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Supreme Court Upholds Individual Mandate on Basis of Taxation Power

By Bruce R. HopkinsAugust 22, 2012 | Print

(Originally published in the August 2012 issue of Bruce R. Hopkins Nonprofit Counsel, available electronically to subscribers on publication.)


The US Supreme Court, on June 28, in a decision that is stunning if only because of the unanticipated basis for it, ruled (5–4) that the individual health insurance mandate, enacted as an integral part of the Patient Protection and Affordable Care Act (Act), while unconstitutional from the standpoint of the Commerce Clause, is constitutional by reason of Congress’s taxation power (
National Federation of Independent Business v. Sebelius).

Anti-Injunction Act

The Court held that the Anti-Injunction Act does not deny jurisdiction in this case. The Court majority respected the decision of Congress to label the sanction underlying the mandate, also known as the shared responsibility payment, a penalty, not a tax. It wrote: “The Anti-Injunction Act and the Affordable Care Act, however, are creatures of Congress’s own creation. How they relate to each other is up to Congress, and the best evidence of Congress’s intent is the statutory text.” And: “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 Anti-Injunction Act therefore does not apply to this suit, and we may proceed to the merits.”

The four dissenting justices wrote that the majority could not conclude that the mandate is not a tax for Anti-Injunction Act purposes, yet hold it to be a tax for constitutional law purposes, writing: “That carries verbal wizardry too far, deep into the forbidden land of sophists.”

Commerce Clause

The general consensus was that if the Supreme Court considered the health care reform case on its merits, the matter would revolve around application of Congress’s Commerce Clause power. This, however, did not happen. Nonetheless, the Court substantively discussed this aspect of the law, finding the mandate unconstitutional in this context, thereby setting some outer boundaries of Congress’s commerce power.

“Given its expansive scope,” the Court majority wrote, “it is no surprise that Congress has employed the commerce power in a wide variety of ways to address the pressing needs of the time.” But, the Court said, Congress “has never attempted to rely on that power to compel individuals not engaged in commerce to purchase an unwanted product.” It wrote that “[l]egislative novelty is not necessarily fatal; there is a first time for everything.” Yet, the Court majority noted, quoting an earlier opinion, sometimes the “most telling indication of [a] severe constitutional problem . . . is the lack of historical precedent” for Congress’s action.

The Court majority observed that the Constitution grants Congress the power to regulate commerce. “The language of the Constitution,” the majority wrote, “reflects the natural understanding that the power to regulate assumes there is already something to be regulated.” All of the Court’s precedential cases “have one thing in common: They uniformly describe the power as reaching ‘activity.’” The individual mandate, however, said the majority, “does not regulate existing commercial activity”; rather, it “instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce.” The Court majority stated: “Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority.” They added: “Allowing Congress to justify federal regulation by pointing to the effect of inaction on commerce would bring countless decisions an individual could potentially make within the scope of federal regulation, and—under the Government’s theory—empower Congress to make those decisions for him.”

Indeed, the Court majority continued, the “government’s logic would justify a mandatory purchase to solve almost any problem.” The example was given of the fact that many Americans (a group making up a larger percentage of the total population than those without health insurance) do not eat a balanced diet. The failure of that group to have a healthy diet increases health care costs (to a greater extent than the failure of the uninsured to purchase insurance). “Under the Government’s theory,” the majority concluded, Congress “could address the diet problem by ordering everyone to buy vegetables.”

The Court majority wrote: “That is not the country the Framers of our Constitution envisioned.” The government’s theory, they said, would permit Congress to “reach beyond the natural extent of its authority.” Noting that Congress “already enjoys vast power to regulate much of what we do,” the majority stated that “[a]ccepting the Government’s theory would give Congress the same license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal Government.”

The majority observed: “The Framers gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress’s actions have reflected this understanding. There is no reason to depart from that understanding now.” They added that the individual mandate’s “regulation of the uninsured as a class is, in fact, particularly divorced from any link to existing commercial activity,” noting that, if the mandate is “targeted at a class, it is a class whose commercial inactivity rather than activity is its defining feature.”

The majority also wrote that the “proposition that Congress may dictate the conduct of an individual today because of prophesied future activity finds no support in our precedent,” stating: “Everyone will likely participate in the markets for food, clothing, transportation, shelter, or energy; that does not authorize Congress to direct them to purchase particular products in those or other markets today. The Commerce Clause is not a general license to regulate an individual from cradle to grave, simply because he will predictably engage in particular transactions. Any police power to regulate individuals as such, as opposed to their activities, remains vested in the States.” The Court majority concluded this aspect of its analysis by writing that the individual mandate “forces individuals into commerce precisely because they elected to refrain from commercial activity,” adding that “[s]uch a law cannot be sustained under a clause authorizing Congress to ‘regulate Commerce.’”

