Affordable Care Act, Part III: When is a "penalty" actually a "tax"?

Is the “penalty” that people who fail to get health insurance must pay under the Affordable Care Act actually a “tax”?

Oddly enough, the Supreme Court’s answer is not that the Act did in fact create such a tax, but only that it is “fairly possible” to interpret the Act that way. Poor Mitt Romney – it’s easy to see how he could get confused, since the justices are in such disarray on the point too. Four of them (the “joint dissenters,” Scalia, Kennedy, Thomas and Alito) insist that the Act’s penalty is not a tax. Chief Justice Roberts, meanwhile, says that “[t]he most straightforward reading of the mandate is that it commands individuals to purchase insurance” (opinion at 31) – or in other words that it is a regulation of behavior, to be judged under the Commerce Clause’s authorization of the regulation of interstate commerce, and (for Roberts plus the joint dissenters) found invalid on that score.

But Roberts goes on to explore whether the law can reasonably be read instead as imposing a tax. As to this possibility, he tells us that “[t]he question is not whether that is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.” (32). This inquiry is based on a longstanding principle of statutory interpretation, the “canon of constitutional avoidance,” which essentially tells courts that to avoid the risk of holding a federal statute unconstitutional, they should find a way, if one is “fairly possible,” to interpret the statute that avoids the reading – even if it was the more natural reading – that posed serious constitutional problems. Ultimately Roberts says (for himself alone) that the statute can be read this way, “[g]ranting the Act the full measure of deference owed to federal statutes” (id.), and the four liberals concur in the argument he then develops to justify this conclusion (33-44). In the course of that argument, Roberts observes that “[w]e see no insurmountable obstacle” to the interpretation being defended – hardly a vigorous declaration that it is in fact the most plausible reading! (38) So actually no one seems to think the likeliest reading of the law is as a tax.

For fans of statutory interpretation (such as me), this decision is an important instance of how much difference this form of legal reasoning can make. It is fair to say that Roberts has to work to find a way to read the law this way. After all, as he points out, the statute “states that individuals ‘shall’ maintain health insurance” (id.), language which certainly sounds like a mandate of behavior or, in other words, a regulation, with the breach of the regulation punished by a “penalty,” another word from the statute itself. In fact, the dissenters point out that the word “penalty” is used to describe this payment eighteen times in the law. (Joint dissent at 21.) They also cite repeated instances of the statute referring to the “requirement” of purchasing insurance. (Id. at 19.)

Moreover, and quite remarkably, the question of whether this payment was a “penalty” or a “tax” comes up twice in the case. The very first issue in the case is whether the Court can hear the case at all, given the existence of another statute called the Anti-Injunction Act, 26 U.S.C. § 7421(a), which forbids suits to challenge taxes before they are paid. The majority position ultimately is that for purposes of this statute, the payment is not a tax, but that for purposes of assessing its constitutionality, it is. The dissent says that this result “carries verbal wizardry too far, deep into the forbidden land of the sophists.” (Joint dissent at 28.)

How does Justice Roberts manage this? The answer is that the Anti-Injunction Act is simply another statute (rather than part of the Constitution); so long as doing so doesn’t somehow violate the Constitution, Congress can define terms in statutes any way it wants. If it doesn’t want the Affordable Care Act payment to count as a tax for purposes of the Anti-Injunction Act, that’s entirely Congress’ call. So here the majority is persuaded that Congress in the Affordable Care Act made clear that the “penalty” was not meant to count as a “tax” under the Anti-Injunction Act. (Roberts at 11-15.)

But for purposes of judging the constitutionality of the statute, the question of whether the payment is a “tax” is not entirely in Congress’ hands. For purposes of the Constitution, Chief Justice Roberts and the four liberals who join him on this point declare (and maintain that precedent supports them), Congress’ “choice of label” is not controlling. (Roberts at 33) Something may be a tax even though Congress called it a penalty, Roberts writes (34-35); and he adds, quoting an earlier case, that “the ‘question of the constitutionality of action taken by Congress does not depend on recitals of the power which it undertakes to exercise.’” (39) But the fact that Congress’ labels aren’t controlling just means it’s possible that something labeled a “penalty” could be something else; we still need affirmative reasons for concluding that it is something else. What are those reasons?

