Senate proposes to cut Orphan Drug Tax Credit to 27.5 percent, and make it public

The Managers Amendment for the “Tax Cuts and Jobs Act” is available on the Senate Finance web page here:

https://www.finance.senate.gov/imo/media/doc/11.20.17%20Tax%20Cuts%20and%20Jobs%20Act.pdf

or here:
11.20.17 Tax Cuts and Jobs Act

I was looking over the Orphan Drug Tax Credit (ODTC) language. The earlier Senate Finance proposal was a more complex formula that ranged from 25 to 50 percent, based upon the increase in R&D spending, with exclusions when a drug was approved for any combination of indications that involved 200,000 or more patients. The newer version simply cuts the credit to 27.5 percent,  down from 50 percent in the existing law.  This increases the net cost of trials by 45 percent over the current law,  (1-.275)/(1-.5) = 1.45.

In contrast, the House version of the bill eliminates the credit completely, which would double the net costs of trials, compared to the current law.

Second, and this is very good and worth supporting in the mark-ups, the Senate now proposes to make the ODTC transparent, as to the taxpayer, the drug and the disease or condition.  If this prevails, there will be transparent trial costs, by drug and indication, whenever the ODTC credit is used.

219 O:\MCG\MCG17B25.xml [file 2 of 4]
S.L.C.
PART V—BUSINESS CREDITS
 Subpart A—General Provisions
SEC. 13401. MODIFICATION OF ORPHAN DRUG CREDIT.
(a) CREDIT RATE.—Subsection (a) of section 45C is  amended by striking ‘‘50 percent’’ and inserting ‘‘27.5  percent’’.
(b) DISCLOSURE OF CREDITS.—Section 45C is amended by adding at the end the following new subsection:
‘‘(e) DISCLOSURE OF CREDITS.—The Secretary shall publicly disclose the identity of any taxpayer (in the case of a pass-thru entity, the name of the entity) to whom a credit is allowed under this section, as well as the amount of such credit, the drug with respect to which the qualified clinical testing expenses were taken into account under this section, and the rare disease or condition for which such drug was being tested.’’. ​

There is also a section (c) ELECTION OF REDUCED CREDIT.


The reduction in the ODTC from 50 percent to 27.5 percent should not influence prices by itself. 

The increases in the net trial costs over the current law will reduce investment and innovation, all other things being equal. The change in the credit is also part of a larger bill that lowers the corporate tax rate and increases the federal deficit.

The reduction of the credit is scored as an increase in federal tax revenues of $29.9 billion over 10 years, which is used to justify the various tax cuts in the bill, the largest involving the reduction in the corporate income tax rate and the reduction in taxes on large estates.