Inversions have been in the news consistently this summer as multiple companies have looked for legal paths away from the U.S. corporate tax system. Burger King became the latest corporation to add to the list after they...
- The Tax Policy Blog
- Supreme Court Problematically Defines Individual Mandate ...
Supreme Court Problematically Defines Individual Mandate as "Tax"
Below are my comments on reading this morning's opinion in the health care ("Obamacare") case, where a 5-4 majority upheld the individual mandate to buy health insurance as authorized under the Taxing Clause. Ours was one of the few briefs submitted that addressed this issue, urging the Court to reject the interpretation that they ultimately adopted.
The Court majority concedes that a tax could have so many penalizing features that it loses its character as a tax and becomes a penalty (p. 42). They also concede that a penalty is "obviously designed to regulate behavior . . . ." (p. 42). However, they hold that it is a tax and not a penalty for three reasons:
(1) The amount due will be far less than the price of insurance, and is not a prohibitory financial punishment. (p.35-36)
(2) There is no requirement of a finding of criminal guilt. (p. 36)
(3) The IRS collects it, and is not permitted to use criminal prosecution or punitive sanctions in doing so. (p. 36)
They further state that the government's authority here "is limited to requiring an individual to pay money into the Federal treasury, no more."
The Court specifically states that it does not "decide the precise point at which an exaction becomes so punitive that the taxing power does not authorize it" (p. 43). That "leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice." (p. 44). Thus, strangely, the Court holds that the mandate is a tax because it is voluntary, not mandatory.
The Court finally states that it is not a direct tax--if it were, it would be unconstitutional for not being apportioned by population-- because not everyone is subject to it. Only those who refuse to buy insurance are subject to it, so it is an excise tax.
The joint dissent -- I can't remember another jointly authored dissent -- tracks our brief's arguments closely. First they, note that a tax raises revenue while a penalty punishes for an unlawful act. (p. 18). They go on: "But we have never held--never--that a penalty imposed for violation of the law was so trivial as to be in effect a tax. We have never held that any exaction of Congress's taxing power--even when the statute calls it a tax, much less when (as here) the statute repeatedly calls it a penalty." (p. 18). They refer to it as "a regulatory penalty, not a tax." (p. 19), noting that it "is imposed for violation of the law." (p. 19)
They note that different categories of people are exempted from the mandate than from the penalty, which makes no sense if it is a tax--all the categories should be exempt. They reference extensively, as we did in our brief, that all evidence in the statutory text and past cases considers it a penalty and not a tax. They also criticize the majority for giving short shrift to the argument that it is a direct tax.
In our brief, we explained that all relevant precedent defines a tax chiefly as a government exaction with the primary purpose of raising revenue. We warned that rejecting that widely-accepted definition could jeopardize settled precedent and taxpayer protections at the federal level and in nearly every state. (We also noted President Obama's comments that the mandate is not a tax.) There has been no development in law that necessitates such a far-reaching change.
A meaningful distinction between "tax" and "penalty" is vital to give operation to numerous federal and state provisions relating to tax policy. To hold that a tax is any government exaction, then government revenue collection efforts across the country could be imperiled, as many revenue sources are not subjected to the heightened restrictions that "taxes" are. To collect fees or impose criminal fines, states for the first time would see these charges subjected to supermajority, multiple reading, and other requirements. While some states may choose to extend such procedural requirements to non-tax revenue sources, this should be done explicitly through the legislative process, not by announcing a new definition of "tax" not comprehended at the time these provisions were adopted.
We had urged the Court to be cautious not to encourage treating penalties as taxes, as that would render many state powers, and potentially the Taxing Power's limitations, meaningless.
Subscribe to the Tax Foundation Newsletter
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official weblog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.