SCOTUS: What Congress can’t regulate, it can tax
In March, at the end of his much-maligned oral argument on the constitutionality of the so-called individual mandate of the Affordable Care Act, Solicitor General Donald Verrilli threw a Hail Mary.
Verrilli had taken a beating on his argument that the mandate didn’t violate the Commerce Clause because Congress was only regulating an existing market, not forcing people who don’t want health insurance into the market for healthcare. Chief Justice John Roberts and justices Antonin Scalia, Samuel Alito and Anthony Kennedy pounded the solicitor general on whether his reading of the Commerce Clause would permit Congress to do pretty much whatever it wanted in the guise of regulating interstate commerce. In the midst of discussing broccoli, health clubs and auto emission regulation, Verrilli and his opponents spent very little time presenting arguments and answering questions on the government’s backup argument for the mandate’s constitutionality: that the penalty imposed on those who do not buy health insurance is actually a tax that Congress is empowered to impose. (Paul Clement of Bancroft argued on behalf of 26 states opposed to the Affordable Care Act, and Michael Carvin of Jones Day on behalf of the National Federation of Independent Businesses.)
Nevertheless, Verrilli devoted his very last moments before the justices to the tax issue. “If there is any doubt about [the mandate's constitutionality] under the Commerce Clause,” he said, “then I urge this court to uphold the minimum coverage provision as an exercise of the taxing power.”
On Thursday, that’s exactly what the Supreme Court did, in a shrewd ruling that solved the chief justice’s dilemma of how to simultaneously leash Congress and acknowledge that everyone eventually needs healthcare. Roberts joined the conservative wing of his party to conclude that the individual mandate is unconstitutional under the Commerce Clause because it would “fundamentally [change] the relation between the citizen and the federal government,” by giving Congress “the vast power … to regulate what we do not do.” But Roberts switched sides and joined justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan in holding that the mandate is, in fact, a tax that falls within Congress’s broad power to impose. In the court’s 82- page opinion, the majority said it’s not significant that Congress didn’t refer to the penalty imposed on people who refuse to buy health insurance as a tax, nor is it unprecedented for the Supreme Court to find that Congress’s power to tax extends beyond the Commerce Clause. “The breadth of Congress’s power to tax is greater than its power to regulate commerce,” the majority said.
That could be a very important sentence for any future Congress. Whatever hypothetical power Congress may have lost in the court’s holding on the Commerce Clause, it gained in the majority’s explicit recognition of the breadth of its taxation power, said Andrew Pincus of Mayer Brown, the author of a prescient amicus brief for a group of constitutional lawyers who highlighted the tax issue more prominently than anyone else in the healthcare case. The court’s ruling that the federal government may impose taxes on what it cannot otherwise regulate is not a new holding, Pincus said, but it’s never before been so black-and-white. “Since the chief justice specifically and explicitly said Congress’s taxing power is not limited to its powers under the Commerce Clause, that puts two independent arrows in Congress’s quiver,” Pincus told me.
He also said that the court’s Commerce Clause interpretation will probably not have much impact. Yes, Roberts in the majority decision and Scalia in his dissent warned of (in the chief justice’s words) the “new and potentially vast domain to congressional authority” they warded off by finding the mandate a violation of the Commerce Clause. But Pincus said Congress hasn’t before tried to impose the sort of individual mandate it attempted in the healthcare law, so we shouldn’t be surprised that this court had grave concerns about it – nor should we expect that federal legislators were poised to enact similar mandates that they now won’t be able to pass. The Affordable Care Act was an awkwardly cobbled-together law that resulted in what could be a unique Supreme Court consideration of the Commerce Clause, according to Pincus.
Ironically, to decide that it had the jurisdiction to determine the constitutionality of the healthcare law, the court first had to determine that the mandate is not a tax, at least as the word applies in the Anti-Injunction Act. In one challenge to the ACA, the 4th Circuit Court of Appeals ruled that the courts cannot consider the merits of the law because the mandate is a tax, and under the Anti-Injunction Act taxes can only be challenged by those who have already paid them. (Since the penalty for refusing to buy health insurance doesn’t kick in until 2014, no one has yet paid it.)
