Not the Power to Destroy: An Effects Theory of the Tax Power

Neil Siegel

In his decisive opinion today, Chief Justice Roberts embraced a view of the tax power entirely consistent with a theory of the tax power that Robert Cooter and I have developed. A somewhat dated version of the article that articulates the theory, forthcoming in the Virginia Law Review, is available here. Bob and I will post an updated version on SSRN soon. The title is "Not the Power to Destroy: An Effects Theory of the Tax Power." Here's the latest abstract:

Unless the U.S. Supreme Court’s tax power jurisprudence reinforces restrictions on the Commerce Clause, Congress can circumvent limits on its commerce power by calling regulations backed by penalties “taxes” and justifying them under the tax power. When the Court restricted federal commerce power in the 1920s and 1930s, it distinguished between taxes, which raise revenues, and penalties, which regulate behavior. This distinction is misguided because many federal exactions do both. The post-1937 Court essentially abandoned judicially enforceable limits on the Commerce Clause, so it had no need to rethink previous distinctions between regulations of interstate commerce and taxes. Since its “new federalism” decisions, the Court has yet to reconsider the scope of the tax power, causing confusion in litigation over the minimum coverage provision in the Patient Protection and Affordable Care Act (ACA).

Legal theory helps to answer constitutional questions when existing doctrine does not. One 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 revenue.

Alternatively, 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 revenues.

Situated between pure taxes and pure penalties are mixed exactions, whose expression sounds like a penalty and whose material characteristics look like a tax. Thus the ACA’s exaction for non-insurance has a penalty’s expression and a tax’s materiality. Should courts interpret a mixed exaction as a tax or a penalty? Our answer depends on the exaction’s effect and follows the Court’s deferential approach to federalism cases. 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 7:52 PM by Neil Siegel [link]