Why There is No Constitutional Infirmity in the Health Care Package
By Irwin Nowick
It was suggested that I give my legal analysis as to the legal issues surrounding the insurance mandate in the health care package that President Obama recently signed into law. In making this analysis, I want to emphasize that the views stated are my own and not given in any official capacity. As to the detailed policy specifics of the package, I will leave that to others.
If you cut to the heart of legal issues on this, the real fight is over the so-called “individual mandate” which is a misnomer. Rather, the final package includes a provision that persons who do not have insurance and are able to afford insurance have to pay an additional income tax for choosing to go bare. For the reasons noted below, this program with the “mandate” is one Congress can enact.
There are five issues with the mandate:
One: Was the program enacted in a procedurally correct way? The answer is yes.
Two: Is the overall program a “general welfare” program? The answer is yes.
Three: Is the “mandate” a necessary and proper means to make the program work? The answer is yes
Four: Is the enforcement of the “mandate” via the tax system generally a legitimate means to do so? The answer is yes.
Five: Is the enforcement of the “mandate” via the income tax system a legitimate means to do so – especially in light of the 16th Amendment? The answer is yes.
From a political standpoint, while I have no doubt that the final package is not perfect and will be reworked over time; I think the final product is fully defensible. Many of the same objections were raised as to Medicare. I remember when Medicare was passed and why it was needed. On a personal note, my parents – but particularly my mother - were what I would call Tamworth Manifesto Democrats in the sense that they believed in the redress of real grievances and the correction of proven abuses. My parents had to be convinced of the need for something before they were willing to fund it – whether with tax dollars or my sister and I.
My parents supported the enactment of Medicare because they believed it was necessary given the medical insurance system in effect at that time. Persons who were born post 1960 have no experience of the constant fear of the WWII generation that one of their aged parents would have an extended catastrophic illness that could literally destroy family finances. It was a major concern/fear in our family and I grew up on the North Shore of Long Island in very comfortable circumstances. Medicare put an end to most of those concerns.
Because of the Medicare experience and the fact that my parents were Roosevelt-Truman Democrats, they also believed that a national health insurance system with a federal role was necessary as a “general welfare” program within the meaning of the Hamiltonian view of the “general welfare” provisions of the Constitution. [Art. I, § 8, cl. 1]. However, they also believed Congress had a corresponding authority and duty under the Necessary and Proper Clause [Art. I, §8, cl. 18], to see to it that taxpayer dollars appropriated under that power are in fact spent for the general welfare and not frittered away.
First, as to how the package became law, while there is some confusion over the manner in which the package was enacted, the methodology complied with constitutional requirements. When Roger Sherman proposed what in effect the Connecticut Compromise in 1787 that resulted in the creation of the United States Constitution it had many components. The Compromise did not address just the bicameral nature of Congress. One of the key components in the Connecticut Compromise is the Origination Clause of the Constitution (Article I, § 7 which was taken from the English system and early state constitutions.
The Origination Clause grants the House the sole prerogative to originate revenue legislation. As such, the “Senate bill” that the President signed into law was really a massive Senate Amendment to HR 3590 which started out as House passed tax bill. HR 3590 initially passed the House on bipartisan votes and bipartisan co-authorship in October of 2009 to deal with some consensus tax issues. HR 3590 was a Senate “gut and amend” which the House concurred in. [What the House will not accede to under a “blue slip” procedure is allow any Senate Tax Bill i.e. a SB, to be used to raise or cut taxes.]
This amendment procedure was explicitly upheld in Flint v. Stone Tracy Co, 220 U.S. 107 (1911) which addressed the validity of the First Corporate Income Tax Act. The original bill passed the House under a House Bill which included inheritance tax provisions. The Senate deleted that and instead contained a corporate tax instead. The Supreme Court held that “The bill having properly originated in the House, we perceive no reason in the constitutional provision ... why it may not be amended in the Senate in the manner which it was in this case.” 220 U.S. at 109. See also: Rainey v. United States, 232 U.S. 310, 317 (1914).
Relying on the statement in Flint that "[t]he amendment was germane to the subject-matter of the bill and not beyond the power of the Senate to propose." [220 U.S. at 143], the federal courts have permitted this deletion in entirety, even when the Senate amendments converted a House bill that reduced taxes into a bill that raised taxes. Wardell v. United States, 757 F.2d 203 (8th Cir. 1985) [cases cited]
Moreover, the Federal courts have generally read the Origination Clause narrowly, upholding acts that raise some government revenues but where the bill was a Senate Bill under a Senate number that originated in the Senate. In fact, no act of Congress has been invalidated for a violation of the Origination Clause – primarily because the House jealously guards its prerogatives.
