Supreme Court upholds health care law's individual mandate penalty as a permissible tax

Doeren Mayhew

Supreme Court upholds health care law's individual mandate penalty as a permissible tax

The Supreme Court, in a 5 to 4 decision, has upheld the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, the provisions together comprise the Obama health care laws. The landmark decision, handed down on June 28, focused on a key provision of the law - the "individual mandate" - and affirmed that it was constitutional under Congress's taxing power.

Key provision

The individual mandate requires individuals to purchase health insurance, beginning in 2014, or pay a penalty. Opponents of the law had focused their challenges on the individual mandate, arguing that the mandate was an unconstitutional extension of federal power. The Supreme Court agreed with opponents that the mandate was not authorized by the Constitution's Commerce Clause or Necessary and Proper Clause, because it regulated "inactivity" (the failure to buy health insurance) that was not commerce.

Power to tax

However, although the requirement to buy health insurance was not constitutional, the imposition of a penalty, for failure to purchase insurance, was a permissible extension of Congress's Taxing Power. The court decided that the penalty was a tax, and therefore constitutional under the power to tax, even though the statute labeled the provision a penalty. The court also concluded that Congress's power to impose a tax was less intrusive than its power to regulate interstate commerce and did not exceed the limits of federal authority.

What is a tax?

In determining that the penalty for violating the individual mandate was a tax, the court identified the following factors:

The amount of the payment was small and could never exceed the cost of the insurance itself;
The penalty applied regardless of whether the taxpayer intended to violate the individual mandate (there was no requirement that the individual knowingly break the law);
The only means of collecting the tax was through the IRS, using the usual means to collect a tax. Liens, levies and criminal sanctions were forbidden.
The penalty was the only means for enforcing the mandate. Individuals who chose to pay the penalty, instead of carrying health insurance, would not be breaking the law or risking further punishment.
Interestingly, the court concluded that the Anti-Injunction Act, which limits judicial actions to restrain the collection of a tax, did not apply to the penalty imposed by the individual mandate. In this case, the court determined that the penalty was identified by Congress as a penalty, not a tax, and that this label precluded the application of the Anti-Injunction Act.

Other tax provisions OK

Part of the argument of opponents of the law was that the other provisions in the health care laws were not "severable" from the individual mandate, and that, if the mandate was unconstitutional, the rest of the law was also unconstitutional. The court's upholding of the mandate allows the balance of the health care law to take effect, including its tax provisions. These provisions include the employer's shared responsibility payment, the health insurance premium assistance credit, the small employer premium credit, an additional 0.9 percent Medicare tax on wages and self-employment income, and a 3.8 percent Medicare contribution tax on unearned income. Both of the Medicare taxes apply to higher-income individuals.

Medicaid expansion penalty unconstitutional

The President's health care package did escape with a completely clean bill of health from the Supreme Court. The court did strike down one nontax provision of the law. The law provided the mechanism for an expansion of the Medicaid program that provides health insurance benefits for lower-income individuals and families. Under the law, additional federal payments would be given to states for expanding their state programs. However, if a state failed to implement the expanded program, the law eliminated all federal Medicaid payments, including payments under the state's existing program. The court ruled that "Nothing in our opinion precludes Congress from offering funds under the ACA to expand the availability of health care, and requiring that states accepting such funds comply with the conditions on their use. What Congress is not free to do is to penalize states that choose not to participate in that new program by taking away their existing Medicaid funding."


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