Legal Analysis and Commentary from Justia

It Does Not Matter Whether Congress Calls a Tax a Tax: Explaining the Dissenting Justices’ Misconceptions About the Taxing Power in the Affordable Care Act Case

Suppose you heard that Congress had passed a law “mandating” that people have children.  If you do not have children, then you will suffer adverse consequences.  If you cannot have—or do not want to have—children who are your biological offspring, then you can still avoid those adverse consequences by adopting children.  But make no mistake: Those who do not become parents will be deemed by the legal system to have engaged in a choice that will result in disadvantageous legal treatment.

Absurd, you say?  Impossible?  Unconstitutional?  Surely, we can imagine that Congress could pass laws limiting the choices that parents can make (such as prohibiting the sale of children into slavery, or requiring that parents make sure that their children are vaccinated against infectious diseases); but can Congress penalize the choice not to have a child?  If this is not the ultimate distinction between “activity” and “inactivity,” then what is?  The choice of whether or not to become a parent seems central to personal liberty, and being forced into parenthood seems somehow un-American.  Right?

Actually, Congress passed that law a long time ago.  People who choose not to become parents are prohibited by law from using as many “personal exemptions” on their income tax returns as parents use—exemptions that would reduce their taxable income.  As a result, non-parents pay more in income taxes than parents pay (all else being equal).  Every year, non-parents pay more money to the IRS than they otherwise would have paid, because they simply refuse to abide by Congress’s mandate to have or adopt children.

What makes this example provocative, of course, is that it seems so absurd to describe the reduction in income tax liability that results from claiming personal exemptions as a “mandate.”  Yet the logic is precisely the same as the logic that one finds in the overheated rhetoric about the “personal mandate” in the Affordable Care Act (ACA).  People choose whether or not to buy health insurance on private exchanges.  If they choose not to do so, then they end up with less money after-tax than they would have in the absence of the ACA’s mandate.

This comparison suggests that all of the hand-wringing about personal freedom in the public discussion of the ACA case was profoundly misplaced.  Even if one is bewitched by the ultimately empty activity/inactivity distinction, one should admit that the taxing power necessarily involves the power to allow some people to improve their financial outcomes, if they are willing to change their behavior in response to implicit legal incentives.  That aspect of our tax system is neither new nor even particularly interesting.

Differences in labeling do sometimes matter in legal—and especially constitutional—analysis.  In most instances, however, and most certainly when the issue is taxes, it is the substance that matters, not the form.  In this column, I will discuss how the dissenting justices in the ACA case became overly obsessed with a matter of labeling, in their analysis of the taxing power.  In the course of doing so, I will also explain how Chief Justice Roberts’s controlling opinion clearly—and even elegantly—dealt with the dangerous red herring that so distracted the dissenters.

What Is a Tax?  Different Uses of Words, in the Constitution and the Laws

The ACA case actually raised two separate tax-related issues, both of which revolved around the question of labels: What is a tax, and for what purposes?  As a threshold matter, the Court had to decide whether the entire case had been pursued prematurely.  Congress, through the Anti-Injunction Act, has limited the ability of parties to sue the government over the collection of taxes.  As a matter of administrative convenience, Congress long ago decided that it would be wise to limit tax challenges to people who have actually been forced to pay the tax at issue, not those who might one day pay that tax.

As a separate matter—the matter that was, ultimately, the decisive issue in the case—the Court had to decide if the choice between buying insurance or paying money to the government was a “tax” within the meaning of Congress’s power under the Constitution to lay and collect taxes.  The Court held that the individual mandate was not a tax for Anti-Injunction Act purposes, but that it was a tax for constitutional purposes.  Some commentators have been confused (or even derisive) about what incorrectly appears to them to be the Court’s inconsistency on the issue of defining what is a tax.  In fact, there is no such inconsistency.

Even the most casual observer understands that the words used in the Constitution and the statutes must be understood in context.  For instance, the First Amendment’s guarantees of free speech and the press are correctly extended to “speech” that is more than simple oration, and to a “press” that now typically involves no printing presses at all.