The Supreme Court opined that it would probably invalidate acts for violations of the clause in United States v. Munoz-Flores, 495 U.S. 385, 397 (1991). The following decisions have held that the following are not bills to raise revenues: (i) bills that raise revenues (including taxes) but that have another principal purpose such as establishing a program, Twin Cities National Bank of New Brighton v. Nebeker, 167 U.S. 1986 (1897); or (ii) bills that impose user fees or raise other non-tax revenues, Munoz-Flores, supra. In Munoz, it did not matter that bill raised more than necessary to fund the program and the excess went to the general treasury. As noted in Munoz:
“Both parties agree that “revenue bills are those that levy taxes in the strict sense of the word, and are not bills for other purposes which may incidentally create revenue.’ Twin City Bank v. Nebeker, 167 U. S. 196, 167 U. S. 202 (1897) (citing 1 J. Story, Commentaries on the Constitution § 880, pp. 610-611 (3d ed. 1858)). The Court has interpreted this general rule to mean that a statute that creates a particular governmental program and that raises revenue to support that program, as opposed to a statute that raises revenue to support government generally, is not a ‘Bil[l] for raising Revenue" within the meaning of the Origination Clause. For example, the Court in Nebeker rejected an Origination Clause challenge to what the statute denominated a ‘tax’ on the circulating notes of banking associations. Despite its label,
"[t]he tax was a means for effectually accomplishing the great object of giving to the people a currency. . . . There was no purpose by the act or by any of its provisions to raise revenue to be applied in meeting the expenses or obligations of the Government.’
“Nebeker, supra, at 167 U. S. 203. The Court reiterated the point in Millard v. Roberts, 202 U. S. 429 (1906), where it upheld a statute that levied property taxes in the District of Columbia to support railroad projects. The Court rejected an Origination Clause claim, concluding that ‘[w]hatever taxes are imposed are but means to the purposes provided by the act.’ Id. at 200 U. S. 437” 495 U.S. at397-398.
The Reconciliation Bill [H.R. 4872] contained per the House Rules Committee website at least 37 substantive deletions/changes/corrections to HR 3590. That was apart from the major changes to the student loan program made by HR 4872. All of HR 4872 changes to HR 3590 had to be – and apparently were - cleared with the Senate Parliamentarian [Alan Frumin] before the bill passed the House as being part of Reconciliation. This was done to be subject to the expedited process of passage in the Senate without being subject to filibuster.
Also under a provision known as the Byrd rule — named after Senator Robert Byrd of West Virginia — every provision passed through Reconciliation must be deemed relevant to the underlying budget by the Parliamentarian. While it appeared that the Senate Parliamentarian had done a pre-introduction sign off on the entirety of the package, he found 2 minor student loan provisions not related to reconciliation and they were amended out of the bill in the Senate.
The House passed HR 4872 after HR 3590 received final passage. The President had to sign HR 3590 before the Senate could act on HR 4872 per Parliamentarian Frumin. HR 4872 passed the Senate 56-43. The House then quickly concurred in the Senate Amendments and the President signed HR 4872 earlier this month. HR 4872 made 37 substantive changes to HR 4872. HR 4872 removed any constitutional issues as to mandate issues vis-à-vis “capitation taxes” [discussed below].
Secondly, as to the authority to create the overall program, Congress has 17 specific powers under Section 8 of Article I, plus “the necessary and proper clause” to implement the foregoing 17 powers as well as all other powers vested by the Constitution in the government of the United State, or in any department or officer thereof. Besides the enumerated powers in Section 8, there are anywhere from 10 to 30 additional powers in the original Constitution and several of the Amendments impliedly gives Congress powers.
The 16th Amendment which itself has given Congress broad income tax authority - and the 21st Amendment - have been held to grant Congress “necessary and proper” clause powers as well. . United States v. Frankfort Distilleries, 324 U.S. 293, 299 (1944); Richardson v. Commissioner, 509 F.3d 736, 743 (6th. Cir. 2007). The specific powers of Congress set forth in 13th, 14th and 15th Amendments to enforce the same are probably needed because those amendments bar various forms of conduct and as such they are not grants of authority.
