If the Penalty for Uninsured Taxpayers Survives, Good Luck Collecting It

My column tomorrow will consider whether the "shared responsibility payment" demanded from Americans who fail to obtain government-approved medical coverage is properly viewed as a "tax," a "penalty" (which is what the Patient Protection and Affordable Care Act calls it), or both (as Solicitor General Donald Verrilli maintains). That question of nomenclature is relevant in deciding whether the individual insurance mandate is constitutional under the Taxing Clause and whether the Anti-Injunction Act of 1867, which generally bars legal challenges to taxes until they are assessed, makes this case premature. Putting those issues aside, the discussion of the penalty's mechanics by the mandate's defenders leaves the impression that it is unlikely to work as intended even if it survives Supreme Court review. 

First of all, the penalty is low compared to the cost of insurance. The minimum payment is $95 in 2014, $325 in 2015, and $695 in 2016 (and thereafter, adjusted for inflation). Alternatively, it is a percentage of the difference between the taxpayer's household income and the filing threshold (currently $9,500 for single people and $19,000 for a married couple filing jointly), assuming the amount generated by that method is higher. The percentages are 1 percent in 2014, 2 percent in 2015, and 2.5 percent in 2016 and thereafter. So an individual earning $50,000 a year would be assessed a penalty of about $400 in 2014, rising to about $1,000 in 2016, still a lot cheaper than buying insurance.

In any case, these penalties can be easily evaded. "Although the act provides that the IRS may not use criminal prosecutions, notices of federal tax liens, or levies on property to collect an unpaid penalty," the Obama administration says in its brief, "the IRS may employ offsets against federal tax refunds. The IRS may also seek payment through correspondence or phone calls." But as a group of tax law professors note in a brief arguing that the Supreme Court should not address the constitutionality of the insurance requirement until it takes effect, taxpayers who know that the IRS has been deprived of its scariest enforcement tools may be less responsive than usual to the agency's letters and calls. The professors also argue that, while the IRS could in theory sue taxpayers for owed penalties, the amount of money involved in any given case is unlikely to justify the effort. 

That means the IRS generally will have to collect the penalties by withholding money from taxpayers' refunds. When those refunds are due to overpayments, recalcitrant taxpayers who do not want to buy health insurance can simply adjust their withholding so the IRS does not owe them anything at the end of the year, which will leave the government with no realistic way of collecting the money. When the IRS owes people money because of the earned income tax credit (which is refundable), the taxpayers are apt to be either exempt from the insurance mandate or eligible for subsidies because of their relatively low income. The upshot is that healthy taxpayers who can readily afford insurance—the people the government needs to subsidize the premiums of the sick policyholders insurers will be required to cover without charging them higher rates—are unlikely to buy it in response to the threatened penalty.

Why did Congress make enforcement of the insurance requirement so toothless? Presumably for the same reason it stopped calling the penalty a "tax" (as it was labeled in early versions of the law): to avoid provoking public anger with the prospect of uninsured taxpayers mercilessly hounded by the IRS. As the Tax Foundation reminds us in its brief against using the tax power to justify the insurance mandate, President Obama "abolutely reject[ed]" the notion that the penalty was a tax during the debate over the legislation. "For us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase," he insisted to ABC News in September 2009. After the mandate was enacted and challenged in court, the administration started calling it a tax because it initially sought to delay resolution of the issue by citing the Anti-Injunction Act. Later it abandoned that position, although it continues to call the penalty a tax when defending its constitutionality. Given the difficulty the government will have extracting this money from taxpayers, the administration probably should call the penalty a "suggested contribution."