Must the Court Demonstrate the Constitutionality of Its Newly Discovered Tax?

Published in The Tennessean, Sunday, July 8, 2012 and Forbes with archives.

by Richard J. Grant

Although the Affordable Care Act contains many new taxes that will soon come into effect, most recent attention has been focused on whether or not the individual mandate provision within the act constitutes a tax.

The Supreme Court has recently ruled, in NFIB v. Sebelius, that what the legislation calls a “penalty” can be construed for constitutional purposes to be a tax. This leaves open the question of what kind of tax it is. The closest that the court came to a clear statement was that it was a tax on “not obtaining health insurance.” But this appears to tax inactivity, which suggests that it contains the same defect as the use of Commerce Clause powers to regulate inactivity.

To overcome this objection, the court insists that “the Constitution does not guarantee that individuals may avoid taxation through inactivity.” But the first and only example it gives is that of a capitation, a head tax “that everyone must pay simply for existing.” Congress may impose such a tax, but it is a direct tax, which means that its revenues must be proportionate among the states according to population.

Since the first administration, revenue-hungry governments have attempted to narrow the definition of “direct tax.” But the current court is incorrect to claim that when the Constitution was written “it was unclear what else, other than a capitation,” might be a direct tax. The definition clearly included accumulated property, which is why, when Congress passed a tax on ownership of carriages, James Madison objected that it was an unapportioned direct tax. In citing that case, Hylton v. United States, the current court noted that the tax was upheld by “reasoning that apportioning such a tax would make little sense, because it would have required taxing carriage owners at dramatically different rates depending on how many carriages were in their home state.” Rather than accept this as an example of narrowness or ambiguity of the definition of “direct tax,” the court should have rejected it as an example of expediency that subordinated the demands of the Constitution to the desire for revenue.

Perhaps expediency motivated the current court to reinterpret the individual mandate penalty as a tax. But it skated over what is being taxed. Imposing a tax for “not obtaining health insurance” implies, somehow, that having health insurance is the state of nature and that the taxable action or commodity is its negative.

To tax inactivity and pretend that it’s an indirect tax makes no more sense than the “regulation of inactivity,” which the court has now limited. The individual mandate’s penalty might best be described as a head tax with full exemptions for those who meet the minimum insurance coverage requirement and full or partial exemptions for those with incomes below defined levels. Even with the exemptions, the burden of the tax that remains falls directly on those persons who were the targets of the penalty. It is also unapportioned.

A head tax is a direct tax. That the court failed to demonstrate the constitutionality of its newly discovered tax is clearly recognized by the dissenting justices. They write: “The holding that the individual mandate is a tax raises a difficult constitutional question (what is a direct tax?) that the court resolves with inadequate deliberation.”

But if the court is guilty of expediency, the dissenting justices were too polite.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

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Copyright © Richard J Grant 2012