Therefore, for all the discussions as to Roscoe Filburn of Wickard v. Filburn, 317 U.S. 111 (1942), the package’s constitutionality is not predicated solely on the commerce clause – though the provisions that regulate insurance company practices are. In United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944), the United States Supreme Court specifically held that Congress could regulate insurance companies under the authority of the Commerce Clause in the Constitution – overruling alleged implications in prior cases that it was not. However, as to the “mandate” it is predicated on the tax and spend clause and the necessary and proper clause the House Rules Committee Reconciliation explanation makes that clear.
Article I, § 8, cl. 1 authorizes Congress to levy taxes “to pay the debts and provide for the common defense and general welfare of the United States. …” As noted above, the “necessary and proper” clause provides that “The Congress shall have Power - To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.” [Article I, § 8, cl. 18]
Prior to the decision of the United States Supreme Court in United States v. Butler, 297 U.S. 1 (1936), there was a major dispute whether the spending and taxing power under Article I, § 8, clause 1, was an independent power of Congress apart from the other 16 clauses in Section 8. In other words, the issue was whether the “general welfare clause” gave Congress discrete powers.
James Madison initially contended [and he changed his mind on this after the War of 1812 showed the need for broad federal powers as to national issues as Alexander Hamilton argued for all along] that “general welfare” purposes were limited to authorizations elsewhere in the Constitution, whereas Alexander Hamilton held that this language amounted to an independent power to tax and spend, provided only that the “general welfare” was served. The Hamiltonian view was also the view of Justice Story in Commentaries on the Constitution (1833) and that of Henry Clay who relied on the General Welfare clause as the basis for his “American System”. In fact, in 1815 and 1816 President Madison signed a series of Hamiltonian measures to make a “more perfect” Union.
One of those 1815-1816 measures was the creation of the Bank of the United States [the forerunner of the Federal Reserve] which was the basis for the United States Supreme Court’s great ruling by Chief Justice Marshall in McCulloch v. Maryland, 4 Wheat. 316 (1819) on the true meaning of the “necessary and proper” clause. Chief Justice Marshall was one of the Founding Fathers. While he did not sit as a delegate at the Constitutional Convention in Philadelphia, he did serve as a junior officer under General Washington during the Revolution, as a state legislator in Virginia, as a Member of Congress, as US Secretary of State before he was appointed by President John Adams to the United States Supreme Court. As such, he was intimately aware of the original understanding of the Constitution. Most importantly, in 1788, Marshall was selected as a delegate to the Virginia convention responsible for ratifying or rejecting the United States Constitution. Together with James Madison and Edmund Randolph, Marshall led the fight for ratification in Virginia.
Butler held the Clay-Story-Hamilton view correct and thus held that the processing taxes at issue were justified under the General Welfare Clause thus taking the Hamiltonian view on the matter. If Congress proceeds under that power then that is all that – plus the “necessary and proper” clause – is needed. Therefore, this focus on the Commerce Clause is really irrelevant.
Because Butler struck down other parts of the Agricultural Adjustment Act – the New Deal Farm policy – the significance of the decision in terms of the expansion of federal power under the spending power to provide for the “General Welfare” was not really noticed until the Constitutional Revolution of 1937 - a series of decisions which reflected the policy of the United States Supreme Court to avoid irrelevancy under Chief Justice Hughes to leave the management of economic policy – unless the action was explicitly in violation of the United States Constitution or clearly beyond Congress’s powers – to the political branches of government. Because Butler was a 6-3 decision, no one paid that much attention that the Court in essence split 5-4 [or even 7-2] for the Hamiltonian view of spending for the General Welfare power.
When the Court upheld as part of the Constitutional Revolution of 1937 the tax portions of the Social Security Act in Steward Machine Company v. Davis, 301 U.S. 548 (1937), it was relying on Butler which sided with Hamilton. See also: Helvering v. Davis, 301 U.S. 619, 640 (1937) [Excise tax on employers, the proceeds of which were not earmarked in any way, although intended to provide funds for payments to retired workers, was upheld under the “general welfare” clause, the Tenth Amendment being found to be inapplicable.] In Fullilove v. Klutznick, 448 U.S. 448, 474 (1980), Chief Justice Burger’s majority opinion [unanimous on this point] noted that it was clearly established that the power to provide for the general welfare “is an independent grant of legislative authority, distinct from other broad congressional powers”.