One reason has to do with the definition of a penalty. Roberts writes that it is a central feature of “penalties” that they “‘mean punishment for an unlawful act or omission’” (37), and so in determining whether the required payment is a tax or a penalty it becomes important to determine whether the failure to buy health insurance (which triggers the duty to pay) is or isn’t unlawful. In other words, is the “individual mandate” not actually a “mandate” at all? Apparently that is indeed the case. As Roberts puts it (id.), “[w]hile the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do so is unlawful.” Instead, it appears that “if someone chooses to pay rather than obtain health insurance they have fully complied with the law.” (As one of my sons pointed out to me, on this reading of the law the "penalty" for not buying health insurance is the equivalent of the baseball "luxury tax," the payment individual baseball teams must make to Major League Baseball when their payrolls grow too extravagant.) Congress, Roberts rather cogently points out, likely “did not think it was creating four million outlaws” (38) – the number of people predicted to choose to pay the penalty rather than buy insurance. (37)

(Here I have to add an aside on an odd feature of the case. My impression is that normally the canon of constitutional avoidance is brought to bear to determine what a statute commands or forbids. Here, the immediate question before the Court with respect to the penalty or tax payment is not what the statute directs people to do or not do as what to call those directions. People must pay money to the government if they do not buy health insurance, and nothing in the Court’s decision changes that. All that happens is that the Court determines that these payments can be interpreted as “taxes” for purposes of the Constitution. But when the Court bolsters that conclusion by arguing that the statute does not actually mandate that people purchase health insurance, it does affect the meaning of the statute in a somewhat concrete way. We now know that those who do not buy health insurance are not lawbreakers. If the duty to buy health insurance was a legal mandate, then failure to comply would have been a violation of the law – and it’s of some importance to people to know that they are, or are not, “lawbreakers.” But one last odd feature: though Roberts seems to view the question of whether it is lawful not to buy health insurance as an important point, he discusses it in somewhat tentative language. For instance, he writes, referring to the large number of people who it is predicted will pay the tax rather than buy health insurance: “That Congress apparently regards such extensive failure to comply with the mandate as tolerable suggests that Congress did not think it was creating four million outlaws.” (37-38) I think one can rely on this case as firm legal authority for the proposition that those who don’t purchase health insurance are not lawbreakers – but the Court’s language on the point is a shade short of absolute. )

Roberts is able to invoke several other arguments (not all of which I’ll retrace here) to support his conclusion that the payment is actually a tax. For one thing, the “penalty” – which does have one other statutory name, the “shared responsibility payment” (33) – is collected through the income tax system. Interestingly, the IRS is barred from using its heaviest enforcement weapons, such as criminal prosecution, to collect it. (7-8) For another, the penalty is predicted to generate quite a lot of money, $4 billion by 2017, as taxes are supposed to. (33) Moreover, the penalty amount is decidedly less than the cost the penalized person would have incurred in purchasing the insurance – suggesting that it’s not much of a penalty, and therefore that it can be read as not being a penalty in the first place. (35) As already mentioned, “it is estimated that four million people each year will choose to pay the IRS rather than buy insurance.” (37) Roberts acknowledges that this tax is certainly meant to affect behavior (that is, to encourage people to buy health insurance), but “taxes that seek to influence conduct are nothing new” (36). At some point, a tax can be so punitive that it can’t any longer be upheld as a tax, but Roberts is confident that this tax doesn’t cross that line (43) – and the large number of people who apparently are prepared to pay the penalty (oops, the tax) seems to support that conclusion. (43)  

To all of this the joint dissenters respond emphatically. They write that (joint dissent at 18):

[W]e have never held – never – that a penalty imposed for violation of the law was so trivial as to be in effect a tax. We have never held that any exaction imposed for violation of the law is an exercise of Congress’ taxing power – even when the statute calls it a tax, much less when (as here) the statute repeatedly calls it a penalty.

And, they say, this payment is “unquestionably” “imposed for violation of the law. Citing the statute’s many references to the “requirement” of purchasing insurance and the “penalty” for not doing so, they write (at 21):

[W]e have never – never – treated as a tax an exaction which faces up to the critical difference between a tax and a penalty, and explicitly denominates the exaction a “penalty.”

These “never’s” may be overstated, by the way. Roberts emphasizes one case “in particular” that did interpret a payment, labeled by statute as a “penalty,” to actually be a “tax.” That earlier decision was not about the constitutional character of the payment but rather about its status under the bankruptcy statute – but it’s not clear why Congress’ label could be overridden for purposes of another statute but not for purposes of understanding the nature of the payment under the Constitution. (Roberts at 35 n.7; the joint dissenters respond in their opinion at 17 n.5.)

