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Wednesday, April 14, 2010

Penalties on the uninsured are thoroughly precedented

Randy Barnett is not just a great scholar; he's also a great lawyer.  Maybe someone else beat him to it, but I credit him with the now-popular claim that health care reform's "mandate" to buy insurance is "unprecedented" in american history, that never before has the government forced anyone to enter into a contract with another party for insurance.  Fantastic rhetorical move.  Not really accurate, though.  People who refuse to buy insurance have been paying a penalty for almost seventy years now. 

Pull back the curtain on the health care legislation -- and make no mistake, it's a pretty darned heavy curtain -- and what you'll find is that it imposes an income-tax surcharge on people who opt not to buy qualifying health insurance coverage.  That's in section 1501 of the legislation, now codified as new section 5000A of the Internal Revenue Code. 

The section is new, but the incentives have all been here for a good long while.  Check out section 106 of the same code -- it's been around since the 1940's.  It says that if your employer pays your health insurance premiums for you, that payment won't count as income.  But if your employer hands you the same payments in cash, it does.  So, if you buy insurance through your employer, lower taxes.  If you refuse to buy insurance through your employer, and demand cash salary instead, higher taxes.  

So, is every tax provision that encourages people to buy things unconstitutional?  Oh, and, before y'all start arguing about the differences between taxes and fines, please let me direct you to my analysis on that question, together with longer versions of the other arguments I made in my earlier posts, here.   

Posted by BDG on April 14, 2010 at 02:24 PM | Permalink


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thanks Chris.

Posted by: jk | Apr 16, 2010 3:27:58 PM

Here's a recent Bailey-deploying precedent for you: Department of Revenue v. Kurth Ranch, 511 U.S. 767, 779 (1994) (tax violates double jeopardy) ("[T]here comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.") (quoting A. Magnano Co. v. Hamilton, 292 U.S. 40, 44 (1934), in turn relying on Bailey). See also Frazier v. Montana State Prison, 1999 WL 50893 (9th Cir. 1999).

Also, FWIW, a little digging around reveals my face-of-the-statute-focused reading of Kahriger and Sonzinsky is not idiosyncratic. See, e.g., Chenoweth, A Judicial Balance Sheet for the Federal Gambling Tax, 53 Nw. U. L. Rev. 457, 463 (1958) (Kahriger cites Sonzinsky for profession of "judicial powerlessness if the federal statute is, on its face, a taxing measure"); Note, The Federal Taxing Power and the Regulation of Crime, 29 Ind. L.J. 377, 389 (1953) (principle that “Congress may not announce a regulatory purpose on the face of a revenue act” survives Kahriger, citing same sentence I quote above); Note, The Federal Gambling Tax and the Constitution, 43 J. Crim. L. Criminology & Police Sci. 637, 640 (1952) (Sonzinsky and Sanchez follow " 'on its face' doctrine").

Posted by: Chris | Apr 16, 2010 1:36:30 PM

Sorry, I thought you were talking about the 1983 case. In the 1974 Bob Jones case, the Court doesn't say that Bailey has been repudiated, but cites the very same page from Sonzinsky (page 513) that I quoted above. The Court said that after Sonzinsky, they weren't in the business of looking behind the face of what Congress has done to see if a tax is really a regulation/mandate. Lim likewise follows (and quotes) page 513 of Sonzinsky in refusing to use "regulatory effect" as a means of scrutinizing taxes. But my argument isn't about regulatory effects. My point is that if, as here, the mandate is on the face of the law, and if the mandate itself exceeds Congressional power, then the tax is unconstitutional too. By directly issuing a command to purchase health insurance, Congress has made itself unmistakably clear, and in precisely the way in which Sonzinsky and Kahriger distinguish Bailey, rather than overruling it.

The lack of unconstitutional-direct-mandates-backed-by-tax-penalty cases (if it is a total lack--for my part, I haven't had the time yet to dig for them) is surely due to the pre-Lopez dearth of cases finding mandates themselves to be unconstitutional. But if Congress had re-enacted the GFSZA by (a) forbidding the possession of guns near school, and (b) imposing tax penalties on such possession, then Sonzinsky and Kahriger wouldn't save the law. (As it was, the re-enacted version added an interstate-commerce hook.) (Also, of course, as explained above, mandates to engage in commerce are themselves unprecedented, so the lack of judicial discussion of them is unsurprising.)

I'm not relying on Butler or any other old spending-clause cases, which is what Lipscomb, Chemerinsky, and Nowak are talking about. Dole v. South Dakota, of course, is the rule for that today. I'm rebutting Prof. Galle's use of Kahriger.

