Health Care Financing Reform (117): Florida District Court Finds that Individual Mandate Was Not Enacted Pursuant to Taxing Power

     Florida State Attorney General Bill McCollum and other parties brought this lawsuit alleging that the Patient Protection and Affordable Care Act violates the constitution.  As reported in yesterday's post, in his ruling on October 14 Judge Roger Vinson of the federal District Court for the Central District of Florida dismissed four of Florida's arguments, but is allowing the state to move forward with two other claims, including the claim that the individual mandate is not a valid taxing measure.  In tomorrow's post I will discuss the disposition of the other claim: Judge Vinson's finding that that the individual mandate may not be a valid enactment under the Commerce Clause.

     Both of the plaintiffs' remaining claims relate to one provision of the health care bill; they contend that the "individual mandate" - the requirement that all individuals who earn over a certain income must purchase health insurance - is unconstitutional.  They claim that Congress does not have the constitutional authority to require individuals to purchase health insurance.  The government takes the position that it does have the power to require individuals to purchase health insurance under both the commerce clause and the tax and spending clause.  The district court found that the plaintiffs' arguments were at least "plausible" and that the matter will proceed to summary judgment, where the issues will be fully briefed and argued.  Today's post concerns the judge's finding that the individual mandate is not a "tax."  In tomorrow's post I will discuss the portion of the judge's opinion relating to the Commerce Clause.

     Congress's power to impose taxes is broad indeed.  It stems from Article I, Section 8, Clause 1, and from the 16th Amendment, which state:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States ….

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

     What precisely is the individual mandate?  According to this summary compiled by the non-profit Kaiser Family Foundation, beginning in 2014 the Patient Protection and Affordable Care Act will require persons under the age of 65 and with incomes in excess of the tax filing threshhold to purchase health insurance or pay a penalty.  The penalty, which the Kaiser Foundation calls a "tax penalty," starts out at 1% of income in 2014 and rises to 2.5% of income, but there are numerous exceptions to the requirement as well as minimum and maximum penalties.  Here is how the Kaiser Foundation describes the individual mandate:

Require U.S. citizens and legal residents to have qualifying health coverage. Those without coverage pay a tax penalty of the greater of $695 per year up to a maximum of three times that amount ($2,085) per family or 2.5% of household income. The penalty will be phased-in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by the cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, undocumented immigrants, incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of an individual�s income, and those with incomes below the tax filing threshold (in 2009 the threshold for taxpayers under age 65 was $9,350 for singles and $18,700 for couples).

     The "individual mandate" is not a criminal law.  Instead, it is enforced by means of the foregoing penalty that has been added to the Internal Revenue Code and which will be collected and enforced by the Internal Revenue Service.  Beginning with tax year 2014, a form will be added to income tax filings that will permit computation of the "penalty" if the person filing does not have health insurance coverage.    The law prohibits the Internal Revenue Service from collecting this penalty by means of tax liens, levies, and criminal proceedings, but other traditional means of tax collection and enforcement remain in place.

     Judge Vinson ruled that the individual mandate imposes a "penalty" and not a "tax."  The judge listed five reasons supporting this finding:

1.  The judge acknowledges that the Supreme Court long ago abandoned the distinction between "regulations" and "taxes," and that instead the Supreme Court has repeatedly ruled that it a law may be a "tax" even though its principal purpose is "regulatory."  Despite this admission, however, Judge Vinson states, "The elimination of the 'regulatory versus revenue-raising' test does not necessarily mean, however, that hte exaction at issue in this case is a 'tax'";

2.  The judge finds that "it is unarguably clear that Congress did not intend for the exaction to be regarded as a tax";

3.  When the health care legislation was working through Congress, all of the earlier versions of the bill called the individual mandate a tax; in the final version, the word "tax" was suddenly changed to "penalty," leading the judge to conclude, "Congress did not call it a tax, despite knowing how to do so";

4.  The court found, "Congress did not state that it was acting under its taxing authority, and, in fact, it treated the penalty differently than traditional taxes."  The bill expressly states that the purchase of health insurance "substantially affects interstate commerce" and that the individual mandate is "essential to creating effective health insurance markets."  There is no mention in the bill of Congress' power to tax and spend for the general welfare.  The court acknowledges in a footnote, however, that Congress is under no duty to specify the sources of power; rather, its failure to do so "is merely one of several facts that shows Congress was not exercising its taxing authority and did not intend for the penalty to be regarded as a tax."  Furthermore, the court noted that Congress had prohibited some of the more severe methods of tax collection such as liens and levies.

