This is one of a continuing series of articles the blog will publish over the next several weeks, explaining more fully the new federal health care law, and the Supreme Court’s review of the constitutionality of key parts of the law. This article is the third of three on the heart of the new law: the mandate that virtually all Americans obtain health insurance by the year 2014. Part I (found here) described why Congress adopted the mandate. Part II (found here) discussed the tie between the mandate and expanded health insurance coverage. This Part III discusses the financial penalty that Congress adopted to enforce the mandate, and how the penalty is to work. Each of these parts has included discussions of related constitutional questions. Prior posts in this overall series can be read, in sequence, here and here and here.
In the current political era, as Circuit Judge Jeffrey Sutton has remarked, “elected officials are not known for casually discussing, much less casually increasing, taxes.” It thus might be quite surprising that, in the legal debate over the new federal health care law, the Obama Administration is fervently defending a plan that will raise some individuals’ taxes by as much as $3,000 a year. That, though, is misleading. The Administration actually considers that tax liability not to be a tax, after all. It persuaded Congress to refer to it, most of the time, as “a penalty” and that label has stuck — except in the legal debate, when the provision again is sometimes called a tax. After all, for those who will owe it, they will pay it to the Internal Revenue Service, along with their federal tax return. What is going on here?
The provision at issue here is of crucial importance to the new Affordable Care Act’s actual operation because it is the sole method that Congress adopted to enforce the very heart of the ACA: the individual mandate, which is the requirement that — with not many exceptions — Americans must sign up for health insurance by the year 2014. Congress did, of course, order Americans to obtain — and to keep up every month — what it called “minimal essential coverage.” In that sense, it is like the obligation to pay taxes every year; one does not have a choice about it. But Congress did not stop there. Just as IRS depends upon penalties and interest charges to make sure that people do, in fact, pay their taxes, Congress in the ACA made the mandate depend upon an assessment for those who do not sign up for and maintain health insurance.
Both the mandate and the attached penalty were inserted by Congress into the federal tax code; that much is clear. But, since both the Administration’s lobbyists and the legislators working for passage of the ACA were squeamish about calling the penalty a tax, as such, Congress placed it in a section of the new law that is titled “shared responsibility payment.” That, of course, is an even more euphemistic phrase. But most of the actual language of the requirement refers to it as a “penalty.”
Circuit Judge Sutton, in an opinion he issued in June as part of a Sixth Circuit Court panel majority upholding the mandate and its penalty, commented that “words matter, and it is fair to assume that Congress knows the difference between a tax and a penalty, between its taxing and commerce powers, making it appropriate to take Congress at its word.” He added, in a bit of judicial understatement: “When was the last time a candidate for elective office promised not to raise ‘penalties’?”
One of the basic reasons why Congress imposes taxes on Americans, of course, is to raise money. Since the Constitution was amended in 1913 (by the Sixteenth Amendment) to allow the federal government to lay a tax upon income, that kind of levy has become the government’s most important and reliable source of revenue. The individual income tax, in fact, now produces something like 45 percent of the government’s revenues each year. But Congress did not adopt the ACA penalty to raise money, even though it might bring in an estimated $4 billion a year, according to the Congressional Budget Office, and could ultimately be paid by as many as 4 million Americans.
No doubt the main reason that, despite its aversion to talking about the penalty as a tax increase, the Administration continues to refer to it in court as a tax measure is because that might provide an additional constitutional source of power for Congress to have adopted the mandate and its attached penalty. Most of the discussion in the lawsuits over the ACA’s key provisions has centered on whether they represent a valid, or invalid, use of Congress’s power under the Commerce Clause — the authority to regulate interstate commerce. And the Commerce Clause debate is the one that has produced conflicting results in the federal appeals courts, with one of them finding that Congress lacked the authority under that Clause to impose the mandate and its penalty. (That was the Eleventh Circuit Court; it is that tribunal’s decision that the Supreme Court has agreed to review.)
But, interestingly, there is no conflict among the federal courts on whether the mandate and the penalty represent a use by Congress of its power over taxation — the Constitution’s General Welfare Clause gives Congress authority to “lay and collect taxes…to pay the debts and provide for the common defence and general welfare of the United States.” As the Eleventh Circuit Court put it, the federal courts “have spoken with clarion uniformity” on the point, concluding without a dissent that the mandate and its penalty operate “as a regulatory penalty, not a tax.”
Thus, if the Supreme Court were to find the mandate and the penalty beyond Congress’s authority to regulate commerce, it is doubtful that the provisions can survive at all. As the Eleventh Circuit commented: “At the end of the day, this penalty is not a ‘tax’ under Article I of the Constitution, and Congress’s taxing power thus cannot sustain it.”