Moreover, the meaning of the same word differs in some statutory situations, as compared to its meaning in the context of seemingly similar constitutional wording.  For example, there are several important international treaties (which are the law of the land under the Constitution, and which are enacted into law through enabling legislation) that use the word “arms” as a reference to thermonuclear weapons.  Even the most expansive reading of the Second Amendment, however, has never said that any rights of the people to “bear arms” extend to such weapons.

It is hardly remarkable, then, that there might be a difference between the meaning of the word “tax” in the Anti-Injunction Act statute, and the meaning of the word “tax” in the constitutional context of the “taxing power.”  The Court’s ruling—which again, held that the individual mandate is not a “tax” under the statute, but is a tax under the Constitution—is not some kind of hypocrisy or clever sophistry on the Court’s part, but rather plain-vanilla legal analysis.

Moreover, the meaning of the word “tax” itself is potentially quite broad, even when we limit our analysis to the constitutional context.  The inside-the-Beltway adage that “if it quacks like a duck, it’s a duck” is usually meant to say that if a law looks and acts like a tax, it must be a tax—no matter what Congress or the President might choose to call it.  Even that insight, however, does not go far enough, because it is not always self-evident what “quacking like a duck” means in the context of taxes.

Again, What Is a Tax?  The Difficult Questions of Intent, and Effects, in Tax Law

Economists tend to view the concept of taxes quite broadly.  Indeed, through our standard supply-and-demand analysis, we tend to view nearly all legal and social factors that impinge on people’s choices as matters of “price,” with any change that the government imposes on those choices characterized as a tax that increases the total price of the disfavored choice or choices.

For example, whereas non-economists will sometimes say something like, “I just couldn’t do that, because people would laugh at me,” an economist might say, “Social opprobrium raised the price of the activity, and the person decided that such a price was too high.”

Or, to give another example, if the government decides to make it more difficult for people to make a particular choice, economists will say simply that the government has “raised the price” of doing something by “effectively taxing” that choice.

Thus, the government can “impose a tax” by making it more difficult for people to do what they might otherwise wish to do.  A law to limit the size of individual servings of soda drinks—a policy prescription recently put forth by New York’s Mayor Bloomberg—for example, simply raises the effective price of buying large quantities of soda.  Such a law does not prohibit buying a lot of soda, but it acts as a tax on doing so, since rather than buying, say, one large soda, a consumer must now buy two smaller ones, a more costly purchase.

Some commentators on the ACA case have asserted, quite incorrectly, that the very nature of a tax is that it involves the actual intent on the part of the government to collect money.  A law imposes a “tax,” under this view, only if Congress meant to raise revenues by enacting the law.  Of course, even if the question is a matter of Congressional intent, the ACA’s individual mandate could easily pass this test.  The Congressional Budget Office has estimated, in fact, that the individual mandate will result in about four billion dollars of additional revenues to the government—not a large amount in the context of the overall budget, but still a significant one.

The net cost of the law to the government was a matter of intense scrutiny during the process of putting the legislation together, and all sources of revenue were important in determining the bottom line.  Even if Congress’s primary reason for including the mandate, therefore, was to prevent free-riding by the uninsured, the mandate’s IRS-collected exaction cannot be said to have been included by Congress without an awareness on Congress’ part that the exaction would raise some money.

Raising money, however, has never been the key to a tax.  Taxes are often levied specifically in the hope that the government might never collect revenues via the tax.  Imagine, for instance, that Congress were to learn that a certain kind of formula for matchsticks was unstable and unsafe.  (This, in fact, is a real example from early in the 20th Century.)  Congress could, of course, prohibit the sale of that unsafe product.  It could also, however, impose a tax on the sale of that unsafe product.  It could then calibrate the tax with the specific intent to make sure that the resulting tax-inclusive price would induce everyone to buy a different type of matchstick.  No money at all would flow to the government, but its purpose in passing the tax would still have been fulfilled.