5.  The fifth reason that Judge Vinson gives for deciding that the individual mandate is not a tax is because the Act does not state that its purpose is to generate revenue.  In Judge Vinson's words:  "the Act does not mention any revenue-generating purpose that is to be served by the individual mandate penalty, even though such a purpose is required."  The court also states, "Obviously, if the penalty had been intended by Congress to be a true revenue-generating tax (that could be used to keep the Act's final cost down) then it would have been treated as a tax 'on its face.'"  Judge Vinson takes the President and Congress to task for characterizing the individual mandate as a "penalty" and not a "tax" in the Act and in their statements to the media.  He quotes President Obama as saying "nobody considers [it] a tax increase" and that it was "absolutely not a tax."  The judge excoriates the President and Congress for their hypocrisy on this point.  Judge Vinson states:

This foregoing statement highlights one of the more troubling aspects of the defendants� �newfound� tax argument. As noted at the outset of this order, and as anyone who paid attention to the healthcare reform debate already knew, the Act was very controversial at the time of passage. Irrespective of the merits of the arguments for or against it, the legislation required lawmakers in favor of the bill to cast politically difficult and tough votes. As it turned out, the voting was extremely close. Because by far the most publicized and controversial part of the Act was the individual mandate and penalty, it would no doubt have been even more difficult to pass the penalty as a tax. Not only are taxes always unpopular, but to do so at that time would have arguably violated pledges by politicians (including the President) to not raise taxes, which could have made it that much more difficult to secure the necessary votes for passage. One could reasonably infer that Congress proceeded as it did specifically because it did not want the penalty to be �scrutinized� as a $4 billion annual tax increase, and it did not want at that time to be �held accountable for taxes that they imposed.� In other words, to the extent that the defendants are correct and the penalty was intended to be a tax, it seems likely that the members of Congress merely called it a penalty and did not describe it as revenue-generating to try and insulate themselves from the potential electoral ramifications of their votes.

Regardless of whether the members of Congress had this specific motivation and intent (which, once again, is not my place to say), it is obvious that Congress did not pass the penalty, in the version of the legislation that is now �the Act,� as a tax under its taxing authority, but rather as a penalty pursuant to its Commerce Clause power. Those two exactions, as previously noted, are not interchangeable.

And, now that it has passed into law on that basis, government attorneys have come into this court and argued that it was a tax after all. This rather significant shift in position, if permitted, could have the consequence of allowing Congress to avoid the very same accountability that was identified by the government�s counsel in the Virginia case as a check on Congress�s broad taxing power in the first place.

In other words, the members of Congress would have reaped a political advantage by calling and treating it as a penalty while the Act was being debated.  … This should not be allowed, and I am not aware of any reported case where it ever has been.

Congress should not be permitted to secure and cast politically difficult votes on controversial legislation by deliberately calling something one thing, after which the defenders of that legislation take an �Alice-in-Wonderland� tack and argue in court that Congress really meant something else entirely, thereby circumventing the safeguard that exists to keep their broad power in check. If Congress intended for the penalty to be a tax, it should go back and make that intent clear (for example, by calling it a tax, relying on Congress�s Constitutional taxing power, allowing it to be collected and enforced as a tax, or identifying revenue to be raised) so it can be �scrutinized� as a tax and Congress can accordingly be held accountable. They cannot, however, use a different linguistic with a perhaps secret understanding between themselves that the word, in fact, means something else entirely.

     The judge's reference to "Alice in Wonderland" quotes Lewis Carroll's "Through the Looking Glass," in which Humpty-Dumpty makes the following argument to Alice:

â��When I use a word,â�� Humpty Dumpty said, in a rather scornful tone, â��it means just what I choose it to mean – neither more or less.â�� â��The question is,â�� said Alice, â��whether you can make words mean so many different things.â��

     Judge Vinson makes an irrefutable argument that the sponsors of the bill said that the bill was not a tax.  He is also correct in concluding that it would be more honest for them to have called it a tax.  What he does not do – what he utterly fails to do – is to make any effort to determine whether this measure is in fact a tax, even though it is called a penalty.

     In my opinion, there are several basic flaws in the court's reasoning.  The first and most basic problem with his analysis is that he assumes that there is a distinction in the law between a tax and a penalty.  In fact, there is not.  Many taxes are penalties, and many penalties are assessed in the form of taxes.  Ever since the Supreme Court overruled the distinction between taxes which are "regulatory" and taxes which are "revenue-raising" it matters not whether the principal purpose of the law is to generate funds or to discourage or encourage certain conduct.  The entire enterprise upon which Judge Vinson embarked was fruitless.  The individual mandate is unquestionably a penalty.  That has no bearing on whether it is also a tax.

