Penalty or Tax Backgrounder

In the debate on health care reform, no issue is more controversial than the Patient Protection and Affordable Care Act’s (“PPACA”) minimum health coverage provision, also known as the “individual mandate.” The individual mandate requires that every individual have health insurance, or be subject to a penalty. Whether the U.S. government can impose a penalty on citizens that do not purchase health care plans may depend on the framing of the penalty. The Obama Administration maintains that this individual mandate is valid under Congress’s power to tax. However, opponents argue that the penalty is not a tax, but rather an unconstitutional penalty. The answer to this question could determine the overall constitutionality of the PPACA.

Penalty v. Tax, and Implications for the Individual Mandate

The “penalty or tax question” is at the center of the individual mandate debate. The PPACA has many facets, from the individual mandate to the coverage of preexisting conditions, and beyond. Some have chosen to look at the Act in pieces, concluding that the individual mandate could be declared unconstitutional and severed from the PPACA, while the majority of the Act stands. See Brief for Respondents on Severability at 28. Others, however, have tried to keep the focus on the entire Act, in the hope that the interwoven nature of many of the provisions will encourage the Supreme Court to uphold the PPACA. See Brief for State Petitioners on Severability at 35.

The outcome of the penalty or tax question may determine the constitutionality of the individual mandate provision. If the penalty for failing to comply with the individual mandate is determined to be a tax, the case could then turn on whether a plaintiff has standing to bring a suit to challenge a tax that has not yet been paid. Alternatively, the PPACA could fail if the Court determines that this penalty or tax exceeds the power given to Congress under the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution. The fate of the individual mandate is critical to the future of other PPACA provisions. If the individual mandate is found unconstitutional, the guaranteed-issue provision, requiring that providers cover individuals with preexisting conditions, would cause a sharp rise in health care costs, because individuals will tend to wait to buy health insurance until they have a medical problem. See Doug Schoen, The Supreme Court Ruling: What’s at Stake for Health Care?, Forbes, Feb. 2, 2012.

Penalty v. Tax Arguments

The Department of Health and Human Services (“HHS”) argues that the PPACA is constitutional in its current form, as the penalty attached to the individual mandate is actually a tax. See Brief for Petitioners (Minimum Coverage Provision) at 21, 52. HHS contends that this penalty is truly a tax because its purpose is to raise revenue. See id. at 54–55. HHS further argues that, while the tax may have some regulatory effects, they are not sufficient to render the tax an invalid exercise of Congress’s taxing power. See id. HHS states that the Commerce Clause gives Congress the power to regulate anything that has a “substantial effect” on interstate commerce, and that the Necessary and Proper Clause gives Congress the power to regulate by whatever means it deems necessary and proper to enforce other powers. See id. at 21–23. Specifically, HHS argues that the tax assessed for the failure to comply with the individual mandate is a means to regulate states’ economies, and thus interstate commerce. See id. at 24.

Many challengers to the PPACA, including several states, argue that the penalty for violating the individual mandate is, in fact, a penalty, and not a tax. See Brief for State Respondents (Minimum Coverage Provision) at 51. These parties make this argument: not only is the punishment for violation of the individual mandate a “penalty” by the Act’s plain language, but it also acts like a penalty because it “enforces a separate legal command.” See id. at 54, 57. Further, they argue, even if the individual mandate’s penalty were considered to be a “tax,” it exceeds the Congressional taxing power. See id. at 62. Some scholars also argue that the penalty is unconstitutional because it is essentially “commandeering”; they argue that Congress is using this tax to get states to do their bidding. See Randy Barnett, Commandeering the People to Avoid Taxation (And Some Other Thoughts), The Volokh Conspiracy, Jan. 21, 2012; see also Randy E. Barnett, Commandeering the People: Why the Individual Health Insurance Mandate is Unconstitutional, 5 N.Y.U. J.L. & Liberty 581 (2010).

Penalty v. Tax, and the Anti-Injunction Act

The penalty or tax argument also interacts with the debate centering on the Anti-Injunction Act (“AIA”). The AIA states that a court may not hear a case against the collection of a tax until after the law has gone into effect and the plaintiff has actually paid the tax. See 26 U.S.C. § 7421. The United States Court of Appeals for the Fourth Circuit has ruled that the individual mandate is a tax, concluding, therefore, that the AIA precludes jurisdiction. See Liberty Univ. v. Geithner, No. 6:10-CV-00015 (4th Cir. Sept. 8, 2011). However, other circuit courts have held that the individual mandate’s penalty is not a tax, and have reached a decision on the individual mandate’s constitutionality. See Nathan Koppel, Fourth Circuit Rejects Challenge to Federal Health Care Law, WSJ Blogs, Sept. 8, 2011.

Prepared by: Lisa Schmidt