The dissent in the health care reform case added that “if every person comes within the Commerce Clause power of Congress to regulate by the simple reason that he will one day engage in commerce, the idea of a limited Government power is at an end.” Put another way, “[i]f all inactivity affecting commerce is commerce, commerce is everything.” The individual mandate, the dissenters wrote, threatens the Constitutional order “because it gives such an expansive meaning to the Commerce Clause that all private conduct (including failure to act) becomes subject to federal control, effectively destroying the Constitution’s division of governmental powers.”

The Constitution, the dissenters continued, “enumerates not federally soluble problems, but federally available powers.” The federal government, they said, “can address whatever problems it wants but can bring to their solution only those powers that the Constitution confers, among which is the power to regulate commerce.” “None of our cases say anything else,” they wrote, observing that Article I of the Constitution “contains no whatever-it-takes-to-solve-a-national-problem power.”

The Court majority then turned to the matter of application of the Necessary and Proper Clause, noting that the Court has been “very deferential to Congress’s determination that a regulation is ‘necessary.’” But, they added, the Court has “also carried out our responsibility to declare unconstitutional those laws that undermine the structure of government established by the Constitution.” With that as background, the Court majority stated that the mandate “vests Congress with the extraordinary ability to create the necessary predicate to the exercise of an enumerated power.” Rejecting the thought that the mandate entails an authority that is “narrow in scope” or “incidental” to the exercise of the commerce power, the majority wrote: “[S]uch a conception of the Necessary and Proper Clause would work a substantial expansion of federal authority. No longer would Congress be limited to regulating under the Commerce Clause those who by some preexisting activity bring themselves within the sphere of federal regulation. Instead, Congress could reach beyond the natural limit of its authority and draw within its regulatory scope those who otherwise would be outside of it. Even if the individual mandate is ‘necessary’ to the Act’s insurance reforms, such an expansion of federal power is not a ‘proper’ means for making those reforms effective.” Thus, the Court majority wrote that the individual mandate “cannot be sustained under the Necessary and Proper Clause as an essential component of the insurance reforms.”

This aspect of the Court majority’s analysis concluded: “Just as the individual mandate cannot be sustained as a law regulating the substantial effects of the failure to purchase health insurance, neither can it be upheld as a ‘necessary and proper’ component of the insurance reforms. The commerce power thus does not authorize the mandate.”

Taxation Power

Thus it was that nearly all the citizenry was startled when the Court majority upheld the health reform legislation on the basis of Congress’s power to tax. The Court majority defined—in this context—the mandate not as a command to individuals to purchase insurance, but as a rule stating that going without insurance is a taxable event. The majority wrote that the question “is not whether that is the most natural interpretation of the mandate” but whether it is a “fairly possible” one. The Court thus granted the legislation the “full measure of deference owed to federal statutes.”

The Court noted that the payment associated with the mandate is described by the law as a penalty rather than a tax. It stated that, while that label is “fatal” to application of the Anti-Injunction Act, “it does not determine whether the payment may be viewed as an exercise of Congress’s taxing power.” The Court discussed cases where “exactions not labeled taxes nonetheless were authorized by Congress’s power to tax”—use of a “functional approach.” That analysis “suggests that the shared responsibility payment may for constitutional [law] purposes be considered a tax, not a penalty.”

The Court majority in this case wrote that the federal government “does not have the power to order people to buy health insurance.” But, it continued, the federal government “does have the power to impose a tax on those without health insurance.” As it put the matter, “taxes that seek to influence conduct are nothing new.”

The majority added: “The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

It is not clear what type of tax this is. The majority said it is neither a capitation tax nor other direct tax that must be apportioned among the states. It is not an income tax; it may be some form of excise tax. The dissent stated that the “meaning of the Direct Tax Clause is famously unclear, and its application here is a question of first impression that deserves more thoughtful consideration than the lick-and-a-promise accorded by the Government and its supporters.”

The dissent observed that, “until today, no federal court has accepted the implausible argument that [the mandate] is an exercise of the tax power.” It turned the issue into another application of the principle of separation of powers: “Imposing a tax through judicial legislation inverts the constitutional scheme, and places the power to tax in the branch of government least accountable to the citizenry.”

Commentary: In his understandable effort to keep the Court from appearing political in an election year, Chief Justice Roberts created a bare majority that managed to find the Act’s individual mandate in violation of the Commerce Clause and simultaneously uphold the constitutionality of the mandate. This is a remarkable achievement, particularly when it is juxtaposed against the fact that four justices voted to invalidate the entire Act. The problem we now have, however, is that while Congress is reminded that it does not have the police power by virtue of the Commerce Clause, it seems to have the rough equivalent of that power by virtue of the taxation power. Congress is likely to restrain itself and not tax inactivity on many occasions, but this decision tells us that the power is there.

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