     Second while Judge Vinson makes a compelling case that Congress called the individual mandate a "penalty," and that President Obama declared that it was not a "tax," he fails to mention that those who opposed the health care bill have repeatedly and vociferously called it a "tax."  See, for example, this statement posted to Minority Leader John Boehner's Health Care Fact Check website on March 21, 2010, the day that the health reform law was enacted:

$17 billion – Amount Americans will fork over to the IRS as a result of the individual mandate tax in the bill – a full $2 billion more than the Senate bill because of changes made in the reconciliation bill. 

There is at least as much hypocrisy in calling a measure a tax for political purposes and then saying it is not a tax when challenging the law in court as there is in calling it not a tax in Congress and claiming that it is a tax in court.  Political rhetoric and misleading labels attached to legislation do not make laws unconstitutional.  The federal courts do not have responsibility for overseeing the accuracy of debates in Congress, nor do they have the power to strike down legislation because they feel that the supporters of a law were less than candid.

     Third, Judge Vinson cherry-picks those portions of the bill and supporting documents that call the individual mandate a "penalty" and minimizes or ignores sources that call it a "tax."  He dismisses the fact that this penalty is codified in the Internal Revenue Code under the heading "Excise Taxes."  In addition, while he correctly notes that the Document JCX 17-10 issued by the Joint Committee on Taxation on March 20, 2010, does not include the individual mandate in its tables listing the effect of various revenue measures in the bill, he fails to mention that the following day the Joint Committee on Taxation released report JCX 18-10 in which the Committee called the individual mandate an "excise tax."  The Committee stated:

The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is an excise tax that is assessed in the same manner as an assessable penalty under the enforcement provisions of subtitle F of the Code.2   As a result, it is assessable without regard to the restrictions of section 6213(b). Although assessable and collectible under the Code, the IRS authority to use certain collection methods is limited. Specifically, the filing of notices of liens and levies otherwise authorized for collection of taxes does not apply to the collection of this penalty. In addition, the statute waives criminal penalties for non-compliance with the requirement to maintain minimum essential coverage. However, the authority to offset refunds or credits is not limited by this provision.

Judge Vinson also neglects to mention that the Congressional Budget Office included the revenue effect of the individual mandate in all of its reports regarding the effect of this legislation on the federal deficit.  For example, here is link to the CBO report of March 18, 2010, showing that the "penalty payments by uninsured individuals" will generate $17 billion in revenue between 2014 and 2019.

     Fourth, and most seriously in my opinion, at no point does Judge Vinson discuss whether or not the individual mandate is a tax; he is concerned only with what it is called.  His entire analysis is focused on how the mandate is referred to in the bill and by its supporters, and not what it really is. 

     Remarkably, Judge Vinson never defines the difference is between a "penalty" and a "tax."  He never goes beyond semantics in his determination that this admitted penalty is not a tax.  I think it clear that a penalty that is contained in the Internal Revenue Code, that is collected by the Internal Revenue Service, that is measured as a percentage of income, and that is contingent not upon the commission of an offense but rather simply because of certain conduct, is a "tax."

     In short, the judge does not define what a tax is, but simply relies on the fact that for political advantage the supporters of the bill stated that it was not a tax.  I think that the relevant and controlling reference is not to Humpty-Dumpty's pompous statement in Lewis Carroll's "Alice in Wonderland" that when he uses a word it means what he wants it to mean, but rather to a corny joke told by Abraham Lincoln.  Lincoln said:

"If you call a tail a leg, how many legs has a dog? Five? No, calling a tail a leg don't make it a leg."

     When Congress calls a tax a penalty, that "don't mean" that it isn't still a tax. 

     In tomorrow's post, as promised above, I will discuss whether or not the individual mandate is constitutional under the Commerce Clause. 

Wilson Huhn teaches Constitutional Law at The University of Akron School of Law. Visit his website on Constitutional Law and his website on Health Care Financing Reform for background, information, and links to other sites devoted to these important areas of the law.

Tagged as: Abraham Lincoln, commerce clause, constitution, constitutional law, enumerated powers, enumerated powers of congress, health care financing reform, health care litigation, health care reform, health insurance reform, individual mandate, judge roger vinson, power of the purse, tax and spending clause