Paying for Obamacare

By Patrick Brennan
Thursday, June 07, 2012

In order to defeat or repeal certain taxes, conservatives often like to label them “job killing,” and it turns out one of Obamacare’s tax increases might be just that — for American workers, and some Democratic congressmen. Those politicians are now joining Republicans in attempting to repeal the execrable measure, an excise tax on medical-device sales.

In a January Bloomberg View column, Ramesh Ponnuru ably covered the detrimental effects of the tax: An industry with a 4 percent profit margin (leading ThinkProgress to call it “ever-profitable”) will now face a 2.3 percent excise tax, and various medical-device companies have either halted hiring or are planning layoffs. A trade-group study suggests that it will cost the industry 45,000 high-paying jobs.

The downsides to this tax, which was expected to raise $30 billion over ten years toward the implementation of Obamacare, are causing chest pains for Democrats. Representative Bill Owens, for instance, explained to Politico that a combination of pressure from constituents and his local Chamber of Commerce prompted him to sponsor its elimination. Even Senate candidate Elizabeth Warren has pledged to repeal the tax — no doubt owing to pressure from voters in Massachusetts, home to a massive biotech industry as well as Boston Scientific, one of the world’s largest medical-device companies.

But aside from being bad politics, the tax is poor policy. The basic principles of business taxation hold that taxes should be applied on net income, or revenues less expenses. The medical-device tax would instead level a 2.3 percent tax on all sales of medical devices produced in or imported into the United States. Congress has thereby put MRI machines and pacemakers in the same category as alcohol, cigarettes, and gasoline. Americans who pay high excise taxes on cigarettes their entire lives will have the additional pleasure of paying such a levy on their life-saving pacemakers and oxygen machines.

If the government is to expand health-care coverage, it has to be paid for, but ideally that would happen in the most efficient and least distortionary way. Impressively, Obamacare has crafted something that’s almost the opposite: an unconventional excise tax, levied only on one narrow industry, extending to many products that are irrelevant to America’s health-insurance system (the medical devices we export every year), but excluding many that are (such as eyeglasses), so that, conveniently, consumers are less likely to notice the added cost. The dubious defense is that health-care reform, since it provides new business for health-care providers and suppliers, should ask those parties to give up something in return. Unfortunately, rather than representing an efficient bargain, the tax would raise the price of medical devices for consumers and actually increase national medical expenditures by billions, increasing the burden of Obamacare, Medicaid, and Medicare.

Even if the provisions meant to pay for Obamacare were well designed, politicians across the political spectrum are likely to eschew them eventually. In recent weeks, Democrats have begun to criticize Republicans for suggesting that they’d keep certain politically popular elements of the health-care reform law. Michael Tomasky at the Daily Beast suggested that Republicans “want to keep the easy and fun stuff and get rid of all that bad-bad-bad stuff.” In some sense, this assertion might well be fair — it is indeed perilously irresponsible to preserve, say, the new preexisting-condition regulations while eliminating some or all of the rest of the law.

But Democrats, by joining in opposition to the medical-device tax, have essentially engaged in this same game. Tomasky points out that Republicans “don’t understand — or more likely do understand but refuse to acknowledge — that the good doesn’t work without the ‘bad.’” The problem, however, is that Democrats are now revealing, if not admitting, that they too would like to strip out the “bad.” Some of them have found the nonsensical medical-device levy to be the first politically costly provision, but it won’t be the last.

Another unlikely Obamacare pay-for is the future huge Medicare-funding cut, which, as Charles Blahous has argued, depends “upon future enforcement at some variance with historical precedent, including even the precedent of the ACA [Affordable Care Act] itself.” That is, the cut isn’t going to happen, and without it, the president’s law will blow a huge hole in the federal budget.

Obamacare’s 2013 tax hike on investment income is another unpopular, and problematic, part of the law’s financing, and it too will surely come under attack as the “fiscal cliff” approaches. Combined with the expiration of Bush’s dividend-tax cut, the effective tax rate on dividends will rise to 43.4 percent, almost surely dealing a brutal blow to equity markets. Especially in a struggling economy, one policy, if not both, will have to go. Republicans are more likely than the Democrats to push for that fix, but both sides will understand its importance.

Liberals and conservatives don’t agree about what constitutes the “good” and the “bad” parts of Obamacare, and so each party reaches different conclusions about how to implement or repeal the bill. But some politically costly elements, such as the device tax, are falling upon all the Republicans and Democrats alike. The consequence of this dynamic is that, as ever, legislators will attempt to preserve the pleasingly profligate parts of a bargain, and eschew the ugly responsible ones.