Proposed Offset for Medical Device Tax Can’t Offset Anything — It’s a Timing Gimmick

October 3, 2013 at 10:02 am

Update, October 11:  We’ve updated this post.

House Republicans have demanded, as part of their price for allowing the government to reopen, that policymakers repeal health reform’s medical device tax, which will help pay for extending coverage to millions of uninsured Americans.  Although the Senate rejected that House proposal this weekend, some policymakers are reportedly trying to revive it and to replace the lost revenues through use of a revenue gimmick:  changing the rules about how much companies must contribute to their employees’ pension funds.  This maneuver would bring in more revenue within the ten-year budget “window” — but lose significant revenue after that.

This proposal is unwise for two basic reasons.  First, as Tom Friedman in the New York Times and Dana Milbank in the Washington Post both wrote yesterday (and CBPP president Robert Greenstein wrote in an October 1 blog), giving concessions in return for avoiding or ending a government shutdown — or avoiding a default — will only make shutdown (and default) threats by congressional minorities, in order to extract policy changes they can’t otherwise win, a regular feature of the political landscape.  That would threaten the functioning of our political system and potentially our democracy, itself.

Second, this proposed change in pension funding rules can’t “pay for” anything.  While it would raise money at first, it would lose money in later years.  Although it would offset some or all of the cost of ending the medical device tax for several years, it would swell deficits and debt for some years after that.

Federal rules set the minimum amount that employers must contribute to company pension plans, in order to keep the plans solvent.  The proposal would allow employers to “smooth out” these contributions over time.  Under the smoothing formula, employers would contribute less in the short and medium term, and more in the longer term.  These contributions are tax-deductible, so shrinking them would raise employers’ income tax payments — and thus overall federal tax revenues — in the years immediately ahead.

But the revenue gain would be only temporary.  Employers would have to contribute more to their pension funds in later years under the smoothing formula.  That means they would take higher tax deductions for pension contributions in those later years and pay less income tax than under the current rules.

So, the proposal could produce a net revenue gain within the ten-year budget window, but produce subsequent revenue losses.  As a result, it would cease to function as an offset, and the package would then increase deficits and debt in all future decades.

A similar but somewhat more modest smoothing provision was enacted in the 2012 highway bill.  The Joint Committee on Taxation estimated it will raise $16.5 billion in revenue over the first five years but then lose $7.1 billion over the rest of the ten-year budget window.  This produced a net revenue gain of about $9 billion for the ten years as a whole, but it will increase deficits in subsequent years as the revenue losses continue for a number of years beyond the budget window.

The proposal now being floated as a way to “pay for” all or part of the cost of repealing the medical device tax apparently would enlarge upon the provisions enacted in 2012, producing a similar pattern of short-term revenue gains.  As with the 2012 provision, however, those gains would be offset by higher deficits in later years, outside the budget window.  If coupled with repeal of the medical device tax, such a package would raise deficits by billions of dollars each year in the long run.

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More About Chye-Ching Huang

Chye-Ching Huang

Chye-Ching Huang is a tax policy analyst with the Center’s Federal Fiscal Policy Team, where she focuses on the fiscal and economic effects of federal tax policy. You can follow her on Twitter @dashching.

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2 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. WKJ #

    On your second point, you are right but that horse left the barn decades ago. A thorough search would probably find hundreds of these illusory revenue offsets, most notably the Roth IRA and the various Roth IRA conversion options that have been enacted.

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