Online ACA symposium: A theory of the tax power that justifies – and may have informed – the Chief Justice’s analysis

The following contribution to our post-decision symposium on the health care cases comes from Robert Cooter, Herman F. Selvin Professor of Law at Berkeley Law School, and Neil Siegel, Professor of Law and Political Science at Duke Law School.

As Randy Barnett and Jeff Rosen have recognized, the Chief Justice’s tax-power analysis in NFIB v. Sebelius closely resembles a theory that we have been developing in conferences and online for two years.  Entitled “Not the Power to Destroy,” the paper was first posted on SSRN on January 23, 2012, and was subsequently discussed on Balkinization.  It is forthcoming in the Virginia Law Review.  The similarities in logic, citations, and rhetoric are striking.  The Chief Justice’s opinion applies two of the three characteristics that we use to distinguish taxes from penalties for constitutional purposes; stresses, as we do, that differences in characteristics cause different effects on individual behavior; and concludes, as we do, that characteristics and effects trump labels and congressional intent.  The Chief Justice cites some of the same sources we do, in the same way and at the same time.  The Chief Justice concludes by invoking the Holmes quote that is our paper’s title.  We offer a substantive, anti-coercion limit on use of the tax power that the Chief Justice adopts and that to our knowledge has not been offered elsewhere.

We will first describe our theory, which may warrant consideration for its own sake because we were free to develop it in an academic paper without the constraints of writing a judicial opinion.  We then identify evidence suggesting that the Chief Justice may have drawn from it.  Regardless of whether he did, our theory lays out the logic informing most of his analysis of the tax power, and justifies the conclusion that he reached.

I.          Our theory

In our view, the Supreme Court’s tax power jurisprudence should reinforce restrictions on the Commerce Clause.  Otherwise, Congress can circumvent limits on the commerce power by calling regulations backed by penalties “taxes” and justifying them under the tax power.  Imagine a post-Lopez federal “tax” of $25,000 for carrying a firearm in a school zone.

When the Court restricted federal commerce power in the 1920s and 1930s, it distinguished between taxes, which raise revenues, and penalties, which regulate behavior.  This distinction is misguided because many federal exactions have long done both. Thus Alexander Hamilton’s program for industrialization recommended higher tariffs on manufactured goods and lower tariffs on raw materials for both revenue-raising and regulatory purposes.  The post-1937 Court essentially abandoned judicially enforceable limits on the Commerce Clause, so it had no need to rethink previous distinctions between regulations of interstate commerce and taxes.  After Lopez and Morrison, the Court did not reconsider the scope of the tax power until NFIB.

Legal theory helps to answer constitutional questions when existing doctrine does not.  One who must pay a pure penalty is condemned for wrongdoing.  Moreover, she must pay more than the usual gain from the forbidden conduct, and she must pay at an increasing rate with intentional or repeated violations.  Condemnation coerces expressively and relatively high rates with enhancements coerce materially.  A pure penalty prevents behavior, thereby raising little revenue.

Alternatively, a person who must pay a pure tax is permitted to engage in the taxed conduct.  Moreover, she must pay less than the usual gain from the taxed conduct, and intentional or repeated conduct does not enhance the rate.  Permission does not coerce expressively and relatively low rates without enhancements do not coerce materially.  A pure tax dampens conduct but does not prevent it, thereby raising revenues.

Situated between pure taxes and pure penalties are mixed exactions, whose expression sounds like a penalty and whose material characteristics look like a tax.  Thus the ACA’s exaction for non-insurance has a penalty’s expression and a tax’s materiality.  Congress called it a penalty, but it is relatively low for most people and lacks enhancements for going without insurance intentionally or repeatedly.

Should courts interpret a mixed exaction as a tax or a penalty?  Our answer depends on the exaction’s effects and follows the Court’s generally deferential approach in federalism cases.  If Congress could reasonably conclude that the exaction will dampen – but not prevent – the general class of conduct subject to it and thereby raise revenue, then courts should interpret it as a tax regardless of what the statute calls it.  If Congress could reasonably conclude only that the exaction will prevent the conduct of almost all people subject to it and thereby raise little or no revenue, then courts should interpret it as a penalty.  Because the Congressional Budget Office predicts that ACA’s exaction for non-insurance will dampen uninsured behavior but not prevent it, thereby raising several billion dollars in revenue each year, we conclude that the exaction is a tax for purposes of the tax power.

