We were disappointed to hear Treasury Secretary Jack Lew defend yesterday the onerous medical device tax that went into effect on January 1st as part of the Affordable Care Act. While Lew admitted that the idea behind the tax was not to target startup medical device companies, the reality is the 2.3 excise tax impairs innovation as it is imposed on all revenues rather than just profit. It is clear that Lew is out of touch with the greater comprehension of the harmful nature of the tax as just last month 79 senators voted in favor of its repeal, demonstrating strong bipartisan support during the budget debate.

The NAM urges the Administration to look at the real world effects the medical device tax is having on manufacturers competing in the global marketplace and to recognize the Senate’s strong vote as marker of bipartisan understanding that the tax is indeed hurting jobs, investment and the ability for the United States to maintain its position as the global leader in medical technology innovation.

We were pleased to read a bi-partisan op-ed by Senator Orrin Hatch (R-UT) and Congressman Jim Matheson (D-UT), who have recently introduced legislation to repeal the Health Insurance Tax (HIT) provision of the Affordable Care Act (ACA), highlighting the escalating costs of health care on small businesses and the adverse relationship this tax will have on their ability to grow jobs in our economy.

As nearly 70 percent of the NAM’s small and medium-sized manufacturers buy health insurance in the fully insured marketplace, the HIT tax will significantly drive up the cost of coverage which comes on top of the nearly 10 percent average increases in premiums that companies’ experienced last year. While the tax technically falls on insurers, CBO has confirmed that it “would be largely passed through to consumers [small business owners and their employees] in the form of higher premiums for private coverage.”

Manufacturers believe it is critical that Congress take action to repeal the HIT tax to help make health care coverage more affordable and to encourage employer provided health insurance for employees before it goes into effect beginning in 2014.

Today H.R. 523 – the Protect Medical Innovation Act – was introduced in the House by Representatives Erik Paulsen (R-MN) and Ron Kind (D-WI). This bill aims to repeal the prohibitory 2.3 percent excise tax on medical device manufactures.

As of January 1st, the excise tax went into effect and manufacturers are already experiencing significant, negative consequences on job growth and innovation as a result of having to cut R&D budgets. A recent study found that as many as an estimated 43,000 jobs will now be at risk as a result of this tax. The NAM has always strongly opposed industry and product specific taxes, as they serve to inhibit growth in targeted sectors and impede on the ability of targeted companies to compete in the global marketplace.

Manufacturers are pleased to see members of Congress working together across the aisle to eliminate this avoidable hindrance to the global success of our medical device companies. We anticipate similar legislation will soon be introduced in the Senate by Senators Orin Hatch (R-UT) and Amy Klobuchar (D-MN). In addition, Senators Al Franken (D-MN), Pat Toomey (R-PA), Joe Donnelly (D-IN), Richard Burr (R-NC), John Cornyn (R-TX) and Robert Casey (D-PA) have also come out in support of repealing this onerous tax.

As this is clearly a bipartisan issue of great concern to American manufacturing, we hope to continue to see members of both parties come together to solve this problem in the coming months.

In the past two weeks we’ve seen op-eds from Indiana Senator Dan Coats in Politico and former Senator Evan Bayh in the Wall Street Journal emphasizing the devastating effects the medical device tax will have on manufacturers and American competitiveness come January 1^st, 2013. To date, the medical device industry employs more than 400,000 employees in the United States and continues to be a global leader in the sector for delivering groundbreaking technology and innovation.

As a result of the health care reform legislation, medical device manufacturers will face a 2.3% excise tax on every medical device sale. Senator Coats states that the device tax is estimated to cost the industry more than $20 billion over next decade. A direct consequence of this tax is that companies have already begun to scale back their workforce and abandon plans for expanding their operations. Senator Bayh mentions that for a typical company, the 2.3% tax on sales amounts to a 15% tax on profits. When combined with the 35% corporate tax and state corporate tax rate, the tax rate for medical device manufacturers would exceed 50% in many jurisdictions. It is clear that the effect of this tax will be particularly devastating for small and medium sized manufacturers.

With only 25 days until the election, we must ensure that Congress repeals the medical device tax when they return to Washington in November to make sure the success this industry has generated continues into the future and that American jobs do not move off-shore.

Today the Federal Reserve reported that industrial production figures for May are down 0.1 percent after having gained 1.0 percent in April.  While total industrial production in May was 4.7 percent higher than in the previous year, the capacity utilization rate for total industry declined 0.2 percentage point to 79.0 percent, a rate 1.3 percentage points below its long-run (1972—2011) average.

May’s 0.4 percent decrease for manufacturing production partially reversed the large increase that occurred in April. As a whole, both durable and nondurable goods production fell in May.

