Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
- The Tax Flaw in Health Care Ruling
The Tax Flaw in Health Care Ruling
This commentary appeared in the Herald News (Fall River, MA) on July 4, 2012 and in the Taunton (MA) Daily Gazette on July 5, 2012.
The payment required under the Patient Protection and Affordable Care Act from individuals who do not have health insurance should be considered a penalty and not a tax under the U.S. Constitution. Last week's ruling by the U.S. Supreme Court holding otherwise jeopardizes a long-standing precedent and could have severe implications for taxpayer protections across the country.
Federal and state courts have articulated a definition of "tax" that is widely accepted today. A tax is imposed for the purpose of raising revenue for government spending, while a penalty is imposed for the purpose of punishing an individual for an unlawful act. No evidence exists that the point of the Affordable Care Act's individual mandate is to raise money for general government operations. Of the law's many supporters that have opined on the purpose of the individual mandate, none have argued that its primary purpose is to raise revenue.
While it may seem like a minor matter, a meaningful distinction between "tax" and "penalty" is vital to many federal and state provisions relating to tax policy. There are many government revenue sources that are not technically considered taxes, and thus are not subjected to heightened requirements like supermajority approval and multiple readings in state legislatures. The Supreme Court's recent decision, however, could classify many of these as taxes, unintentionally changing the rules under which state government agencies operate.
The distinction between what is a tax and what is a penalty is even more important given how the Supreme Court explained its ruling.
The decision written by Chief Justice John Roberts acknowledges that the federal government doesn't have the power to enforce the individual mandate under the Constitution's Commerce Clause, the passage that is usually cited as Congress' authorization for regulating economic activity that crosses state borders.
The authorization for the individual mandate is instead justified by the Chief Justice under what is known as Congress' taxing power. In order to judge the individual mandate as permissible under the Constitution, Justice Roberts had to find that it was a kind of tax. Thus, we see the strange re-definition of what constitutes a "tax" that we find in the decision. By twisting the traditional and historic meaning of a tax, the chief justice has allowed the Affordable Care Act to remain in force, but has set a precedent that calls into question any number of previous cases challenging the limitations of the government's authority to levy taxes.
The argument against the individual mandate being considered a tax, however, goes even further. Even if it were otherwise permissible under the Taxing Power, the tax would still be what's known as a direct or "capitation" tax, in direct violation of the Constitution. A direct tax is only permissible if it is apportioned among the states in proportion to population, or levied on incomes.
The penalty for not purchasing private health insurance which the Roberts court calls a tax in not apportioned among the states nor entirely levied on incomes - many individuals will fall under the provision that requires them to pay a flat $695 for violating the mandate.
The prohibition of unapportioned direct taxes exists for an important reason.
Founding Father and first Secretary of the Treasury Alexander Hamilton characterized the provision as a compromise that ensured that the federal government could have recourse to direct taxation if needed, but not in a way that could invite abuse.
The taxing power of Congress was intentionally limited in specific ways that served as a check on the government's power. Last week's ruling would erode those protections, giving the federal government ever more latitude in deciding what is and is not a tax and when it can be applied.
Given the troubling aspects of the Supreme Court's recent ruling, state and federal courts are faced with a confusing future in which the previously settled question of what qualifies as a tax will find itself at war with Chief Justice Roberts' new definition.
These conflicting precedents will likely affect cases far removed from the topic of health care and the individual mandate. Only a further high court verdict can reconcile them again, and such an opportunity may be a long time coming.
Join the Tax Foundation's fight for sound tax policy Go
Tax Policy Blog
The official weblog of the Tax Foundation.
Tax By State
For information on your state, select it from the drop-down menu.
Ask a Tax Expert
Contact information for Tax Foundation policy staff Ask