Posted by: Chris | Apr 16, 2010 12:43:40 PM

Bob Jones, 416 U.S. 725, 741 n. 12 (1974) (explaining how the court abandoned the pre-1937 cases); U.S. v. Limpscomb, 299 F.3d 303, 319 (5th Cir. 2002); U.S. v. Limm, 444 F.3d 910, 913 (7th Cir. 2006).

See Chemerinsky s. 3.4 at 198(1997)("This aspect of Butler has never been followed."); Nowak s. 5.5 at 231 (8th ed. 2010) (same).

In short, I do not believe any court has cited Kahriger for the proposition that you rely on to argue that the mandate exceeds congress' taxing power. Am I wrong?

Posted by: jk | Apr 16, 2010 11:59:26 AM

Bob Jones doesn't mention Bailey at all. I'm not sure what circuit courts or treatises you're talking about.

Posted by: Chris | Apr 16, 2010 9:01:30 AM

But even the Supreme Court in Bob Jones said the Court has abandoned Butler and Bailey. Lots of Circuit Courts have also said they will ignore these cases. And, for what it is worth, every leading con law treatise has stated that the supreme court has abandoned Bailey & Butler. (Although Tribe does say that the Court may revisit the issue in light of Lopez' recalibration of the commerce clause.)

Regarding the penalty issue, I thought in the area of tax law the court doesn't look at labels? Couldn't the court just as easily see this as an "income tax surcharge" designed to raise revenue?

Posted by: jk | Apr 16, 2010 3:21:00 AM

Sorry, that should be nothing that isn't labeled as one.

Posted by: Chris | Apr 16, 2010 12:32:43 AM

I think it's emphatically the province and duty of the judicial department to say what the law is. And the 1937 & 1953 reaffirmations of Bailey were actions too. As far as I'm aware, no actions of the Court (or any lower court) since then have contradicted the principle. Have there been any other instances, either by the Supreme Court or a lower court, of (a) a mandate, concededly outside Congress's power if enacted alone, but (b) held to be constitutional because it was enforced only through tax penalties? I don't think so. At any rate, as the CBO said in 1994, this sort of law--a mandate to engage in a particular commercial activity, together with a penalty labeled as such--is unprecedented. What counts as a penalty enforcing a mandate, rather than just a plain tax? Kahriger is extremely generous: essentially anything that isn't explicitly labeled as one. Whether or not that's too generous, 26 U.S.C. sec. 5000A is explicitly labeled as one.

Posted by: Chris | Apr 15, 2010 11:36:42 PM

Chris, but shouldn't we focus more on what the Court has done and not one what it says? The fact is, since 1937 it has never relied on Butler or Bailey to strike down a tax law. Has any federal appellate court? But even if Bailey hasn't been implicitly overruled, doesn't this still leave us with the question of what constitutes a penalty?

Posted by: jk | Apr 15, 2010 10:39:17 PM

There was no anti-wagering mandate in Kahriger, only an anti-wagering purpose, and the Court said the difference was critical. If the Court intended to bury Bailey v. Drexel Furniture, there was a way to do that, but it's not what the Court did. They distinguished it, just as they did in Sonzinsky.

If Raich is right, the narcotics tax is fine.

Posted by: Chris | Apr 15, 2010 4:10:16 PM

As to Chris' reading of Kahriger, that case upheld the federal wagering tax -- a tax that had no real revenue-raising purpose but was instead, as Chris puts it, "explicitly used as a penalty to back a mandate." The tax's origin and design was to put bookies and other gamblers out of business by wholly eliminating their profit margin on wagers. The Court upheld the tax, noting that whatever its purpose, a tax was a tax if it raised any sums -- a principle that (as the Court noted) validated federal taxes that raised as little as a couple of thousand of dollars a year. Kahrigher buried the sorry tax-regulation distinction (for good reason). Chris, would you invalidate the federal narcotics tax?

Posted by: Norman Williams | Apr 15, 2010 3:29:22 PM

Sanchez is perfectly consistent with the reaffirmation of Bailey in Sonzinsky; it cites the same page from Sonzinsky that I cited (and nothing else). I'm not suggesting that a tax is per se invalid merely because it has a regulatory effect, but that a tax explicitly used as a penalty to back a mandate is unconstitutional if the mandate itself is. I don't think you've identified any counterexamples to that principle, which, as I noted above, the Supreme Court has reaffirmed several times. Moreover, if I'm misinterpreting these sentences from Sonzinsky and Kahriger, what do they actually mean?

