April 7, 2010

Does the new health insurance law have a tax problem?

By Does the new health insurance law have a tax problem?

Author: Daniel Himebaugh

No one likes to talk about taxes or Congress.  Test me on this.  The next time you're fumbling for a conversation starter, try opening with, "So how about Congress's power to tax and spend?"  And enjoy the silence.

Maybe Congress's taxing power isn't the best topic for small talk, but it is of central concern when it comes to President Obama's freshly minted health insurance legislation, which has many people talking these days.  In fact, whether or not the new health law ultimately passes constitutional muster might depend on how a court interprets Congress's authority to tax.

In their lawsuit challenging the constitutionality of Obamacare, several state attorney generals have alleged that the penalty assessed on individuals who fail to purchase health insurance under the new law is an unconstitutional tax.  This claim has received less attention than some of the other grounds for challenging the law, but it's an intriguing argument that deserves a closer look.

It's well known in legal circles that courts rarely strike down federal taxes on constitutional grounds.  So rarely do courts do this, that some commentators have described Congress's taxing power as "plenary."  But Congress's power to tax is not boundless.  The Constitution sets out some important limitations on this power.  One of those limitations applies to a special category of taxes the Constitution calls "capitations."

A capitation is a tax imposed on each person, without regard to his or her property, occupation, income, or other distinguishing characteristic of the taxpayer.  Capitations are also known as "head taxes;" in essence, a capitation is a tax on being alive.

If Congress decides to impose a capitation tax, the Constitution says that it must do so only "in proportion to the census."  Thus, Congress can make you pay a capitation tax, but only if the burden of that tax is spread among the states, according to population.  (This usually means that the per capita tax rate differs by state, which would seem to make capitation taxes politically poisonous).

So how does this constitutional limitation on capitation taxes apply to health care?  Well, what if the requirement to purchase health insurance, a burden imposed on each of us simply by virtue of our existence, is a capitation tax in disguise?  Although we usually think of taxes as money we pay to the government, a "tax" can include any governmental imposition on persons or property, and is not necessarily pecuniary in nature.

Think about it.  Under the new health care law, the federal government requires each of us to pay money to an insurance company to buy an insurance policy, or pay a fine to the IRS.  If we buy the policy, our money doesn't go to the government, but we pay the insurance company because the government tells us to.  Isn't that exactly how a tax works, except we are used to paying the government directly, not paying to purchase something the government tells us we have to buy?

Because this mandate functions just like a tax, let's assume for the sake of argument that it is.  All right then, what kind of tax is it?  The Constitution mentions a few different types of taxes, including duties, imposts, and excises.  And the Sixteenth Amendment deals with taxes on income.  But the individual mandate doesn't tax goods from other countries (duties), vessels (imposts), or articles and transactions (excises).  It's also not a tax on income.  The individual mandate taxes each of us because we exist, and because the government thinks we should all own a health insurance policy as long as each of us is here.  If this isn't a capitation tax, what is it?  And if it is a capitation tax, why didn't Congress apportion it like the Constitution says it must?

It's true that, to the best of my knowledge, Congress has never imposed a capitation tax.  But there's a first time for everything, and Congress has managed to accomplish a lot of other "firsts" with Obamacare.  It's reasonable to question, as the state attorney generals do, whether Congress has found a way to pass a capitation tax right under our noses by masking it as an affirmative duty to purchase a product from a private vendor.  This is unprecedented.

What to read next