ObamaCare: Tax or Penalty?

While the Commerce Clause will get most of the press, the real news in the Obamacare decision today lies in tax.  Keep reading.  I find that most students, like most regular people, turn off their brains once they see the word tax in a sentence.  Most of Judge Hudson’s opinion is devoted to whether the Obamacare provision is a tax or a penalty.  According to him, there is a world of difference.  For if it is a tax, then it is not subject to the limits of the Commerce Clause. The Supreme Court has suggested that taxation for the purpose of revenue is subject to the easier limitations imposed only by the General Welfare Clause of the Constitution; the position that the taxing and spending clauses must only be “to pay the Debts and provide for the common Defence and general Welfare of the United States” was first taken by Alexander Hamilton, and his view has prevailed.  Thus, the tax code affects all kinds of individual behavior that most would agree is well outside the Commerce Clause, such as marriage, the size of families, and charitable donations to religious groups.

But if the Obamacare provision is only a penalty, then it does fall under the limitations of the Commerce Clause.  Judge Hudson distinguished here between taxes that are for the purpose of raising revenue to support the government, and a tax that is really just a financial penalty for refusing to follow a federal regulation.  Hudson found that the $750 tax for failing to buy health insurance was the latter.  This distinction, however, has not been the holding of a significant Supreme Court opinion since before the New Deal.  In the Child Labor Tax Case (1922), the Court held that Congress could not use a tax on goods made by child labor to escape the Supreme Court’s decision that the Commerce Clause did not give Congress the power to regulate those goods.  But since 1935, the Court has never found a tax to be unconstitutional because it advanced a regulation outside federal power.  It has even upheld taxes on concealed firearms, marijuana, and wagers.  This is a second necessary element of Judge Hudson’s decision that will call on the current Supreme Court to stretch if it is to agree that Obamacare is unconstitutional.

Perhaps we should look to the president for the last word regarding whether the individual mandate constitutes a tax or a penalty.  The Obama administration claimed in court in this case that the $750 penalty was a tax.  This is a direct contradiction of what President Obama represented to the American people during consideration of the health care bill.  In response to a question on ABC News from George Stephanopolous claiming the provision was a tax, Obama responded: “That’s not true, George,…[It] is absolutely not a tax increase.”

  1. Michael Tee

    Well there’s another instance where the first of the would be dictators (“permanent president”) of the United States was wrong.

    John Yoo: The Supreme Court has suggested that taxation for the purpose of revenue is subject to the easier limitations imposed only by the General Welfare Clause of the Constitution; the position that the taxing and spending clauses must only be “to pay the Debts and provide for the common Defence and general Welfare of the United States” was first taken by Alexander Hamilton, and his view has prevailed.  Thus, the tax code affects all kinds of individual behavior that most would agree is well outside the Commerce Clause, such as marriage, the size of families, and charitable donations to religious groups.

  2. Scott R

    So a trillion dollar debacle may go down in flames due to a semantic inconsistency, as exposed by Stephanopolous? A truly spectacular “own goal” if so.

    Would this judge have allowed the mandate if the phrasing had been more like “Those who buy health insurance shall pay less to Uncle Sam than those who don’t, all other factors being equal”? Substitute “a house” for “health insurance” in that sentence and you’ll see why the precedent for such coercion has already been set.

    Thank God for Democrat incompetence.

      

  3. Duane Oyen

    Foolish consistency is the hobgoblin of little Democrats. (RW Emerson, paraphrased)

  4. outstripp
    John Yoo: …  For if it is a tax, then it is not subject to the limits of the Commerce Clause. The Supreme Court has suggested that taxation for the purpose of revenue is subject to the easier limitations imposed only by the General Welfare Clause of the Constitution;…

    John,

    What does “easier” mean here?  Looser or easier to limit?

  5. Bereket Kelile
    outstripp

    John,

    What does “easier” mean here?  Looser or easier to limit? · Dec 13 at 8:09pm

    I think easier applies to the limitation. That is, the limitation of the general welfare clause is a lower bar to pass, thus an easier limitation. The more restrictive limitation is the commerce one, I think, if I remember. That one sets the bar higher. 

    John, I’m wondering which term the Attorney General was trying to have applied, tax or penalty. And a broader question would be which one should our side be arguing, that it’s a tax or something else, to win this case in the end? It sounds like we want the more restrictive limitation of the commerce clause to apply. 

  6. Pat in Obamaland

    Wonderful post Professor Yoo!  I believe the issues presented by the tax or penalty question and the Commerce Clause will make for one of the most important cases in our lifetime.  I do not want to violate any Ricochet rules but SSRN has two fascinating law review articles by Professor Steven Willis and Nakku Chang on the subject (the first is Constitutional Decapitation and Health Care and the second is a response to critics entitled Oy Yes, the Healthcare Penalty is Unconstitutional).  Casual reading only a lawyer could love!

  7. Ken Sweeney

    The previous two rulings also ruled that the tax was a penalty, although they supported the commerce clause rationale for upholding Obamacare.

    Will Justice Sonia Sotomayor have to recuse herself from ruling on this case due to her role in the Obama administration?

  8. Bill McGurn
    C

    John, Has there been anything remotely like the individual mandate in the past, so we might have a clue about the law? The Virginia court, to this non-lawyer, seemed to have done us all a great service by clarifying the issue.

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