The Supreme Court ruled, in a hairsplitting analysis, that for the purposes of consideration under the Anti-Injunction Act, what matters is how Congress labeled the penalty in the Affordable Care Act. Even if the penalty functions like a tax, Congress didn’t call it one in the statute. And since the Anti-Injunction Act is also Congress’s creation, the justices said, we should look to the text of both statutes to determine how they relate. “The Affordable Care Act does not require that the penalty for failing to comply with the individual mandate be treated as a tax for purposes of the Anti-Injunction Act,” the court concluded. “The Anti-Injunction Act therefore does not apply to this suit, and we may proceed to the merits.”
So how is the penalty that’s not a tax under the Anti-Injunction Act a tax under the Constitution? Because, according to the Supreme Court, different standards apply. The majority said its analysis of the mandate’s constitutionality isn’t restricted to what Congress called the penalty. It pointed in particular to two cases, Bailey v. Drexel Furniture from 1922 and New York v. United States from 1992, that stand for the proposition that the court’s consideration of Congress’s power to tax doesn’t depend on whether Congress uses the word “tax” in the text of a law. In Drexel, for instance, the government imposed what it called a tax on the use of child labor. The Supreme Court said the tax was so disproportionately high that it was actually a penalty, not a tax, and was thus an invalid exercise of Congress’s taxing power. In New York, by contrast, the court upheld a surcharge on out-of-state nuclear waste shipments as a tax, even though it wasn’t called a tax in the law itself.
In this case, the justices said, the penalty for refusing to purchase healthcare was a tax in all but name. (If you followed the political fallout Thursday, after the healthcare law was upheld, it’s not much of a mystery why Congress avoided using the word “tax” in the statute.) The penalty – which will cost most people “far less than the price of insurance,” according to the court – is to be paid to the Internal Revenue Service along with income taxes, and there’s absolutely no other sanction for people who choose to pay the penalty rather than buy insurance. The IRS cannot use any more coercive collection methods than it does with regular taxes, and those who refuse to buy health insurance will not face prosecution. Those factors added up to the majority’s determination that the penalty is a tax.
“It is estimated that four million people each year will choose to pay the IRS rather than buy insurance,” the court wrote. “We would expect Congress to be troubled by that prospect if such conduct were unlawful. That Congress apparently regards such extensive failure to comply with the mandate as tolerable suggests that Congress did not think it was creating four million outlaws. It suggests instead that the shared responsibility payment merely imposes a tax citizens may lawfully choose to pay in lieu of buying health insurance.”
In the majority opinion, Roberts raised the question of the propriety of such a tax. “If it is troubling to interpret the Commerce Clause as authorizing Congress to regulate those who abstain from commerce,” he wrote, “perhaps it should be similarly troubling to permit Congress to impose a tax for not doing something.” But he concluded that’s not the right analysis. “The court today holds that our constitution protects us from federal regulation under the Commerce Clause so long as we abstain from the regulated activity. But from its creation, the Constitution has made no such promise with respect to taxes.” The penalty is not a constitutionally barred “direct tax” (an ill-defined term that the Supreme Court has interpreted extremely narrowly), so, according to Roberts and the majority, it passes constitutional muster.
In her dissent, Ginsburg asked why the court needed to decide the Commerce Clause issue, since the majority’s tax holding meant the law would be upheld regardless of its constitutionality under the Commerce Clause. Putting aside whatever intracourt politics underlie the splintered ruling, Roberts said the more natural reading of the individual mandate provisions of the ACA is that it’s a “command to buy insurance,” not that it’s a tax. For that reason, he said, the Commerce Clause had to be considered first. “It is only because the Commerce Clause does not authorize such a command that it is necessary to reach the taxing power question,” Roberts wrote.
Ginsburg’s concern won’t much matter if Andy Pincus, the Mayer Brown Supreme Court guru, is right about the limited application of the court’s Commerce Clause holding and the balance of the justices’ endorsement of Congress’s broad taxation power. The Commerce Clause has a tortured history in the hands of the Supreme Court, as the justices themselves acknowledged in the healthcare opinion (and at oral arguments in March). It’s been sliced, diced, dehydrated and reconstituted as industry in this country has expanded and changed. Let’s hope the chief justice did what he seems to have wanted and kept things just about at status quo.
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