News & Accolades

Today the Supreme Court issued its much anticipated decision in the cases challenging the Affordable Care Act. Those cases posed challenges to two provisions of the Act: the individual mandate requiring individuals to purchase minimum health insurance coverage and the Medicaid expansion provision giving funds to the States on the condition that they provide specified health care to all citizens whose income is below a certain threshold. What follows is a brief, plain English recap of the Court’s decision.

 

Introduction

Chief Justice Roberts wrote the majority opinion, which opened with this caveat:

We do not consider whether the Act embodies sound policies. That judgment is entrusted to the Nation’s elected leaders. We ask only whether Congress has the power under the Constitution to enact the challenged provisions. . . . Resolving this controversy requires us to examine both the limits of the Government’s power, and our own limited role in policing those boundaries.

The Court began its analysis with the proposition that the federal government is a government of constitutionally enumerated powers and as such is limited in the kinds of legislation it may enact. The two constitutional enumerations of power at issue in this case were Congress’s power to regulate interstate commerce under the Commerce Clause and Congress’s power to levy taxes under the Taxing and Spending Clause. These enumerated powers are given a broad interpretation, because of the language of the Constitution (for example, the Necessary and Proper Clause) and because of the Court’s general reticence to invalidate the enactments of the elected leaders.

With that basic background, the Court turned to the question of whether the individual mandate was within Congress’s constitutionally enumerated powers. The individual mandate requires most Americans to maintain health insurance coverage or else pay a penalty to the Internal Revenue Service. The government advanced two theories for the proposition that Congress had the power to enact the individual mandate: under the Commerce Clause and under the power to tax.

Individual Mandate Not Authorized by Congress’s Commerce Clause Power

The Commerce Clause authorizes federal regulation of interstate commerce, a notion that is given an expansive reading. For example, the Court decided in 1942 that Congress had the power to limit the area of land farmers could devote to wheat production, even if that production was for personal consumption, because of the impact on the interstate market for wheat. Wickard v. Filburn, 317 U.S. 111 (1942). The Court acknowledged this expansive reading of the Commerce Clause but also stated that “[t]he language of the Constitution reflects the natural understanding that the power to regulate assumes there is already something to be regulated.”

However, a 5-4 majority of the Court (Chief Justice Roberts joined by Justices Scalia, Kennedy, Thomas, and Alito) noted that the individual mandate “does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce.” Drawing the government’s position to its natural conclusions, the Court’s opinion harkened back to the many (and humorous) oral argument questions surrounding where the boundary of congressional regulation should be marked. If Congress can compel individuals to purchase health insurance, what is stopping Congress from ordering individuals to purchase broccoli in an effort to address diet and obesity problems? The Court concluded that the government’s reading of the Commerce Clause went too far and indeed would mark a fundamental shift in the relationship between citizens and the federal government. Thus, the Court held that the individual mandate was not authorized under Congress’s constitutional authority to regulate interstate commerce.

Individual Mandate Authorized Under Congress’s Taxing Power

The Court then considered whether the individual mandate was authorized under Congress’s taxing power. The Taxing and Spending Clause authorizes the raising of revenue by taxation of activities, even activities that the federal government cannot otherwise control. Whereas the theory under the Commerce Clause asked the Court to consider whether Congress had the authority to compel individuals to enter into the health insurance market, the theory under the taxing power asked the Court to consider whether Congress had the authority to impose a penalty upon those individuals who did not purchase health insurance coverage.

Under the ACA, the consequence for failing to maintain minimum health insurance coverage is the payment of a penalty to the IRS. The ACA describes this payment as a penalty, not a tax. That label, however, did not prevent the Court from viewing the payment as an exercise of Congress’s taxing power. Whether an exaction is constitutional under Congress’s taxing power has never been a question controlled by Congress’s choice of label. For example, in 1922, the Court held that the Child Labor Tax, although labeled a tax by Congress, was not authorized by Congress’s taxing power. Bailey v. Drexel Furniture Co., 259 U.S. 20, 36-37 (1922); see also Quill Corp. v. North Dakota, 504 U.S. 298, 310 (1992) (“[M]agic words or labels” should not “disable an otherwise constitutional levy.”); United States v. Sotelo, 436 U.S. 268, 275 (1978) (“That the funds due are referred to as a ‘penalty’ . . . does not alter their essential character as taxes.”).