 The production index for durable goods declined 0.5 percent after a gain of 1.4 percent in the previous month. The capacity utilization for durable goods manufacturing was 78.0 percent, a rate 5.0 percentage points higher than the previous year and 0.9 percentage point above its long-run average. The largest increase among major durable goods industries was for wood products (up 1.0 percent) and smaller gains were recorded by fabricated metals; electrical equipment, appliances, and components; and miscellaneous manufacturing. Industries with decreases of more than 1.0 percent included nonmetallic mineral products, primary metals, motor vehicles and parts, and furniture and related products. The production of non-durables decreased by 0.2 percent, making May the third consecutive month without a gain for non-durables despite increases of around 1.0 percent in apparel, leather, petroleum and coal products.

Overall, the index for Manufacturing in May was 5.2 percent above the previous year level, reflecting a longer-term positive trend.

Tomorrow the Ways and Means committee will mark up the Protect Medical Innovation Act of 2011 (H.R. 436), repealing the 2.3% excise tax on the gross sales of medical devices included in the health care reform law. Set to take effect in 2013, this excise tax is estimated to cost US businesses close to $30 billion in new taxes. This will effectively back companies into a corner to scale back operations and cut resources for R&D, thus stifling innovation and forcing job cuts.

This industry-specific tax will be particularly harmful for small to medium sized manufacturers (80 percent are companies with 50 or less employees, 98 percent have 500 employees or less), as the tax is assessed on a company’s sales rather than profits. In fact, many companies have already announced layoffs in anticipation of the effective date.

Medical device manufacturers have been a shining star throughout our economic recession and the US continues to be the world leader in manufacturing life-saving and life-enhancing treatments. We should not constrain this segment of the manufacturing community, but rather see that their success continues well into the future. The NAM strongly supports rolling back this tax before it takes effect.  We need to ensure that medical device manufacturers are able to remain dynamic and innovative in order to improve the quality of life of patients.

The Economic and Statistics Administration released a report today on the “Benefits of Manufacturing Jobs,” looking at the current state of the manufacturing sector and job trends. Its good to see that since January 2010 (lowest period) to April 2012, manufacturing employment expanded by nearly 500,000 jobs. This is the strongest cyclical rebound since the recessions in the 1980s.

The authors, David Langdon and Rebecca Lehrman, point to the essential role manufacturing continues to play in innovation, as manufacturing firms fund most domestic corporate R&D, and in driving export growth. The report demonstrates signs of renewed strength in the sector and its importance for providing “good jobs” to workers and to the greater economy via innovation that improves our nation’s standard of living.

Some of the highlights of the report include:

•On average, hourly wages and salaries for manufacturing jobs are $29.75 an hour compared to $27.47 an hour for non-manufacturing jobs. Total hourly compensation, which includes employer-provided benefits, is $38.27 for workers in manufacturing jobs and $32.84 for workers in non-manufacturing jobs, a 17 percent premium.

•The educational attainment of the manufacturing workforce is rising steadily.  In 2011, 53 percent of all manufacturing workers had at least some college education, up from 43 percent in 1994.

• The innovative manufacturing sector relies more heavily on STEM education than non-manufacturing.  For instance, nearly 1 out of 3 (32 percent) college-educated manufacturing workers has a STEM job, compared to 10 percent in non-manufacturing. 

•Higher educational attainment for manufacturing workers carries higher premiums and the size of the premium, including or excluding benefits, increases consistently with educational attainment.

•The compensation premium has risen over the past decade across all levels of educational attainment.

Advanced education and training is becoming increasingly more important to manufactures. The NAM continues to push policymakers to address the issue of better training for our workforce to meet the needs of modern manufacturing, both today and in the future.

Emily Sternfeld is a policy associate, National Association of Manufacturers.

At at the end of the year the top dividend tax rate (roughly 25% of all dividends earned) will rise from 15% to 43.4% which has manufacturers very concerned. This rate change reflects the expiration of the 2001/2003 tax cuts, which lowered the rate from 39.6% percent to 15%, as well as the new additional 3.8% surtax under the Affordable Care Act of 2010. This will be the single largest dividend tax hike in history!

This is bound to have an impact on the stock market. In a May 4^th Op-Ed that appeared in the Wall Street Journal, Donald Luskin concludes that if no action is taken by Congress, the stock market is set to fall by at least a whopping 30%. According to Luskin, it all comes down to simple arithmetic – when the tax rate goes up, the after-tax yield goes down thereby causing the stock price to fall.

Manufacturers are concerned about the effects of this tax increase, and with good reason. The rate change will impact the entire market, as companies that do not pay dividends may still be priced with the expectation that dividends will be paid in the future.

And who stands to lose? Corporations and shareholders of all incomes, including retirees, pension plans, etc. While we often hear high taxes on investment income will only affect the wealthy, the reality is that all shareholders will be hurt, as corporate dividend payouts are reactive to the dividend tax. Let’s also not forget that dividends are only paid to shareholders after a corporation is taxed on its profits. 

If lower rates for investment income are allowed to expire, the cost of capital will increase, investment will lag and manufacturers in the U.S. will find it harder to create jobs and effectively compete in the global marketplace. Manufacturers are urging Congress to address this issue soon and restore confidence to investors, or we will all be experiencing the negative market effects come January 1st, 2013.

Emily Sternfeld is a policy associate, National Association of Manufacturers.