National Federation of Independent Business v. Sebelius, (Sup Ct 6/28/2012)

In the landmark decision of National Federation of Independent Business v. Sebelius, (Sup Ct 6/28/2012) 109 AFTR 2d 2012-2563, the Supreme Court held that the individual mandate of the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148) reflected a constitutional exercise of Congress's taxing power.  

Background on the individual mandate. For tax years ending after Dec. 31, 2013, non-exempt U.S. citizens and legal residents will have to maintain minimum essential health insurance coverage or pay a penalty. “Minimum essential coverage” includes government sponsored programs (e.g., Medicare, Medicaid, Children's Health Insurance Program), eligible employer-sponsored plans, plans in the individual market, certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS. (Code Sec. 5000A)

Under Code Sec. 5000A(g), the penalty is to be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68 of the Code (Code Sec. 6671 through Code Sec. 6725 ). IRS's authority to use certain collection methods (namely, liens and levies) for the penalty is limited, but its authority to offset refunds or credits is not limited. (For an article on potential obstacles regarding IRS's collection authority, see Weekly Alert ¶  14  07/05/2012.)

Supreme Court proceedings and decision. During oral arguments and in documents submitted to the Court, the taxing power argument was largely advanced as secondary to whether PPACA was a valid exercise of Congress's authority under the Commerce Clause. PPACA proponents argued that the “practical operation of the minimum coverage provision is a tax law,” observing that it is “fully integrated into the tax system, will raise substantial revenue, and triggers only tax consequences for non-compliance.”

It is “well settled that a penalty for violation of a separate legal command is not a tax. That is my strong personal opintion.

The Court ultimately ruled that the individual mandate fell within Congress's taxing power. Noting that PPACA can be read in multiple ways, the majority found that one possible reading is that the mandate doesn't so much order individuals to buy insurance, but rather imposes a tax on those who do not, and the lack of insurance is merely a pre-condition to the tax. Although this may not be the “most natural interpretation,” it is nonetheless a reasonable one that should be considered in deciding whether a statute is constitutional. Significantly, the shared responsibility payment also shares many attributes of a tax, such as producing revenue for the government and being paid when taxpayers file their returns.

In her concurrence, Justice Ginsberg (joined on this issue by Justices Sotomayor, Breyer, and Kagan) stated that she would have also upheld the individual mandate as a valid exercise of Congress's power under the Commerce Clause. She argued, in effect, that the failure to purchase health insurance doesn't necessarily render an individual a non-participant in the health care market.

 Although the Supreme Court's opinion was fractured, five of the nine justices (Roberts, Scalia, Kennedy, Thomas, and Alito) found that the individual mandate didn't fall within Congress's power under the Commerce Clause because, among other things, that power is predicated on the existence of commerce to regulate. In other words, since the mandate targets individuals' failure to obtain health insurance, this is an inactivity that can't be construed as commerce.

For many years, the Supreme Court took an expansive view of Congress's Commerce Clause power, using it as a grounds to uphold laws relating to such diverse matters as civil rights and professional football. However, in this decision, the five justices stated that upholding PPACA on that ground would effectively expand Congress's power by allowing it to compel individuals to become active marketplace participants. The position of the five justices on the Commerce Clause, albeit not united in a single opinion, will likely shape future analysis of legislation, whether or not viewed as binding precedent.

Commentators have expressed concern that the Court's decision will restrict Congress's power to enact social welfare legislation, or force Congress to rely on its taxing power in doing so. This, in turn, could lead to an even more complicated Code, and put additional pressures on IRS.

Critics have also noted that the same activity/inactivity argument that was advanced in the Commerce Clause context applies in the taxing power context as well. Upholding the mandate based on the taxing power means that Congress can not only tax income and property, but also the failure to take certain actions. This, critics claim, could change the entire structure of taxes that are also intended to influence behavior—instead of rewarding positive actions, Congress could instead impose taxes on those who fail to take such actions.

Finally, commentators have also asserted that the individual mandate falls outside of the traditional, revenue-raising view of taxes. Although taxes can and have been policy-oriented as well, critics claim that the individual mandate crosses the line.

Bottom line. It's unclear exactly how the Supreme Court's decision will impact future legislation. It could, for example, signal the Court's willingness to restrict Congress's power under the Commerce Clause—or it could provide the basis for an expansive view of the taxing power. Although the focus on this decision has largely been on upholding the mandate, its precedential value remains to be seen.

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