Simplistic definitions of taxes are, therefore, exceedingly difficult to defend.  The Chief Justice’s controlling opinion in the ACA case recognized this by saying, in essence, that there are a lot of situations in which Congress formulates a policy in a way that everyone recognizes as a tax.  (In a subtle manner, therefore, the Court suggested that “People know it when we see it.”)  Chief Justice Roberts then argued that, if Congress enacts a functionally identical law that people do not recognize as a tax, it is the functional equivalence of the two that matters.  It is not what Congress said, or even what it thought it has done, that matters.  It is whether Congress could have done the same thing, in a way that would have involved more easily recognizable forms of taxes.

“But They Didn’t Call It a Tax!”  The Dissenting Justices Focused on a Meaningless Question

For the four dissenting justices, however, the Chief Justice’s analysis involves a horrific failure to properly understand what Congress thought it was doing.  In the dissenting opinion’s peroration, for example, the dissenters insist that the Court “rule[d] that what the statute declares to be a requirement with a penalty is instead an option subject to a tax” (emphasis added).  The dissenters thus embrace the idea that Congress can do something in two functionally equivalent ways, but the law at issue will be outside of Congress’s power unless it uses the magic words necessary to bring it under the dissenters’ preferred vocabulary.

What does functional equivalence mean, in this context?  The ACA could do exactly what it currently does, but Congress could have described it as follows: If a citizen chooses to buy health insurance, he will receive a reduction in his tax liabilities; otherwise, he will pay the taxes that he would normally pay.  Whether or not that formulation would result in a net decrease in revenues to the Treasury would depend upon whether Congress raised tax rates more generally to make up the difference.  Just as it does with the tax-induced “mandate” to be a parent (which I discussed at the start of this column), Congress must decide whether to make up the lost revenue elsewhere in the tax code—or not to spend money on certain government programs, or to increase the annual budget deficit.

The point is that Congress could put people in exactly the situation that they will be in under the ACA; but by using different words, it could have described its doing so as either a “tax increase for those who do not buy insurance,” or a “tax cut for those who do buy insurance (funded by changes elsewhere in the taxing and spending laws).”  Or, Congress could simply call the ACA a “mandate” with a “penalty,” which is the route that Congress chose.

The Chief Justice’s opinion, moreover, cites cases showing that the Supreme Court has broadly adopted this substance-over-form approach.  (This is an approach that, I should add, is mother’s milk to those of us who work in the area of tax law.)  The 1941 Nelson v. Sears, Roebuck & Co. case, quoted by the Chief Justice within a string cite, is especially clear: “In passing on the constitutionality of a tax law, we are concerned only with its practical operation, not its definition or the precise form of descriptive words which may be applied to it.”

Even so, the dissenters in the ACA case are absolutely infuriated that the rest of the Court did not insist on holding Congress to a form-over-substance approach.  Notably, although the dissenters attempted (unsuccessfully) to distinguish one of the cases cited by the Chief Justice, they had nothing to say about the three cases cited by the Chief Justice for the proposition that substance dominates over form.

Creating a False Distinction: The Dissent’s Misunderstanding of the “Tax” and “Penalty” Labels.

Rather than attack the Chief Justice’s substance-over-form analysis head on, the dissenters insist instead that there is a requirement in the Court’s precedents that Congress’s Act here be described as either a tax or a penalty, but not both: “The provision challenged under the Constitution is either a penalty or else a tax. . . . The two are mutually exclusive.”  The dissenters never explain, however, why they are (or even why they should be) mutually exclusive, other than to cite some cases that draw a distinction between a tax and a penalty.

In the context of those cases, such a distinction was surely important.  That does not mean, however, that there is a constitutional requirement that, in all contexts, what are sometimes called penalties cannot also be taxes.  The dissent merely says (or, rather, shouts): “But we have never—never—treated as a tax an exaction which faces up to the critical difference between a tax and a penalty, and explicitly denominates the exaction a ‘penalty’ ” (emphasis in original).

