Not the Power to Destroy: A Theory of the Tax Power that Justifies the Minimum Coverage Provision

Neil Siegel

One question in the healthcare litigation presently before the U.S. Supreme Court is how to characterize the exaction imposed by the Affordable Care Act (ACA) on individuals who fail to obtain health insurance in accordance with the law’s minimum coverage provision. Is the exaction a tax, or is it a penalty? The status of the exaction makes no difference for purposes of analysis under the Commerce Clause or the Necessary and Proper Clause, but it makes a decisive difference under the tax power.

The Court’s cases offer inconsistent guidance on the constitutional difference between a tax and a penalty. When the Court restricted federal commerce power in the 1920s and 1930s, it distinguished between taxes, which raise revenue, and penalties, which regulate behavior. This distinction is untenable because many federal exactions have long done both, like the 18th century “imposts” that raised revenue from imports and suppressed foreign competition with American industry. The post-1937 Court essentially abandoned judicially enforceable limits on the Commerce Clause, so it had no need to reconsider previous distinctions between taxes and regulations of interstate commerce backed by penalties.

Since its “new federalism” decisions, the Court has yet to reconsider the constitutional scope of the tax power. As a result, judges and litigants contradict one other in the litigation over the minimum coverage provision.

In Not the Power to Destroy: A Theory of the Tax Power for a Court that Limits the Commerce Power, 99 Va. L. Rev. (forthcoming 2012), Robert Cooter of Berkeley Law and I develop a theory of the difference between a tax and a penalty for purposes of the tax power. We then apply the theory to the ACA’s exaction for non-insurance.

A person who must pay a pure penalty is condemned for wrongdoing. Moreover, she must pay more than the usual gain from the forbidden conduct, and she must pay at an increasing rate with intentional or repeated violations. Condemnation coerces expressively and relatively high rates with enhancements coerce materially. A pure penalty prevents behavior, thereby raising little or no revenue.

By contrast, a person who must pay a pure tax is permitted to engage in the taxed conduct. Moreover, she must pay less than the usual gain from the taxed conduct, and intentional or repeated conduct does not enhance the rate. Permission does not coerce expressively and relatively low rates without enhancements do not coerce materially. A pure tax dampens conduct but does not prevent it, thereby raising revenue.

Situated between pure taxes and pure penalties are mixed exactions, whose expression sounds like a penalty and whose material characteristics look like a tax. An example is the ACA’s exaction for non-insurance. The ACA calls this exaction a “penalty,” which sounds like condemning wrongdoing—the wrong of remaining uninsured and shifting the risk of high medical costs to others. In contrast, the exaction’s rate and structure resemble a tax: many people can expect to gain from remaining uninsured and paying the exaction, and the exaction does not increase with intentionality or recidivism. The exaction has the expressive characteristics of a penalty and the material characteristics of a tax.

Should courts interpret a mixed exaction as a tax or a penalty? For purposes of judicial review, our answer depends on the exaction’s anticipated effect. If Congress could reasonably conclude that the exaction will dampen—but not prevent—the general class of conduct subject to it and thereby raise revenue, then courts should interpret it as a tax regardless of what the statute calls it. If Congress could reasonably conclude only that the exaction will prevent the conduct of almost all people subject to it and thereby raise little or no revenue, then courts should interpret it as a penalty.

The Congressional Budget Office predicts that ACA’s exaction for non-insurance will dampen uninsured behavior but not prevent it, thereby raising several billion dollars in revenue each year. Accordingly, the exaction is a tax for purposes of the tax power.
Posted 2:48 PM by Neil Siegel [link]