In any event, based on precedent and other considerations, the dissenters conclude that “to say that the Individual Mandate merely imposes a tax is not to interpret the statute but to rewrite it.” (Joint dissent at 24.) Judicial legislation is always problematic in our system, but here the dissenters see two special concerns as well. First, the last thing courts should be doing is imposing taxes, a matter of special democratic concern. Second, once the penalty is construed as a tax, a new constitutional problem has to be addressed – the constitution’s requirement in Art. I, § 9, cl. 4, that “direct taxes” be (as the dissenters put it) “apportioned among the States according to their population.” (25) This requirement blocked the institution of the federal income tax until the 16th amendment was passed to remove the barrier, but it remains part of the Constitution, and while it wouldn’t apply to income taxes, it could conceivably apply to this tax. To figure out what the impact of the “direct tax” provision would be, the dissenters say, is no easy matter, and that’s another reason not to adopt an interpretation of the statute that requires resolving this additional constitutional problem. In fact, the government didn’t even discuss the question in its opening brief – a further sign, the dissenters suggest, of how far anyone was from really believing this statute could be read as a tax law. (25-26) (The majority, however, is undaunted and concludes that this tax isn’t a direct tax. (Roberts at 40-41.))  

Are the dissenters right? Does the Supreme Court’s upholding of the Individual Mandate rest on a judicial rewrite of the statute? My impression is that the answer is – just barely – no. It’s clear that Congress meant to present the country with something called a “requirement” (to buy health insurance), supported by something called a “penalty” for failure to do so. Congress, in other words, “framed” the law as a mandate backed up by punishment. But the punishment is too mild – it’s cheaper to disobey this law than to obey it. And it is at least unclear that Congress meant to turn the millions of anticipated non-purchasers of health insurance into lawbreakers – rather than tax-owers. Perhaps the weakness of the penalty and the ambiguity surrounding the status of non-purchasers reflect how controversial the law was; the legislators barely passed the statute, and when they did so they passed a soft version. But that ambivalence marks the space within which more than one interpretation of what Congress had done became “fairly possible.”

Even so, Roberts himself seems only just persuaded. The gossip about his having switched sides at the last moment would confirm this, but I mean to emphasize more the hesitation in the words he wrote on behalf of himself and the four liberals. They find “no insurmountable obstacle” to their decision. Roberts, for himself, says he reaches the decision “[g]ranting the Act the full measure of deference owed to federal statutes.” The canon of constitutional avoidance is a quite venerable technique of statutory interpretation, and is sometimes employed quite dramatically, but I suspect that this is one of the more aggressive acts of interpretive avoidance on record.

And what justifies that? Roberts’ answer, which I’ve quoted already a couple of times, is that he is “[g]ranting the Act the full measure of deference owed to federal statutes.” One translation of that phrase is that he is deftly avoiding a confrontation with the President and potential injury to the Supreme Court’s standing in the country – a legitimate concern for the justices, as I’ve already argued in my first post on this case. But as a matter of legal argument, Roberts is harking back to an old presumption, perhaps not so much acknowledged in recent decades, that federal statutes are constitutional. He writes, quoting a case from the 1880s, that “‘Proper respect for a co-ordinate branch of the government’ requires that we strike down an Act of Congress only if ‘the lack of constitutional authority to pass [the] Act in question is clearly demonstrated.’” (Roberts at 6, writing only for himself). This presumption is certainly rebuttable, but it rests on an important premise – namely that members of Congress and the President, who together make our statutes, are acting with fidelity to the Constitution. Maybe not, of course, but as a starting principle I think this idea has a lot to recommend it. If that is one’s starting point, then it makes sense to look, and even to look hard, for ways to square what Congress and the President have done with the Constitution’s commands. If the price of upholding their work is to reread it, even dramatically, that is a lesser price than would be overturning it.

It’s certainly possible to argue that the canon of constitutional avoidance, employed this way, is actually an abuse of judicial authority. That’s roughly what the joint dissenters would say in this very case. Sometimes that may be so. But I think its use here, to preserve what Congress and the President did while still laying out new constitutional ground rules for the future, was justified, and wise.