In terms of earmarked funds from a tax, appropriation of the proceeds of a tax to a specific use does not affect the validity of the exaction if the general welfare is advanced and no other specific constitutional provision is violated. This was the express holding in Cincinnati Soap Co. v. United States, 301 U.S. 308, 313 (1937) – another Constitutional Revolution of 1937 case - [9-0] where the Court upheld dedication of a processing tax on coconut oil despite the fact that the tax collected upon oil of Philippine production was segregated and paid into the Philippine Treasury. Indeed, the NRA supported Pittman-Robertson wildlife improvement program is based on a firearms and ammunition excise tax system. The interstate highway system is financed by various vehicle related excise tax provisions.
As the United States Supreme Court unanimously noted in 2004 in Sabri v. United States, 541 U.S. 600 (2004):
“Congress has authority under the Spending Clause to appropriate federal monies to promote the general welfare, Art. I, §8, cl. 1, and it has corresponding authority under the Necessary and Proper Clause, Art. I, §8, cl. 18, to see to it that taxpayer dollars appropriated under that power are in fact spent for the general welfare ….. See generally McCulloch v. Maryland, 4 Wheat. 316 (1819) (establishing review for means-ends rationality under the Necessary and Proper Clause). See also Hodel v. Virginia Surface Mining&Reclamation Assn., Inc., 452 U. S. 264, 276 (1981) (same); Hanna v. Plumer, 380 U. S. 460, 472 (1965) (same). Congress does not have to sit by and accept the risk of operations thwarted by local and state improbity. See, e.g., McCulloch, supra, at 417 (power to 'establish post-offices and post-roads' entails authority to "punish those who steal letters").” 541 U.S. at 605.
There is no question that federal tax dollars have to be spent for the “general welfare”. However, as Justice Cardozo noted in 1937, the concept of the general welfare is not “static”. “Needs that were narrow or parochial a century ago may be interwoven in our day with the wellbeing of the Nation. What is critical or urgent changes with the times.” Helvering v. Davis, 310 U.S. 619, 641 (1937). If there was one part of the Constitution that the Framers knew would evolve as times changed, it was the “general welfare” clause. Spending federal monies to promote a system of health insurance might not be viewed as valid in 1787 but Alexander Hamilton, James Madison, Justice Story and others of the Founding Era knew that this was an evolving concept. If anyone doubts that, then the validity of Medicare, Medicaid, and SCHIP are in doubt. Yet, no one has made that claim.
Third, the mandate mechanism is a valid use of the “necessary and proper clause” under McCulloch. Many have noted in order to have a universal system that is cost effective you have to have a mandate to participate or a tax differential if one does not. The “individual mandate” has impeccable Republican antecedents as many have noted. It is based on what the Republicans have stated is a matter of personal responsibility. It is or has been supported by Mitt Romney, Bob Dole, Chuck Grassley, Judd Gregg, Mike Crapo, Robert Bennett, Lindsey Graham, Lamar Alexander, Newt Gingrich, and other Republicans. The policy reasons for the mandate have been articulated on multiple grounds. In fact, on Charlie Rose earlier this week Rahm Emanuel noted each part of the package which had Republican antecedents. On the “mandate issue” he noted that the 1993 Republican proposal by Senator John Chafee had 32 Republican coauthors supporting an “individual mandate” enforced via the income tax system.
Also as Gail Collins noted in the New York Times, unless persons are prepared to assert that medical practitioners and hospitals can and should refuse to take patients without insurance or who cannot up front pay a huge “retainer”, then there is an obligation to mandate persons have insurance. I do not see Republican Members of Congress objecting to their coverage. Nor, do I see elected Republicans electing to go bare and not utilize state PERS style insurance systems in the various states. While there were a number of constitutional concerns about the House bill that the Senate used as its vehicle to implement a “mandate” in terms of capitation taxes, the Reconciliation package corrected those problems.
Fourth, as I noted above, I feel that the term “mandate” is incorrect. Rather, as finally enacted in Reconciliation there is a tax differential for choosing not to have insurance when one can afford it and then in essence being subsidized by others. The Reconciliation bill via its tax changes made that the case. This “choice” language was explicitly used on the House Rules Committee explanation of HR 4872’s provisions.
Use of the tax system to implement a General Welfare policy by using the tax system to influence behavior is not unusual and it has been upheld repeatedly by the United States Supreme Court. As the Court noted in 1950 through Justice Tom Clark:
“First. It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. Sonzinsky v. United States, 300 U. S. 506, 300 U. S. 513-514 (1937). The principle applies even though the revenue obtained is obviously negligible, Sonzinsky v. United States, supra, or the revenue purpose of the tax may be secondary, Hampton&Co. v. United States, 276 U. S. 394 (1928). Nor does a tax statute necessarily fall because it touches on activities which Congress might not otherwise regulate. As was pointed out in Magnano Co. v. Hamilton, 292 U. S. 40, 292 U. S. 47 (1934):
“From the beginning of our government, the courts have sustained taxes although imposed with the collateral intent of effecting ulterior ends which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addressed to their accomplishment.’
