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Surprisingly, it may be tax reform — not Affordable Care Act repeal and replace — that has the greatest impact on the health care industry in 2017.
President Donald Trump and GOP leaders have promised to lower the corporate tax rate, provide for a one-time repatriation of overseas corporate profits at a reduced rate and encourage manufacturing by allowing for the expensing of capital investment (among other things).
Despite the talk, a long-promised and little-delivered outline from Trump back in April highlighted the heavy lifting still needed to be done on tax reform even before a comprehensive plan can be released. Core principles unveiled by Republican leaders in July provided even less detail.
Even with a draft tax plan in hand and Obamacare repeal sidelined for now, pushing tax reform through requires time. And that’s something in short supply this fall as Congress juggles raising the debt ceiling, passing a fiscal year 2018 budget (another continuing resolution through December is likely), confirming nominees, and tackling other must-do items on the congressional agenda.
Tax reform itself could be doomed by an ongoing budget impasse. While conservatives and moderates battle over cuts to mandatory spending, the FY 2018 budget resolution is meant to serve as a vehicle for tax reform much in the same way the FY 2017 budget resolution is acting as a vehicle for health care reform. Reconciliation based on 51 GOP votes is the key to getting these highly partisan bills through the Senate, and several efforts will fail without a budget vehicle to which they can attach.
But tax relief for U.S. corporations does look likely somewhere around the bend. The White House says it aims to release its full tax plan by September and have Congress approve it by the end of the year. Whether it happens this year or next, more important than the timing of efforts to reform the tax code may be the scope of the reform itself.
First, corporate tax rates will come down. Trump says 15 percent, and the House GOP says 20 percent … but 25 percent may be more likely considering a battle raging over how to pay for these cuts. The $1 trillion (over 10 years) border adjustment tax at the center of the House plan is a nonstarter with the Senate and the White House and is no longer under discussion. Without the BAT, experts say that tax reform is doable — but on a much smaller scale.
The elimination of the BAT should give anyone who fills a drug prescription a sense of relief. A border adjustment tax would hit everything in a supply chain — either directly or indirectly — to the extent that margins are thin and costs are passed on from the top down. Drugs are a necessity, very unlike many other consumer products that would have been impacted by additional import costs, and while insurance companies, pharmacies and PBMs interplay to determine the ultimate cost, it’s consumers who bear that ultimate burden.
The BAT would have made rising drug prices worse.
Second, and key to the biopharmaceutical industry, is a repatriation tax holiday. Pharmaceutical companies have a particularly easy time maintaining overseas profit stockpiles; intellectual property can be moved incredibly easily. As a result, a repatriation tax holiday (Trump proposed a one-time repatriation of overseas corporate profits at a reduced rate of 10 percent during the campaign) would aid medical device and biopharma companies. Legislation introduced in 2011 would have allowed businesses to repatriate up to $150 million per year at a 5.25 percent tax rate provided the funds were specifically used by the companies to hire additional scientists, researchers and comparable personnel engaged in life science research.
Third is full expensing for capital investment, a major impact for any capital-intensive industry that would allow the full cost of investment to be deducted from taxable income in the first year. Full expensing would decrease the cost of capital, thereby incentivizing investment and capital formation (potentially including foreign capital as well).
Full expensing would be a boon for R&D-heavy industries like biopharma and medical device manufacturers, providing for upfront tax relief while inviting additional dollars for investment.
Cost is sure to be a major issue for tax reform. The president has said that economic growth will resolve all revenue problems, but fiscal conservatives in the House and Senate will be looking for proposals baked into the package to offset any loss of revenue. Conservatives may see tax reform as an opportunity to reduce overall federal spending by cutting revenue off at the source, but leadership has indicated a desire to keep any tax bill budget neutral. An analysis by the Tax Foundation finds that a 15% corporate tax rate (President Trump’s proposal) with no offset would reduce federal revenue by $2 trillion over ten years, sure to be a non-starter for any serious conversation.
Republicans are bound to ask themselves how much reforming of the tax code can actually be accomplished. Surely it will be less than they want, but tax reform is too much a part of the GOP’s DNA to not push the effort all the way to the finish line.
With the uncertainty that remains in the GOP’s efforts to repeal and/or replace the Affordable Care Act, the health care industry should find positive news in whatever comes from tax reform. With lower rates, capital expensing, repatriation of overseas profits, and a “priority” on permanence at the core of the GOP’s tax principles, health care companies can look forward to some relief — not to mention the opportunity to put more dollars to work — as they continue to wait and see what’s next on the repeal-replace front.
Whatever the shape or form of tax form, it likely will be welcomed with open arms by corporate America.
Ipsita Smolinski is managing director of Capitol Street, where she advises clients on national health care policy and emerging trends.
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