As if this part of the health care controversy were not confusing enough, one other aspect of the “tax or penalty” dispute has to be taken into account as a further source of confusion. This goes to the question of whether anyone, anywhere in the country, has a legal right to go to court to challenge the mandate and the attached penalty. If they truly are tax provisions, there is a federal law that says bluntly that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” Those words could hardly be plainer: a federal or state court simply has no power to hear a case that seeks to stop the federal government from collecting a tax — provided, of course, that it is a tax that is at issue. That law is called the Anti-Injunction Act.
One of the issues the Supreme Court has agreed to decide is whether that Act bars all of the challenges to the mandate and its penalty. Because no one involved on either side of the controversy before the Court argues that the Act does bar these challenges, the Court has chosen an independent lawyer to make the case for shutting down the challenges altogether. (That simply means that the Court wants to hear both sides of this issue, not that it is leaning toward the side of blocking the challenges.)
Interestingly, perhaps, the Obama Administration began its defense of the ACA in court last year by arguing that the Anti-Injunction Act did, indeed, bar the challenges. That was part of a package of procedural points the government put forward to keep the courts from reaching the ultimate question of the constitutionality of the mandate and its penalty. As the cases moved up from the District Courts to the Circuit Courts, however, the Administration abandoned that argument altogether. Now, it insists that at least some of the challenges were validly filed — because, it contends, the mandate and the penalty are not really a tax, at least for Anti-Injunction Act purposes.
Leaving aside the tax versus penalty debate, what is the penalty, and how will it work when, if it survives, it goes into effect in the tax-filing period in 2015 (for tax year 2014)?
The ACA says quite simply that, if a taxpayer “fails to meet the requirement” to obtain and keep in force “for each month beginning after 2013,” he or she is required to pay “a penalty with respect to such failures.” Any penalty is to be paid with a federal tax return — that is, by the usual tax due date of April 15, 2015. If an individual who is a dependent, under federal tax law, is obliged to pay the penalty, the taxpayer on whom that individual is dependent must pay the tax. If a couple files a joint return, both of them are under a legal duty to share in paying the penalty.
The ACA uses complex formulas to determine how much the penalty will be, but in general it is to be calculated for each month that the individual does not have health insurance, and it is to be paid either as a flat amount or as a percentage of “household income.” If it is to be a flat dollar payment, the law starts with $95 a year for 2014, $325 for 2015, and $695 for 2016 (each month’s assessment is 1/12th of those totals). After 2016, the monthly amount is to be adjusted for a cost-of-living amount. If it is assessed as a percentage of household income, it starts at 1 percent of a base amount in 2014, goes to 2 percent for 2015, and to 2.5 percent after 2015.
The provision has a religious exemption, for anyone whose faith leads them to oppose health insurance, and there is an exemption for undocumented immigrants living illegally in the U.S. Prison inmates also do not have to pay a penalty for failing to have insurance. There is an exemption for low-income people — defined as anyone whose insurance premium for a year would be more than 8 percent of their yearly household income. And there is one for the truly poor — those whose income is so low they do not have to pay taxes anyway. Another exemption applies to members of Indian tribes. There is a grace period for those who are without health insurance for less than three months in a year. Finally, federal officials can grant a “hardship” exemption for an individual who can show he or she has not been able “to obtain coverage under a qualified health plan.”
In the lawsuits over the mandate, the challengers generally have protested the constitutionality of the mandate itself, rather than attacking the fact of the penalty or its specific terms. The courts have apparently assumed that, if the mandate is a valid exercise of Congress’s authority, the lawmakers also had the power to adopt a mechanism for enforcing it. Judge Sutton, of the Sixth Circuit, suggested something like that when he was addressing (and rejecting) the claim that the mandate and penalty were actually tax provisions.
He wrote: “It is easy to envision a system of national health care, including one with a minimum-essential-coverage provision, permissibly premised on the taxing power. Congress might have raised taxes on everyone in an amount equal to the current penalty, then offered credits to those with minimum essential insurance. Or it might have imposed a lower tax rate on people with health insurance than those without it. But Congress did neither of these things, and that makes a difference.” Congress adopted the mandate and penalty in their present form, the judge concluded, “to change individual behavior,” not to raise money for the Treasury’s coffers.
So now, the Supreme Court is tasked with defining how much power Congress has to alter “individual behavior,” with a financial penalty attached to what it deemed a form of misbehavior — that is, letting everyone else put up the money to make health insurance available to nearly everyone.
Next in this series: A discussion of the effect on the ACA’s other provisions if the insurance mandate is struck down.