Medical device firms spent millions to get the device tax to go away

WASHINGTON – It took tens of millions of dollars in lobbying and campaign contributions, but in the end, Minnesota's medical device companies got what they wanted out of Congress: the gutting of a sales tax they claimed was crippling them.

In the waning days before the Christmas recess, both chambers of Congress passed a two-year suspension of the 2.3 percent excise tax without finding a replacement for the lost revenue — a decision that would add roughly $29 billion to the national debt over 10 years if the suspension eventually leads to the tax's permanent repeal.

Because tax repeals are incredibly difficult to pull off, particularly after the money has been collected, the medical device industry sank millions into behind-the-scenes lobbying on Capitol Hill and hefty campaign contributions to Minnesota's politicians on both sides of the aisle.

The state is second only to California in the number of people — some 35,000 — working in medical technology at more than 700 companies.

While the repeal campaign was costly to medical device firms, it was effective.

Republican Rep. Erik Paulsen has successfully passed seven House bills since 2012 to get the excise tax repealed. He also consistently led the pack in the House and Senate for campaign contributions from the medical device industry, pulling in $97,000.

In the upper chamber, Democratic Sens. Amy Klobuchar and Al Franken worked on it, too. Klobuchar has been fighting the tax from the beginning. In 2012, her most recent election cycle, she received $90,000 in campaign contributions from the industry.

"I advocated for the repeal because of the jobs in our state and the people who work in the industry. This is a tax that was assessed inordinately on one state," Klobuchar said in a statement.

When he was up for re-election in 2014, Franken received $55,000 from the medical device industry, according to the Center for Responsive Politics, a nonprofit, nonpartisan research group based in Washington, D.C.

The companies, and the politicians supporting a repeal, complained the tax was crippling a budding industry. They blamed it for lackluster growth; many politicians, including Paulsen, called it a "job killer."

That rhetoric, though, isn't in line with three reviews of the medical device industry over the past couple of years. Those studies found that massive job losses weren't necessarily a result of the tax, in part because companies could pass higher costs along to consumers by increasing prices.

What is clear is that the tax's suspension was a windfall for device companies, especially the big ones. Medtronic paid about $135 million in excise taxes in fiscal year 2015.

Medtronic, one of Minnesota's largest medical device companies, spent $10 million on lobbying in 2013 and 2014. St. Jude, another Minnesota company, spent $795,000 in 2014 on lobbying alone, according to the Center for Responsive Politics.

The Advanced Medical Technology Association spent $2.36 million lobbying in 2014 and nearly $2 million in the first three quarters of 2015.

"There was no new magic strategy," said Shaye Mandle, CEO of LifeScience Alley, Minnesota's medical technology trade group. "We just lobbied the way you're supposed to: You get the facts and get them in front of as many people as possible."

Craig Holman, who works for the government watchdog group Public Citizen, calls this pay-to-play effort on Capitol Hill heavily influential in how politicians operate.

"Obamacare needs that tax in order to survive. … The mere fact that you've got liberal Democrats in Minnesota undermining the financing of Obamacare really shows how much influence campaign contributions can have," he said.

In a statement, Klobuchar said that suspending the tax "will improve patients' lives, create well-paying jobs and give Minnesota businesses the certainty and stability needed."

However, the General Accountability Office, Congressional Research Service and an industry study did not conclude that the 2.3 percent tax on sales would lead to massive job losses.

The CRS said the tax was unlikely to affect profits because the added costs would largely be passed on to consumers through higher prices. And the GAO found overall net profits among 30 large-sized companies, including Medtronic, St. Jude and 3M in Minnesota, grew 43 percent from 2005 to 2014.

Among 72 small and medium-sized companies, including four in Minnesota, there were overall losses of about 28 percent during that time period. But federal researchers were hesitant to attribute those losses to the tax, particularly since the losses decreased overall from 2010 through 2014 — when Obamacare was first passed.

Another private study by Emergo, a group that annually surveys hundreds of U.S. device company executives, found in 2014 that 14 percent of respondents cut jobs because of the device tax, another 29 percent raised prices to compensate and 57 percent of companies did nothing.

Stephen Parente, professor of health finance and associate dean of the Carlson School of Management at the University of Minnesota, said the tax is most burdensome for small start-up companies. He said the federal reports were not representative because they don't take small and medium-sized firms into account.

The tax, he said, "has a chilling effect. It does need to be paid off at some point, but I think suspending it for two years gives them some breathing room. Everybody is certainly paying for this."

Klobuchar said she would prefer the tax cut was paid for and that she would seek options for permanent paid-for relief in the future. Franken's office noted that his position predated the largesse he received from the industry.

"Minnesota is home to countless medical device companies — large and small — that produce lifesaving devices used by tens of millions of Americans," Franken said in an e-mail. "I'm happy to have played a role."

allison.sherry@startribune.com • 202-383-6120

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