The Individual Mandate's Tax Troubles

The federal government keeps arguing that the individual mandate to purchase health insurance in last year's health care law is constitutional because it's a tax. Judges, even those who've ruled in favor of the mandate's constitutionality, keep disagreeing with them. Every single one of the decisions related to the constitutionality of the mandate has affirmed that, despite the government's arguments to the contrary, the mandate is not a tax—and therefore cannot be constitutionally justified by Congress's taxing power.

Despite giving the mandate a stamp of approval, yesterday's 6th Circuit ruling agreed on the tax issue. The distinction is important: Taxes are primarily designed to bring the government tax revenue. But the Obama administration's legal position is that the portion of the mandate that counts as a tax is the penalty paid by those who fail to comply. The mandate's penalty functions primarily as a regulation: It's intended to control behavior, not raise money.  

And as Circuit Judge Jeffrey Sutton explained in a concurrence to yesterday's ruling, if the government had clearly structured the mandate as a tax, it probably would have been easier to justify constitutionally:

It is easy to envision a system of national health care, including one with a minimum-essential-coverage provision, permissibly premised on the taxing power. Congress might have raised taxes on everyone in an amount equivalent to the current penalty, then offered credits to those with minimum essential insurance. Or it might have imposed a lower tax rate on people with health insurance than those without it. But Congress did neither of these things, and that makes a difference.

The difference is not merely legal. The law's backers worked hard to avoid publicly calling it a tax during the year-long debate prior to passage. When asked whether he believed the mandate was a tax, President Obama replied unequivocally: "I absolutely reject that notion." Congress also wrote it into the law as a penalty, not a tax, so as not to be accused of raising taxes. Nevertheless, as soon as the case went to court, the Obama administration's lawyers were quick to embrace the tax argument. 

It's also true that, during the health care debate, many of the law's critics argued that the mandate was effectively a new tax. But that argument was different than the one now being made by the Obama administration. Instead of arguing that the penalty for failing to comply with the mandate was a tax, critics of the law argued that the insurance purchase requirement itself constituted a new form of taxation.

Think of it this way: If the government decided to collect new revenue from businesses and individuals explicitly for the purpose of using that revenue to pay private insurers to provide Americans with health insurance, then it would be certainly be understood as a tax. (This approach would also have revealed the law's true, far higher cost by forcing the Congressional Budget Office to score the cost of those premiums.)

ObamaCare's mandate avoids this only by requiring Americans to pay that same premium revenue to private insurers directly, without the government intermediary. For constitutional purposes, it's clearly not a tax. But for those required to pay, the effect is much the same.