Posted by: Chris | Apr 15, 2010 12:19:53 PM

Also, on Orin's point, I doubt that Randy would agree that the requirement would be more palatable if it only applied to some segment of the population. And, indeed, section 1501 excepts out lots of people (e.g., those for whom it would represent economic hardship; native americans) from a surtax, even if they don't purchase insurance.

Posted by: BDG | Apr 15, 2010 11:49:13 AM

Chris, I think you mischaracterize Kahriger et al. For example, how do you explain the language in U.S. v. Sanchez, 340 U.S. 42, 44 (1950)?: "It is beyond serious question that a tax dose not cease to be valid merely because it regulates, discourages, or even definitely deters the activity taxed."

Posted by: BDG | Apr 15, 2010 11:45:44 AM

There is a much more practical matter that is going largely undiscussed. The penalty is not really a penalty because Congress was chicken. It is not nearly high enough to avoid adverse selection and demographic meltdown of the insurance pool. Then there is not penalty for not paying the penalty. The legislation expressly says that failure to pay is not a crime and the IRS is not allowed to impose a tax lien to collect it. There is no way this Rube Goldberg machine will actually work in its current form. The reason: there was insufficient consensus on what the machine ought to look like before it was passed.

Posted by: Kendall | Apr 15, 2010 11:29:13 AM

I see your point, Norman - then I suppose it all hinges on the tax/fine distinction, which Brian's disussed elsewhere.

Posted by: Mark D. White | Apr 15, 2010 6:05:52 AM

Brian's point, which is I think is correct, is that the health care reform law only encourages the purchase of private insurance in the same way as it encourages the purchase of insurance through one's employer. There is no regulatory mandate to buy insurance backed by civil or criminal penalties (though I think that would be constitutional too); rather, individuals who refuse must pay higher taxes, which taxes are justified to subsidize the cost of medical care that those individuals are receiving or will receive. The health insurance tax no more forces individuals to buy insurance than the progressive federal income tax "forces" people to take lower paying jobs.

Posted by: Norman Williams | Apr 14, 2010 11:34:18 PM

I didn't get the point of the example - the tax code contains many provisions to encourage or discourage certain types of behavior or consumption (charitable giving, mortgage interest, etc.). But instances in which the tax code treats one type of consumption (or renumeration) differently than others do not equate to forced commerce; they affect the terms of trade, of course, and they influence behavior (as intended), but they don't mandate any specific purchase.

Posted by: Mark D. White | Apr 14, 2010 5:05:28 PM

As I understand Randy's claim, the claim is that it "unprecedented" for the federal government to force *everyone* to do something like this -- not that it has never before forced *anyone* to do something like this.

I should add that I don't buy Randy's argument: He is trying to take one issue (factually, whether the federal government has done this precise thing before) and treat it as if it answered a quite different issue (legally, the doctrine of stare decisis).

Posted by: Orin Kerr | Apr 14, 2010 4:01:14 PM

Unlike Karhiger and Sonzinsky, which taxed gamblers and weapons dealers without directly regulating them, the health-care bill is, on its face, a regulation backed by a penalty. The law says plainly in the new 26 U.S.C. sec. 5000A(a), "An applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month." This is called, in the law itself, a "Requirement to Maintain Minimum Essential Coverage." Section 5000A(b)-(c) refer repeatedly to the "penalty" enforcing this requirement.

Kahriger and Sonzinsky specifically acknowledge the principle that if Congress (a) makes a regulation, and (b) enforces it with a tax, then the tax is invalid if the regulation is beyond Congress's powers. See United States v. Kahriger, 345 U.S. 22, 31 (1953) ("Penalty provisions added for breach of a regulation concerning activities in themselves subject only to state regulation have caused this Court to declare the enactments invalid."); Sonzinsky v. United States, 300 U.S. 506, 513 (1937) ("The case is not one where the statute contains regulatory provisions related to a purported tax in such a way as has enabled the Court to say in other cases that the latter is a penalty resorted to as a means of enforcing the regulations."). Each cites at this point the Child Labor Tax Case and distinguishes it, rather than overruling it. The "extraneous to any tax need" sentence, which comes next in Kahriger, plainly doesn't overrule sub silentio a case that the Court just distinguished.

The CBO made the same claim that an individual mandate would be unprecedented in 1994.

Posted by: Chris | Apr 14, 2010 3:25:55 PM

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