“These principles are controlling here. The tax in question is a legitimate exercise of the taxing power despite its collateral regulatory purpose and effect.” United States v. Sanchez, 340 U.S. 42, 44-45 (1950)
As to health insurance, the income tax laws have long provided preferential tax treatment for health insurance premiums and benefits. There is no doubt that but for it’s statutory exclusion from gross income, the dollar value of health insurance benefits would be taxable income under 26 USC 61(a). The United Supreme Court has interpreted the section broadly to extend to “all economic gains not otherwise exempted.” Commissioner v. Banks, 543 U.S. 426, 433 (2005); See also, e.g., James v. United States, 366 U.S. 213, 219 (1961) (Section 61 encompasses “all accessions to wealth”) (internal quotation mark omitted); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (“[t]he Court has given a liberal construction to [‘gross income’] in recognition of the intention of Congress to tax all gains except those specifically exempted”). ‘Gross income’ in § 61(a) is at least as broad as the meaning of ‘incomes’ in the Sixteenth Amendment.”)
Statutorily, the premiums are deductible as to the payer and the insurance benefits to the payee do not count as taxable wage or other income. Under the 16th Amendment, Congress has power to condition, limit, or deny deductions from gross income in order to arrive at the net that it chooses to tax. Helvering v. Winmill, 305 U.S. 79, 84 fn. 10 (1938) [Cases cited]
Using the tax system to change behavior in fact was advocated by Senator McCain. During the 2008 Presidential campaign Senator McCain proposed that employers could no longer deduct health insurance premiums above a certain amount with amounts above the same treated as taxable wage income which is consistent with the 16th Amendment. The money generated thereby would be used to provide persons with vouchers/tax credits to purchase individual insurance. This probably would have resulted in a substantial increase in social security and Medicare taxes paid into the system. There are a number of substantive policy issues with that approach but it is a use of the tax system to change behavior.
Similarly, the Wyden-Bennett proposal by Senators Ron Wyden (D-Oregon) and Bob Bennett (R-Utah) which was co-authored by Senator Lindsey Graham (R-South Carolina), Lamar Alexander (R-Tennessee), Judd Gregg (R-New Hampshire), and Mike Crapo (R-Idaho) had a arguably a heavier “mandate” than the Reconciliation package.
Wyden-Bennett proposed to end the tax exclusion for health insurance benefits from being counted as taxable wages and the employer would in essence lose the deductibility of premiums. Instead, those sums would be converted into an “above the line” standardized tax deduction for individuals. Wyden-Bennett also included a mandate that employers provide salary and wages increases over a two year period essentially equal to the amount paid previously for basic healthcare insurance premiums, as employers no longer have to provide basic healthcare coverage.
In addition, per Wyden-Bennett employers would have to pay a new tax equal to between 3 percent and 26 percent of the national average premium for the minimum benefits package for each employee, depending on their firm size and amount of gross revenues per employee. There is a substantial question whether this was a tax cut or tax hike for employers because of the FICA and Medicare Tax issues.
As part of Wyden-Bennett, there would be a menu of plans to enroll in via state run exchanges. All citizens and permanent residents would be required to pay for coverage as part of their federal tax liability. Payment would be made via tax withholding by employers. Individuals would effectively pay the federal government, which would channel the funds to the appropriate coverage and from there to the insurers. Employers would no longer provide basic coverage in most cases. Wyden-Bennett mandated an automatic payroll deductions akin to what exists with Social Security and Medicare taxes – only the money going to employee designated insurers via a pass through system.
While not discussed at the time – and parts of Wyden-Bennett made it into the final package - Wyden-Bennett had the potential to raise substantial amounts of money for the Social Security and Medicare Trust Fund because it would in effect result in non wage income being converted into wage income for Social Security and Medicare Tax purposes. The same thing could be said for Senator McCain’s 2008 proposal. I do not know what the overall tax consequences were at the end of the day in terms of the cumulative tax aspects but it was a use of the tax system.
It is very clear from an examination of Wyden-Bennett that it enforced its mandate via the income tax system. Therefore, using the tax system to encourage people to obtain insurance and discourage those who do not is not a radical step – at least per at least 5 present United States Senators who are Republicans.
