that everyone is willing to put something on the table to get us there. But we need the Congress to stop playing wars and come to a consensus on what’s going to help this country get back on its feet.”