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With special tax suspended, medical device firms reap big savings

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U.S. Rep. Erik Paulsen
U.S. Rep. Erik Paulsen was a proponent of the tax suspension.
Brett Neely | MPR News 2014

U.S. medical device manufacturers started the new year with a windfall in the form of a two-year suspension of a controversial tax on their revenue. 

According to the Congressional Budget Office, the suspension could save the device industry a lot of money — nearly $5 billion. 

Minnesota is home to a concentration of such companies. Industry executives say the tax hurt their businesses.

"I remember, when this tax went into place, it forced us to make cuts and sustain those cuts," said George Montague, chief financial officer of Smiths Medical. The Plymouth-based company takes in more than $1 billion a year selling specialty medical products.

Montague said the company had paid $10 million a year in medical device taxes, "and so now we're getting that funding back."

Montague insisted the windfall will go into building the business.

"We're making significant investment in our product portfolio, in improving our product portfolio," he said. "And what this enables us to do is accelerate some of that investment."

The med tech industry has branded the device tax a job-killer. Montague said Smiths Medical will be adding new jobs, but he doesn't know how many.

U.S. Rep.  Erik Paulsen, R-Minn., a leading opponent of the tax, stopped by Smiths Medical on something of a victory lap. Paulsen said the law suspending the tax for two years could provide a major boost to Minnesota's economy.

"There are estimates that because of Minnesota's high concentration in this sector, essentially the largest in the world in a concentrated environment, that Minnesota would be paying 25 percent of the tax," Paulsen said. "That's a big deal to our economy."

Paulsen also paid a visit to NxThera, a much smaller company developing treatments for urological conditions. 

NxThera CEO Bob Paulson said his firm had only been paying the device tax since November, when the company started selling products in the United States. Still, he said, the tax made it harder to find financing because investors balk at putting their money into an industry that's been singled out to pay a tax. Now he plans to add to his staff of 43 in sales and research.

"It absolutely means additional money that we can invest in both of those areas," he said. 

Bob Paulson said the tax suspension will create thousands of new jobs in Minnesota. But there's no clear consensus among analysts on that. 

The Congressional Research Service concluded the tax was having fairly minor effects on employment, changing payrolls by no more than two-tenths of 1 percent. But the same report called the tax difficult to justify and noted such excise taxes are typically put in place to discourage behavior, such as smoking.

Jason McGorman, a senior analyst with Bloomberg Intelligence, said the suspension won't really change what big companies are doing but will help their bottom lines. Big, publicly traded firms also might return the money to shareholders by re-purchasing their own shares, he said. 

Smaller companies felt a bigger tax bite than the giants, so they're more likely to put the tax savings back into the business, McGorman said.

Industry analyst Brooks West of Piper Jaffray said device makers should invest the windfall in research and development rather than passing the money through to owners and investors. Otherwise, he said, they risk the government re-imposing the tax.

"I think it works best for everybody if there's a solid commitment to R and D within the device industry," West said. "And I think that's where the money's going to go."

But Rep. Paulsen doubts the tax will return. He's optimistic that the two-year tax suspension will become permanent.

Whether the device tax is gone for good remains to be seen. But judging from stock prices of the big firms, Wall Street does not seem to think the suspension will make much of a difference in their fortunes.