But what does that prove?  The Court’s previous cases have, under even the dissent’s reading, never confronted this issue directly.  The Court has at times called taxes penalties, but never the reverse.  At most, therefore, this raises a question of first impression for the Court.  The dissent is saying, in essence, “We have never said this before, so we never can.”  Other than their manifest feeling that the ACA is an abuse of Congress’s power under the Commerce Clause, the dissenters offer no reason why the taxing power of Congress should be limited by labels.  “We have relabeled in the past, but never in this particular way,” is simply not an argument.

The dissenters’ misapprehension of the nature of tax laws can, however, most clearly be seen in an odd throwaway line at the end of their opinion, discussing a different issue: “Those States that decline the Medicaid Expansion must subsidize, by the federal tax dollars taken from their citizens, vast grants to the States that accept the Medicaid Expansion. If that destabilizing political dynamic, so antagonistic to a harmonious Union, is to be introduced at all, it should be by Congress, not by the Judiciary.”

The dissenters seem to think that such cross-state subsidization are “destabilizing” and “antagonistic” to harmony within the Union.  Yet the very nature of federalism guarantees that all fiscal decisions will necessarily result in some states being “net winners” and others being “net losers.”

Moreover, analyses have shown overwhelmingly and consistently that so-called Red States are huge net recipients of federal funds, while most Blue States are net payers.  For the dissenters to be so utterly unaware of the facts of fiscal life in the United States is little short of stunning.  For them to act as if the Court’s decision somehow introduces a new, destabilizing dynamic into the country would be laughable, if the logic behind it were not so troublingly off-base.

It Is As It Should Be That the Court’s Decision Put This Issue Back Into the Realm of Simple Politics, and Out of the Realm of Law

There might be some value, one could imagine, in forcing Congress to be honest.  If something is really a tax, after all, then why not force Congress to call it a tax?  Again, however, this presumes that there is an obvious and uncontroversial meaning of the word “tax.”  That Congress and the President would avoid using a word that has become so politically charged in the last few decades is hardly a surprise.  If some partisans think that the political rhetoric crossed the line into outright dishonesty, they should take their case to the people, not to the courts.

Indeed, the Republicans have spent the past week claiming that the Court’s decision has turned the entire ACA into a tax, which is simply silly.  The Court said that it is possible, for purposes of the Constitution, to describe a tax/penalty/exaction as within Congress’s taxing power. And this is a tax that, moreover, will be paid by at most (according to the Congressional Budget Office) only about 4 million people, because many people will—wisely and appropriately—make the choice to buy health insurance.  That decision on the part of a projected 4 million people does not, in itself, make the entire law a tax.

Even so, this is a good place for the country to be.  The Republicans have staked much of their political fortunes on the idea that taxes are all bad, all the time.  The Democrats have not done much in the way of putting up a fight, but they have at least broadly defended the idea that, as Justice Oliver Wendell Holmes memorably wrote: “Taxes are the price we pay for a civilized society.”

If the American people really think that Congress and the President have done something awful by giving people the same choice in buying insurance that it gives them in becoming parents, then they can punish Congress and the President at the polls.  If they really think about it, however, I suspect that most people will realize that this entire challenge to the ACA was a triumph of hyperventilated rhetoric over unremarkable legal analysis.

Neil H. BuchananNeil H. Buchanan, a Justia columnist, is an economist and legal scholar, a Professor of Law at The George Washington University, and a Senior Fellow at the Taxation Law and Policy Research Institute, Monash University (Melbourne, Australia). He blogs at DorfonLaw.org, and he is the author of The Debt Ceiling Disasters: How the Republicans Created an Unnecessary Constitutional Crisis and How the Democrats Can Fight Back.
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  • http://www.facebook.com/charles.cork.9 Charles Cork

    Justice Holmes, from a legal realist position, famously discussed the insignificance of the distinction between a “penalty” and a “tax” in The Path of the Law, 10 Harv. L. Rev.
    457, 461 (1897).

