The Supreme Court Says the Health Care Mandate is a Constitutional Tax

By :: June 28th, 2012

In its long-awaited decision on the Affordable Care Act, the Supreme Court has ruled that Congress can require people to either have health insurance or pay a tax if they don’t.  

Because the High Court found that the penalty for not having coverage is a tax and not a fee or a banana, it ruled Congress has the constitutional authority to impose such a levy. In effect, the 5-4 decision written by Chief Justice Roberts concluded that Congress can tax you for failing to acquire insurance. Thus, the mandate as created by the ACA is constitutional.

But the Court rejected the White House’s main legal argument—that Congress has the authority under the Commerce Clause to require people to get insurance. It will be interesting to see how legal scholars read this in the coming weeks: Is the Court saying that tax policy is the only tool Congress has to enact certain social welfare programs? If so, it would put an already-stressed tax code under even greater pressure.  

The 5-4 decision is very complex. With dissents and concurring opinions, it runs 193 pages. Chief Justice Roberts joined Justices Ginsburg, Breyer, Sotomayor, and Kagan to uphold the ACA. Four justices—Thomas, Scalia, Alito, and Kennedy—concluded that the entire ACA is unconstitutional.

Oddly, while the Court ruled the no-insurance penalty is a tax for the purpose of determining its constitutionality, it also said that it not a tax for other purposes. A law called the Anti-Injunction Act says that no-one can sue to stop the collection of a tax until after they have paid it. And some argued that the ACA was not ripe for legal review since no-one has yet paid the fee. But the Court concluded that, since Congress never called the penalty a tax, the law it not subject to the Anti-injunction law.      

The ACA includes a number of tax provisions—only a few of which are related to insurance reform.

Among them:

The tax on those who don’t have health insurance. The key to the individual mandate, this provision would penalize those who do not have insurance starting in 2014. The penalty begins at $95 and phases up to a maximum of $695 or 2.5 percent of income by 2016.

Subsidies for buyers. These subsidies are aimed at helping low-income households purchase individual insurance through the health exchanges created by the law. The subsidies are effectively refundable tax credits managed by the Internal Revenue Service.

Small business tax credits. These subsidies, initially up to 35 percent of an employer’s premium contribution, are already in effect. The subsidy gradually phases out as the firm’s average wage and the number of its employees increase.

Medicare payroll tax. Starting in 2013, the ACA raises the Medicare Part A payroll tax by 0.9 percent for those making $200,000 or more (couples making $250,000).  

Taxes on unearned income. The law also imposes a new 3.8 percent tax on investment income and other unearned income for wealthy households, also starting in 2013.

Increasing the threshold for itemized medical expenses. Today, taxpayers can deduct medical expenses that exceed 7.5 percent of adjusted gross income. The ACA raises that threshold to 10 percent beginning next year.

Taxing high-value employer-sponsored health plans. Technically imposed on insurers, the law sets an excise tax on individual coverage that exceeds $10,200 or family coverage of more than $27,500. The levy, effective beginning in 2018, is equal to 40 percent of the premiums that exceed these thresholds. Because it is indexed by the rate of the consumer price index (which rises more slowly than medical costs), the tax will gradually apply to less generous policies.    

Other revenue raisers. The law includes a number of other minor taxes intended to help pay for the health coverage expansion. These include new penalties on Health Savings Accounts, limits on Flexible Savings Accounts, and an excise tax on indoor tanning salons.

The Court upheld all of these taxes with the rest of the law (except for a requirement that states expand their Medicaid coverage for the working poor).

The political fate of the ACA remains to be seen, of course. But the Supreme Court has at least settled the dispute over whether it is constitutional.       





  1. Michael Bindner  ::  2:56 pm on June 28th, 2012:

    The Medicaid finding will likely give more weight to the move to federalize Medicaid entirely as part of tax reform. More importantly, the stock market most likely priced in repeal (because the main stream media never really reported that the fallback position of the government on the mandate was the taxing power (listen to the last 60 seconds of the Solicitor General’s rebuttal). Now the market will price in pre-existing condition reforms and it will not be pretty for insurance companies. The market will not wait for actual consumer behavior, but instead its prediction of what it will be. I suspect that insurers will beg for a subsidized public option and that subsidy will take the form of the consumption tax proposed by Len Burman – although they may use a Net Business Receipts Tax instead and make it part of comprehensive tax reform (an NBRT allows employers to have deductions for alternate arrangements – such as paying prebates directly rather than having them come from the government, while allowing the health insurance exclusion to continue). I suspect that the new tax will fund Medicaid federalization, the subsidize public option, an expanded child tax credit (which will replace both the mortgage interest deduction and Food Stamps) and the perennial battle over the DocFix. It should also include the 15% tax rate automatic income tax payment proposed by Len.

    There will likely be a separate income tax for the top earners, as proposed by Graetz (and me and Len in his 28% rate), as well as an out and out VAT to cover discretionary spending, life farm subsidies and domestic military spending.

    With every development, you must admit my tax plan seems more likely all the time. Perhaps you should finally hire me to work on it and actually get paid to do so.

  2. Tax Roundup, 6/29/2012: Supreme Court Frenzy edition « Roth & Company, P.C  ::  9:13 am on June 29th, 2012:

    […] Gleckman at TaxVox, The Supreme Court Says the Health Care Mandate is a Constitutional Tax: But the Court rejected the White House’s main legal argument—that Congress has the authority […]

  3. the supreme court obamacare decision, april’s case-shiller, may’s new homes sales, personal income & outlays, durable goods, et al | r.j.'s space  ::  7:51 pm on July 1st, 2012:

    […] that allowed the mandate, supported by chief justice roberts, the swing vote in this case, was to allow the penalty for not buying insurance as a tax, which would be allowed under congress’s constitutional authority to impose taxes…in […]

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    […] Tax Vox, The Supreme Court Says the Health Care Mandate is a Constitutional Tax […]

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    […] Tax Vox, The Supreme Court Says the Health Care Mandate is a Constitutional Tax […]

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