The Court then described the difference between a tax and a penalty:

In distinguishing penalties from taxes, this Court has explained that if the concept of penalty means anything, it means punishment for an unlawful act or omission. . . . While 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. Neither the Act nor any other law attaches negative legal consequences to not buying health insurance, beyond requiring a payment to the IRS. . . . Indeed, it is estimated that four million people each year will choose to pay the IRS rather than buy 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. It suggests instead that the shared responsibility payment merely imposes a tax citizens may lawfully choose to pay in lieu of buying health insurance.

This penalty, according to the Court, “looks like a tax in many respects.” The penalty is paid into the Treasury when the individuals file their tax returns; it does not apply to individuals not required to pay federal income taxes; the amount of the penalty is determined by factors such as taxable income, number of dependents, and joint filing status; the requirement to pay the penalty is enforced by the IRS; and the penalty must be assessed and collected in the same manner as taxes. Thus, the penalty involves that essential feature of any tax: “it produces at least some revenue for the Government. . . . Indeed, the payment is expected to raise about $4 billion per year by 2017.”

Using the functional approach instead of relying only on the labels given by Congress, a 5-4 majority of the Court (this time Chief Justice Roberts was joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan) determined that the penalty could be considered a tax for constitutional purposes. The Court saw no problem with the fact that the penalty, although it will admittedly raise considerable revenue, is plainly designed to expand insurance coverage: “[T]axes that seek to influence conduct are nothing new. . . . Today, federal and state taxes can compose more than half the retail price of cigarettes, not just to raise more money, but to encourage people to quit smoking.”

Ultimately the Court concluded that the ACA’s requirement that certain individuals pay a penalty for not obtaining health insurance may reasonably be characterized as a tax and was a permissible exercise of Congress’s power to levy taxes. The Court did conclude by saying, “Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

Medicaid Expansion Provision Not Authorized Under Spending Clause

The Court then turned to the question of whether the Medicaid expansion provision was within Congress’s constitutionally enumerated powers. The Medicaid expansion provision expands the scope of the Medicaid program and increases the number of individuals the State must cover. If a State does not comply with these expanded requirements, it may lose its federal Medicaid funding.

The Court has “long recognized that Congress may use [its power under the Spending Clause] to grant federal funds to the States, and may condition such a grant upon the States’ taking certain actions that Congress could not require them to take” by simple mandate. However, when Congressional action turns from pressure to compulsion, the legislation runs contrary to our system of federalism. A 7-2 majority of the Court (this time Chief Justice Roberts was joined by Justices Scalia, Kennedy, Thomas, Breyer, Alito, and Kagan) viewed the Medicaid expansion provision not as encouragement to act, but as “a gun to the head” that “leaves the States with no real option but to acquiesce in the Medicaid expansion.” The Court, therefore, held this provision unconstitutional. Notably, this is the first time the Court has ever determined that a Spending Clause condition-upon-funding was unconstitutionally coercive.

Medicaid Expansion is Optional Not Mandatory

A different majority of the Court (Chief Justice Roberts joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan) determined that, assuming the Medicaid expansion provision is unconstitutional, the constitutional violation can be avoided by reading that provision as allowing for optional expansion rather than mandated expansion. Thus, while the federal government can offer funds to States wishing to expand their Medicaid programs, it cannot penalize those States choosing not to do so.

Conclusions

The vote counts indicate the justices’ struggle with these issues of first impression, which split the Court along irregular lines for each of the key holdings in the opinion. Interestingly, the Court was unanimous in one conclusion—that the Anti-Injunction Act did not apply and the Court could decide the case on the merits. The Anti-Injunction Act bars lawsuits attempting to restrain the assessment or collection of taxes, meaning that an aggrieved taxpayer must wait until he or she has paid the tax and then file suit for a refund. However, Congress chose to label the payment for not complying with the individual mandate a “penalty” instead of a “tax.” While the wording used in the statute did not affect the determination of whether the penalty was authorized under Congress’s taxing power, that plain wording made all the difference in determining that the Anti-Injunction Act did not bar this lawsuit.

Chief Justice Roberts closed his opinion as he began: “The Framers created a Federal Government of limited powers, and assigned to this Court the duty of enforcing those limits. The Court does so today. But the Court does not express any opinion on the wisdom of the Affordable Care Act. Under the Constitution, that judgment is reserved to the people.” How the people react to the Court’s decision, especially in the upcoming election, will be interesting to watch.

 


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