    It is ironic that in earlier times, a “penalty” was regarded as something more detestable than a “tax,” since it connoted a moral wrongdoing worthy of public condemnation in most cases. The current critics have completely inverted the country’s earlier values.

  • http://www.facebook.com/frank.masciocchi Frank Masciocchi

    What a specious argument! Comparing 1040 tax exemptions to the ACA penalty/tax is a stretch. Here’s an idea: when formulating your legal analysis try to differentiate between legal & economic concepts. Additionally, you apparently overlooked the 4 liberal justices concurred in the result. They, too, were highly critical of Justice Roberts’ opinion.

  • calvinci

    Great and understandable analysis. Thank you.

  • David R Lueck

    The parents who have children are given an exemption so they are paying LESS tax than the parents without children. Your argument tries to flip it by saying the parents with children are paying the baseline tax and the parents without are required to pay added tax.

    The healthcare mandate requires people to pay a tax where their was none at all.

  • http://www.facebook.com/william.hicks.9822 William Hicks

    As much as I dislike the result, I believe Chief Justice Roberts’ opinion is the most on-point. The penalty provision of the individual mandate clearly stretched Congress’s powers under the Commerce Clause beyond all constitutional limits, but just as clearly was within their power to tax. As Roberts correctly pointed out, it is a reviewing court’s duty to preserve the constitutionality of a statute by any reasonable construction of its language. And setting aside the political aspects of Congress’s choice of the word “penalty” rather than “tax” (remember, Obama promised not to raise taxes on the middle and lower classes, precisely those least likely to afford health insurance and most likely to be the subject of the “penalty”) and simply examining the practical effect of the “penalty,” it is a tax much the same as what amounts to the “tax” imposed for not purchasing a hybrid vehicle. (Really, is there any distinction in the practical effect of a tax for purchasing one product as opposed to a deduction for purchasing another?) Roberts set aside the politics, reasoned that what waddles like a duck and quacks like a duck is in fact a duck, regardless of the administration’s politically expedient characterization as “waterfowl,” so to speak, and then concluded that the provision in question, by whatever label, was within Congress’s power to tax. And he’s right. Unfortunately for Obama, Chief Justice Roberts exposed his deceitful play on words.

  • http://www.facebook.com/william.hicks.9822 William Hicks

    Chief Justice Roberts got it right. Reviewing courts are to give the language of a statute any reasonably construction in order to save it from constitutional attack. The Obama Administration, for reasons of political expediency, may have characterized as a “penalty” the individual mandate provision, but its practical effect is the same as levying a tax on those who do not purchase health insurance. Congress employs similar tactics quite regularly such as, for example, the tax deduction for purchasing a hybrid vehicle. Is there any practical distinction in providing a tax deduction for purchasing one product and taxing one’s choice to purchase another? The net result is paying more for not purchasing the product of Congress’s choosing. Roberts set aside the politics, examined whether the practical effect of the “penalty” likewise could have been characterized as a “tax” (if it waddles and quacks like a duck,then chances are….), and concluding that it just as easily could or should have been labled as a “tax,” correctly saved the statute from constitutional challenge. Unfortunately for the Obama Administration, Chief Justice Roberts laid bare the deceitful means by which the campaign promise was broken not to raise taxes on the lower and middle classes … those least likely to afford health insurance and most likely to be taxed, or “penalized,” under the individual mandate provision. Liar, liar, pants on fire….

  • heatherGirl

    This is an absurd comparision. You receive a tax break for having children. You do not receive a tax penalty for not having children.

    • Eleanor

      You get a “tax penalty” for not having children, means you don’t get to claim deduction for a child whereas the parents get that deduction. I don’t think that at the end of year the deduction really don’t matter that much. I just hate to have more taken out of my check because of having to have Insurance. That means lots less take home pay, and that is what I make my budget for. Barely getting by as is, so take more money away from me, means I spend less, and economy loses. What are we gaining, other than I have health insurance. That is great, but have not had illnesses in 4 years. Have a family dr. and pay a discounted amount of cash. If it is too much, work out a payment plan. My gain-0000 minus whatever.

 

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