The Reconciliation package simply took the use of the tax system one additional step further than is generally the case under current law by imposing in effect a “play or pay” tax. I should add that several states – the principal one being Nevada – has a wage tax on employer payrolls but gives a dollar for dollar credit against the tax for health insurance premiums paid. This mechanism was adopted to avoid ERISA problems and to lessen the cost on the general population for uncompensated care which all taxpayers bare. In fact, we already have a mandate within Medicare Part D as some have noted.
Therefore, the imposition of a tax to in effect force responsible behavior by those persons who choose to go bare itself is constitutional under the above noted precedents provided that the actual tax imposed is itself a constitutional tax in the sense that Congress under the Constitution can impose that tax in conformity with the Constitution. The mechanism is discussed below.
Fifth, as to the use of the income tax system to enforce responsible behavior, three provisions of the Constitution directly circumscribe the type of taxes Congress can impose.
In terms of its taxing powers, Congress is flatly barred from taxing exports – this was a specific part of the Connecticut Compromise [Art. I, § 9, Cl. 5]. In 1996, the Supreme Court held in that this provision prohibits Congress to tax any goods in export transit, and further forbids taxes on any services related to such export transit. United States v. IBM, 517 U.S. 843 (1996). IBM was reaffirmed in 1998 in United States v. United States Shoe Corp, 523 U.S. 360 (1998). The “mandate” is not an export tax so that issue is irrelevant.
Also, while Congress can impose a national capitation or property tax [“direct tax”], to do so it must be “apportioned” which in point of fact means that the tax cannot be imposed. Only three taxes are known to be “direct”: (1) a capitation tax, U.S. CONST. art. I, § 9, (2) a tax upon real property, and (3) a tax upon personal property. See: Fernandez v. Wiener, 326 U.S. 340, 352 (1945) (“Congress may tax real estate or chattels if the tax is apportioned”). I feel that the Senate proposal since repealed was problematical as a direct capitation tax.
The apportionment requirement was adopted as part of the so-called “3-5th’s rule” on counting slaves towards congressional representation and it was intended as an anti-slavery device. Many Northern delegates were opposed to the three-fifths compromise on the ground that if slaves were property, then they should not count for the purpose of representation. Apportionment effectively meant that if the slaveholding states were to receive representation in the House for their slaves, then because apportioned taxes must be allocated across states based upon their representation, the slaveholding states would pay more in taxes to the national government than they would have if slaves were not counted at all in determining representation.
Finally, Congress can impose any tax which is not direct or on exports provided that it is uniformly applied as to rate through out the United States. Taxes which are not direct or which are export taxes are lumped into indirect taxes. These include excise taxes which are taxes laid “upon a particular use or enjoyment of property or the shifting from one to another of any power or privilege incidental to the ownership or enjoyment of property.” Fernandez, 326 U.S. at 352; see also [Thomas v. United States, 192 U.S. 363, 370 (1904) (excises cover “duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like”).
More specifically, excise taxes include, in addition to taxes upon consumable items, [see Patton v. Brady, 184 U.S. 608, 617-18 (1902)]: (i) taxes upon the sale of grain on an exchange; [Nicol v. Ames, 173 U.S. 509, 519 (1899)], (ii) the sale of corporate stock; [Thomas, 192 U.S. at 371], (iii) doing business in corporate form [Flint, 220 U.S. at 151]; (iv) the transfer of property at death [Knowlton v. Moore, 178 U.S. 41, 81-82 (1900)]; (v) gifts [Bromley v. McCaughn, 280 U.S. 124, 138 (1929)]; and (vi) income from employment. [See Pollock v. Farmers’ Loan&Trust Co., 157 U.S. 429, 579 (1895) (Pollock 1) (citing Springer v. United States, 102 U.S. 586 (1881))]. The final package had a uniform income tax rate. Uniformity exists "tax is uniform when it operates with the same force and effect in every place where the subject of it is found." United States v. Ptasynski, 462 U.S. 74, 82 (1983). This is clearly a uniform “tax”.
As to the tax mechanism to encourage/discourage there was as I noted above a legitimate concern that the Senate proposal in HR 3590 before Reconciliation created a “direct tax” because it was a flat fee with the hallmark of a Direct or Capitation tax that requires apportionment. I believe that the “flat fee” aspect of the Senate proposal in HR 3590 was why the opponents went all out to kill Reconciliation – because the flat fee was the best constitutional argument to kill the misnamed “individual mandate” even though the misnamed “mandate” was originally a Republican-Conservative Think Tank idea.