Those who think the Court should have invalidated the minimum coverage provision will reject our theory.  We regard the label Congress affixes to an exaction as less important than its material characteristics and anticipated effects. We deem irrelevant congressional intent to raise revenue, as opposed to regulate behavior.

At the same time, those who resist any judicially enforceable limits on the tax power also will reject our theory.  We impose some modest, substantive limits on the tax power that sound in coercion.  For example, imagine that the exaction for non-insurance in the ACA were $70,000, so that almost no one would go without insurance and thus the exaction would raise little or no revenue.  Our theory would declare such an exaction a penalty and thus beyond the scope of the tax power.

II.        The Chief Justice’s opinion

Chief Justice Roberts adopts two of our characteristics that distinguish a tax from a penalty for constitutional purposes: its level and whether there is a scienter requirement.  In his view, a tax is an exaction at a moderate level that is collected by the IRS and does not have a scienter requirement.  See slip op. at 35-36.  As we do, he stresses that a tax can tip into being a penalty when the burden becomes excessive and thus coercive, and that the minimum coverage provision is well below this tipping point.  See slip op. at 42-45.  And he connects the scienter requirement to the condemnation of an act as illegal, as we do.  See slip op. at 37, 43-44.

Moreover, the Chief Justice agrees with us that differences in characteristics cause different effects on behavior.  One such difference, we agree, is that a tax raises revenues, whereas a penalty does not necessarily do so.  See slip op. at 33.  We also agree on another difference in effect: a tax dampens behavior without preventing it.  See slip op. at 36.  Indeed, our paper explains that taxes raise revenues just because they dampen behavior without preventing it.

In addition, Chief Justice Roberts concludes, as we do, that the characteristics and effects of an exaction trump its label for constitutional purposes.  See slip op. at 12, 34-35, 39.

Finally, the Chief Justice, like us, focuses on the anticipated effect of an exaction on individual behavior, not on Congress’s intent to raise revenue, rather than to regulate behavior:

None of this is to say that the payment is not intended to affect individual conduct. Although the payment will raise considerable revenue, it is plainly designed to ex­pand health insurance coverage. But taxes that seek to influence conduct are nothing new. Some of our earliest federal taxes sought to deter the purchase of imported manufactured goods in order to foster the growth of do­mestic industry. See W. Brownlee, Federal Taxation in America 22 (2d ed. 2004); cf. 2 J. Story, Commentaries on the Constitution of the United States §962, p. 434 (1833) (“the taxing power is often, very often, applied for other purposes, than revenue”).

Slip op. at 36.  Compare this documentation with page 12 of our paper, where we discuss Hamilton’s program for industrialization; cite page 22 of W. Elliot Brownlee’s Federal Taxation in America (2d ed. 2004); and quote Joseph Story’s Commentaries for the proposition that “the taxing power is often, very often, applied for other purposes than revenue.”.

There are some differences between the Chief Justice’s analysis of the tax power and ours.  He does not mention recidivism.  Even so, we believe that he would have voted differently if the amount one had to pay for going without insurance went up significantly each month that one continued to go without insurance.  He thinks it pertinent that the payment will be collected by the IRS.  We think whether a payment is a tax or a penalty is distinct from the question of who enforces it.  Unlike us, he invokes a saving construction.  See slip op. at 31-32.  This seems unnecessary to us as he elsewhere states that the minimum coverage provision “may reasonably be characterized as a tax.”  Slip op. at 44.

But overall, the similarities are several and striking.

Note that the Chief Justice, like us, parts ways with some liberal defenders of the minimum coverage provision by emphasizing the size of the exaction and the presence or absence of a scienter requirement.  To my knowledge, no tax-power brief in the ACA litigation before the Court stressed a substantive limitation on the tax power that prohibits Congress from coercing individuals, as it can when it uses the commerce power.  This is what we mean when we state, borrowing from the Holmes dissent in Panhandle Oil Co. v. Mississippi ex rel. Knox (1928), that Congress’s power to tax is not the power to destroy.  The Chief Justice underscores this point by invoking the same language from Holmes.  See slip op. at 43.  Based on where he comes down on the Commerce Clause, we doubt he would have upheld the minimum coverage provision as a tax if he believed that doing so would mean there are no judicially enforceable limits on the tax power.

We may be wrong about all this.  The Chief Justice does not cite us.  Perhaps we have independently drawn the same conclusions from the same case law and knowledge of economics.    Regardless, our theory justifies almost all of his analysis of the tax power, as well as the decisive vote that he cast.