Health Care Penalty: Unconstitutional Tax

As I’ve posted before, the Health Care Act violates the Taxing Powers of the Constitution.

My more extensive study now appears in Of Constitutional Decapitation and Health Care. The article appears in the July 12, 2010 issue of Tax Notes, the premier publication on Tax Law matters. As I understand the copyright issues, I may post this link and you may download a copy for yourself. You may distribute the link – or a link directly to Tax Analysts; however, no one may, without written permission (from my co-author and from me), re-distribute the article.  Please read it and post responses here at Redstate.  Other blogs will likely feature the article; however, comments in them often include personal attacks.  I’d very much appreciate a source of more friendly – including critical – feedback.  The debate will continue – and you can help.

To summarize, a tax is constitutional in five ways:

1. It is a uniform Duty.
2. It is a uniform Impost.
3. It is a uniform Excise.
4. It is imposed on “derived income” consistent with the 16th Amendment.
5. It is a properly apportioned Direct Tax (which includes a Capitation Tax).

The Health Care Penalty satisfies none of these. No one claims it meets the first two.

As to number three, Congress styled it as an Excise Tax; however, it fails all traditional excise tests. It cannot be “passed on.” It is not imposed on a “transaction, use of property, or exercise of a privilege.” Indeed, it is imposed on the “failure to act.” Granted, current law includes at least eleven “Failure to Act” excises, at least in terms of how the Internal Revenue Code denominates them. But, each applies to an entity – rather than to an individual – and all actually apply to actions. For example, Section 4943 imposes an excise on Private Foundations which fail to distribute sufficient income. While styled as a tax on a “Failure to Act,” this is actually a tax on the affirmative decision to accumulate income in an entity – a far cry from the Health Care Penalty on the failure of an individual to obtain proper health insurance.

As to number four, the penalty fails to satisfy the 16th Amendment for many reasons. Above all, it does not cross the threshold requirement of applying to “derived” income. Historically, the Court has applied a “realization” requirement for income in terms of tax law. The decisions are many, and the evolution of the jurisprudential test has been significant; however, the ultimate test is clear. To be derived, the income must be an “undeniable accession to wealth, clearly realized, over which the taxpayer has complete dominion.” The penalty ostensibly taxes an individual’s income in general; however, any fair reading recognizes the “tax trigger” involves the “shifting of costs” and the “use of the health care system” without insurance. Indeed, the government has so argued in pending litigation in Michigan. If the income producing event is the use of the system or the shifting of costs, the penalty is premature. It cannot constitutionally apply – under the 16th Amendment – until an appropriate event, e.g., purchasing health care products or services without insurance. That would be an appropriate event for an Excise and arguably for an income tax; however, that is not what Congress chose to tax. It chose to tax the mere potential that someone might shift costs. The Court recognized in the Indianapolis Power decision that the mere potential for income does not satisfy the Section 61 realization requirement, which is identical to the language of the 16th Amendment. Hence, the penalty is not Constitutional under the 16th Amendment.

Which leaves number five. To be constitutional, the tax must be properly apportioned as a Direct Tax or a Capitation. It is not. No one claims it is apportioned properly. Hence, it must fail.

Many others argue violations of the Commerce Clause and the Tenth Amendment. I am sympathetic with those arguments. The recent Federal District Court opinion in Massachusetts regarding same-sex marriage and the partial unconstitutionality of the Defense of Marriage Act supports the Tenth Amendment claims. However, the Commerce Clause and Tenth Amendment objections are insufficient.

Any fair reading of Congress’ power to regulate Commerce would not extend to the Health Care Mandate. Note: I refer to the Mandate here, as opposed to the Health Care Penalty above: the two are different. However, even if the mandate fails, the penalty would likely survive unless the Court either rejects the notion it is a tax (which I believe it to be) or the Court finds the penalty unconstitutional under the Taxing Powers – which I argue. The same analysis applies to the Tenth Amendment arguments: even if the Act fails under the Tenth Amendment, it can survive as a Tax. Thus attacking it on tax grounds is essential. Thank goodness, it is not difficult.