Therefore, the constitutionally safe way in terms of the tax itself was to proceed is via the income tax system which is what ended up happening. This was clearly proper. The United States Supreme Court has repeatedly noted that Congress has had the power to lay and collect taxes on incomes from the beginning of the American Government under the United States Constitution in 1787 so long as the tax rates were uniform throughout the United States.
While the 16th Amendment adopted in 1913 expressly authorized income taxation on all income, the 16th Amendment did not create a general and new power to tax income per se. Going back to the Civil War Congress had at one time or another imposed an income tax on certain kinds of income and it had been upheld by the United States Supreme Court in 1880 in Springer v. United States, 102 U.S. 586 (1880). Springer addressed an income tax on wages. In light of Springer, prior to 1895 it was thought that all income taxes had been considered non-direct taxes (not required to be apportioned) but subject to a uniform rate, graduated or flat. Indeed, in 1874 in Scholey v. Rew, 90 U. S. 331, 348 (1874) the Court expressly decided that the term “direct tax” does not include a tax on income. See also: Pacific Insurance Company v. Soule, 74 U. S. 433 (1868): Tax on incomes of insurance companies not a direct tax.
However, in 1895 in Pollock v. Farmers' Loan&Trust Company, 157 U.S. 429 (1895), aff'd on reh'g, 158 U.S. 601 (1895), while the United States Supreme Court reaffirmed Springer and held that a tax on income from labor/work was a valid indirect tax (a tax not required to be apportioned), Pollock held that a tax on income derived from property such as interest, dividends, capitol gains, or rents was — or should be treated as — a direct tax. Pollock involved a tax imposed on the rental proceeds of the ownership of real property. [New Hampshire and Tennessee do not tax wage income but do have income taxes on interest, dividends, rents received, and capitol gains.]
The response to Pollock was such that the 16th Amendment overruled Pollock as to “apportionment” by allowing income to be taxed from whatever source derived. Specifically, the 16th Amendment provides:
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
As the United States Supreme Court post 16th Amendment noted repeatedly, the 16th Amendment made the apportionment rule inapplicable to any “income tax” assuming “income” was taxed. The term “income” has been defined repeatedly by the United States Supreme Court as noted above and there is little doubt that the “mandate” is a tax on income.
Congress has the power to tax incomes from any source without having to apportion the tax. [Another aspect of Pollock was unanimously overruled by South Carolina v. Baker, 485 U.S. 585 (1988). Baker held that Section 310(b) (1) of the Tax Equity and Fiscal Responsibility Act of 1982 did not violate the Tenth Amendment to the United States Constitution and that a nondiscriminatory federal tax on the interest earned on state bonds did not violate the intergovernmental tax immunity doctrine; this is the case which permitted the federal taxation of bonds issued by U. S. state governments. In this case, the Supreme Court stated that the contrary decision of the Court 1895 in Pollock had been effectively overruled by subsequent case law.]
In Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926) the United States Supreme Court reviewed Pollock, the Corporation Excise Tax Act of 1909 [which imposed the first federal corporate income tax and was upheld in the above cited case of Flint v. Stone Tracy Co., 220 U.S. 107 (1911)] and the Sixteenth Amendment, and concluded that:
“The Sixteenth Amendment declares that Congress shall have power to levy and collect taxes on income, ‘from whatever source derived,’ without apportionment among the several states and without regard to any census or enumeration. It was not the purpose or effect of that amendment to bring any new subject within the taxing power. Congress already had power to tax all incomes. But taxes on incomes from some sources had been held to be ‘direct taxes’ within the meaning of the constitutional requirement as to apportionment. Art. 1, § 2, cl. 3, § 9, cl. 4; Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601. The Amendment relieved from that requirement, and obliterated the distinction in that respect between taxes on income that are direct taxes and those that are not, and so put on the same basis all incomes ‘from whatever source derived.’ Brushaber v. Union P. R. Co., 240 U. S. 1, 240 U. S. 17. ‘Income’ has been taken to mean the same thing as used in the Corporation Excise Tax Act of 1909, in the Sixteenth Amendment, and in the various revenue acts subsequently passed. Southern Pacific Co. v. Lowe, 247 U. S. 330, 247 U. S. 335; Merchants' L. & T. Co. v. Smietanka, 255 U. S. 509, 255 U. S. 219. After full consideration, this Court declared that income may be defined as gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital. Stratton's Independence v. Howbert, 231 U. S. 399, 231 U. S. 415; Doyle v. Mitchell Brothers Co., 247 U. S. 179, 247 U. S. 185; Eisner v. Macomber, 252 U. S. 189, 252 U. S. 207. And that definition has been adhered to and applied repeatedly. See, e.g., Merchants' L. & T. Co. v. Smietanka, supra; 255 U. S. 518; Goodrich v. Edwards, 255 U. S. 527, 255 U. S. 535; United States v. Phellis, 257 U. S. 156, 257 U. S. 169; Miles v. Safe Deposit Co., 259 U. S. 247, 259 U. S. 252-253; United States v. Supplee-Biddle Co., 265 U. S. 189, 265 U. S. 194; Irwin v. Gavit, 268 U. S. 161, 268 U. S. 167; Edwards v. Cuba Railroad, 268 U. S. 628, 268 U. S. 633. In determining what constitutes income, substance rather than form is to be given controlling weight. Eisner v. Macomber, supra, 252 U. S. 206” 271 U.S. at 173-174
The bill that initially passed the House as the House’s main vehicle [HR 3962] used as “choice mechanism” an income tax of 2.5% on adjusted gross income if a taxpayer is not part of a qualified health insurance program. As noted above, Congress has long had preferential tax treatment for health insurance premiums and no one challenged that. The funding mechanism in HR 3962 was clearly constitutional because of the 16th Amendment. The Senate Amendment to HR 3590 initially imposed what it called an “excise tax” or a “penalty tax”.
The Senate proposal I believed had the attributes of a “capitation” or “head tax” which requires apportionment and hence invalid. I emailed Professor Joseph Dodge at the Florida State University School of Law who is an expert on this issue and bluntly asked if he believed that the Senate Bill was is in fact a Head or Capitation Tax requiring Apportionment. The answer he gave was “No” while other legal beagles I emailed noted I raised a legitimate point.
The reason it was an issue prior to Reconciliation was that under the 16th Amendment, Congress cannot make a thing “income” which is not so in fact.Burk-Waggoner Oil Ass’n v. Hopkins, 269 U.S. 110, 114 (1925). However, Congress can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9. Murphy v. I.R.S., 493 F.3d 171, 179 (D.C.Cir. 2007) cert den. __U.S. __ (2008) See also: Penn Mutual Indemnity Co. v. Commissioner, 277 F.2d 16, 20 (3d Cir. 1960) (“Congress has the power to impose taxes generally, and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will”).
While it is permissible to impose an “excise tax” and the Internal Revenue Code has within it many excise taxes putting aside what is an “Income Tax”, taxing something as income when it constitutionally not and risking the direct tax argument is an ill advised move and that is what the flat fee tax was – a lawsuit waiting to happen.
However, what controls and what was enacted was in Reconciliation. The “capitation issue” is now a moot point because HR 4872 controls as this part of HR 3590 was rewritten. It goes to a percentage tax on income subject to tax as opposed to a flat fee for those who choose to go bare. I would argue that they are paying this because they are in essence engaging in a conscious decision to go bare and being subsidized for that behavior. Reconciliation was enacted was an ability to pay “flat income tax”. This tax is far less onerous than a number of other proposals.
The Reconciliation income tax mechanism now law provides that individuals who choose to remain uninsured but are able to be insured are the only persons subject to this uniform income tax. It did so by: (i) exempting from the tax persons with income below the income tax filing threshold which means that poor people are not impacted and they probably go into Medicaid, (ii) lowers the flat payment from $495 to $325 in 2015 and from $750 to $695 in 2016 and (c) raises the percent of income that is an alternative payment amount from 0.5 to 1.0% in 2014, 1.0 to 2.0% in 2015, and 2.0 to 2.5% for 2016 and subsequent years. This makes the assessment more progressive so that there is a correlation to the ability to pay. The subsidies are part of this – a proposal Mitt Romney publicly endorsed in 2005-2006.
Because the percentage approach is clearly a uniform rate, it is constitutional because it is the fallback. As noted above, Congress can cap deductions and can cap taxes as well. Indeed, capping tax rates is a central Republican policy. All the State Attorney Generals who were ready to litigate the “direct tax” issue are probably chagrined that the Senate direct tax is no more.
Since the mid 1980's Irwin Nowick has worked for the California State Assembly and State Senate on a plethora of policy issues, most notably firearms legislation. He is seen frequently in the Capitol hallways and offices assisting legislators in drafting and amending pending legislation.