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PPACA your bags, we're headed to Taxes

Now that the Patient Protection and Affordable Care Act (PPACA) has been signed into law, what, specifically, does PPACA do, tax-wise? Let's take a look at the so-called "individual mandate".

Very briefly, under PPACA, you (generally) will be subject to a financial "penalty" if you don't buy or otherwise get health insurance. Some people are not happy about this. Let's look at the law first, and then what people are saying about it.

What the law actually does

Under the current (pre-reconciliation) version of PPACA, specifically, § 1501, which will add § 5000A to the Internal Revenue Code, starting in 2014, for each month you do not have health insurance you must pay a nominal "penalty" of about $8 a month, ramping up to $62.50 per month in 2016 and thereafter. Generally insurance premiums are much higher than that, so this does not provide much incentive to purchase insurance coverage.

Fortunately, PPACA § 10106 addresses that problem: "Section 5000A(b)(1) of the Internal Revenue Code of 1986, as added by section 1501(b) of this Act, is amended to read as follows...." Pardon me? Instead of enacting what you meant to enact, you enact something else, then amend it? In the same piece of legislation? We'll get to that later.

I'll summarize to spare you the pain of reading it yourself: Under PPACA's amendment to its own new § 5000A of the Internal Revenue Code, you would pay either the average nationwide monthly premium, or the greater of a fixed dollar amount or 2% of your income (fully phased in in 2016), if that amount is less than the average nationwide monthly premium. (HR 4872 would make further adjustments to this formula). In fake algebra: penalty = lesser of (average premium or (greater of (fixed dollar amount or percentage of income))).

Alternatively, you could just buy health insurance and not worry about it; if you can't afford insurance, you're likely eligible for a subsidy.

Without ascribing any motive to Congress, there are some potentially interesting things happening here. If Congress is adding a new legal provision, why add the provision in full, then amend it in the same bill? Doesn't this approach just double or triple (or more) the work of someone trying to find out what the law is? Briefly: Yes.

At least one benefit is that this approach conveniently embeds the legislative history within the Act itself, which can aid future inquiries into congressional intent should any litigation arise. Perhaps it could also allow an offending provision to be more easily severed in case of a constitutional or other legal issue. As for other benefits, it could help prepare people for the frustration and confusion of driving in Washington, D.C., or serve as a component of cognitive stimulation therapy—I'm guessing they weren't intentionally headed in those directions, though....

Another potentially interesting issue is Congress's choice to impose a "penalty" under the tax code for failing to purchase insurance, rather than impose a tax and exempt people from that tax if they purchase insurance. Potato, potahto, you might say—it is the same result. That is, unless you are a red-State Attorney General up for reelection this year. Which brings us to....

What people claim the law does

The New York Times recently published an article describing how various State Attorneys General plan to sue to enjoin implementation of provisions of PPACA that these officials allege force people to buy insurance. (See also the Washington Post's opinion piece). The Times article indicates that various constitutional law scholars suggest that these challenges will "amount to no more than a speedbump" on the way to implementing PPACA for a variety of reasons, one of which is that the penalty payment is tied Congress' taxing power authorized by the Constitution.

For the originalists out there, the 16th Amendment to the U.S. Constitution reads:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The Times article describes legal scholars' views that the Supreme Court has very broadly construed Congress's "power to lay and collect taxes". Congress has been doing this for Medicare for more than 40 years: If you're employed by someone else, you currently pay a 1.45% tax on your income from that employment; if you're self-employed, it's about 2.9%. Under PPACA, if you make more than $200,000 in employment income per year (or $250,000 if you file a joint return), you will pay an extra 0.5% of your income, starting in 2013.

Clearly, that is a tax, and it funds insurance (Medicare Part A). It differs from the PPACA penalty in several respects: 1) This is a mandatory payment to the government; and 2) there's no guarantee that you'll actually become a beneficiary of the system (you and the Medicare program both need to survive until you're 65 or sufficiently disabled). Apparently, these Attorneys General have no problem with Medicare. They seem to accept that the government can make you pay taxes to support a government insurance program that you may never use, but they don't seem to accept that the government can give you a choice: pay tax penalties or purchase private insurance that you could use today.

What is the reasoned basis for this objection? I don't have an answer, but PJ O'Rourke asks a similar question, implying that if the Attorneys General (he singles one out, but I won't) wanted to be ideologically consistent, they would be pushing for a single-payer health care system, like the one we had for sailors more than 200 years ago.

I do not pretend to know enough about the intricacies of the Internal Revenue Code or income tax jurisprudence to opine on Congress's motives for implementing this provision via a "penalty" rather than a "tax", however, based on the plain text of the bill itself and the other provisions surrounding it, imposing a penalty under the tax code does not seem substantially different from directly imposing a tax. Admittedly, neither "tax" nor "penalty" appear to be explicitly defined within the Internal Revenue Code or the Constitution—although we can all agree that both are money that must be paid to the government and are not attached to a criminal offense (i.e., they are not fines).

In case of any doubt about the penalty's status as a "tax", enter the Commerce Clause (U.S. Const. Art. 1 § 8 cl. 3): Congress explicitly incorporated "findings" (see PPACA § 1501) indicating that health insurance and health care services constitute "interstate commerce", and that the penalty is a way to regulate that commerce. So, not only is it a "tax", but it also regulates interstate commerce (at least, Congress intends for it to do so). Belt with suspenders, anyone? If you're curious, U.S. v. Morrison, 529 U.S. 598, 608-09 (2000), presents a good overview of Congress's (very) broad power to regulate interstate commerce; I am no Constitutional scholar, but the penalty provision seems to be well within that power.

The Post's opinion piece (see above) does raise an interesting point, however: "the individual mandate extends the commerce clause's power beyond economic activity, to economic inactivity".

It would be a more interesting point if it did not rest on such shaky ground: 1) The penalty is functionally indistinguishable from a "tax" (see above), and thus, does not necessarily emanate from the Commerce Clause; and 2) the statement incorrectly assumes that people who don't buy insurance don't have an economic effect on health care. For example, if an uninsured person goes to an emergency room to get primary care treatment, and doesn't pay the bill (PDF), that person is engaging in economic activity by causing the emergency room to incur expenses, which then get passed on to paying customers (patients, rather). Sounds like commerce to me. The "penalty" imposed by PPACA is designed to discourage or offset that negative economic activity. Similarly, if the uninsured person does pay, clearly, that is economic activity. Perhaps I'm missing something, but does anyone see a legitimate Constitutional issue here?

Thoughts, comments?

© 2010 Alex M. Hendler. All Rights Reserved.