Is the Mandate Penalty a Tax or a Fine?

March 26, 2012

The government insists that it's not a tax. It may regret taking that position.

The media has described the first round of the arguments over the constitutionality of the Affordable Care Act as the least-interesting aspect of the challenge. The question Monday is over whether the Supreme Court is permitted to rule on law’s the individual mandate to purchase health insurance before the financial penalty against those who ignore the mandate takes effect in 2015. A 19th century law forbids challenges of new taxes until after the government starts collecting the tax.

That means today’s argument centers on a simple question: Does the penalty for being uninsured qualify as a tax, or is better understood as a fine? (In the law it is called a “shared responsibility payment,” but isn’t that precisely what a tax is supposed to be?) The Constitutional implications of the answer, concerning legal jurisdiction and the law’s “ripeness” for judicial review, may be arcane; the question itself is not.

It seems obvious to me that the penalty is a tax, but then again, I’m not a lawyer. The IRS would collect the money. A taxpayer’s liability to pay it will be determined upon filing his taxes. If he is owed a tax refund, the amount of his refund will be reduced by the sum of his shared responsibility payment. If he owes a payment, his balance due will likewise increase.

Yet news reports described the justices (who obviously really really really want to rule on this thing) as skeptical that the payment is truly a tax. “Just because it looks like a duck, walks like a duck, and quacks like a duck doesn’t necessarily mean it’s a duck,” said Justice Stephen Breyer. (OK, what Breyer actually said was that just because the penalty “is being collected in the same manner of a tax doesn’t automatically mean it’s a tax,” according to the Washington Post.)

This view - that the mandate’s penalty is not a tax, however it may look - seems to bode well for mandate opponents. If the penalty is a tax, then it seems hardly different, in principle, than other provisions of the tax code that encourage particular behaviors. All such benefits are subsidized by those who don’t receive them; any tax break could be called a tax penalty on those who don’t meet the criteria for receiving the break. How, exactly, is the shared responsibility payment any different than the home mortgage-interest deduction, which confers tax benefits on homeowners at renters’ expense?

If it’s not a tax - if it only looks like a duck but is in fact a gazelle - then defending it seems (again, I’m not an expert) more complicated because it removes a potential argument that the government might have made in its favor: That Congress does have the power to levy taxes and that there is nothing novel about conferring tax benefits on favored groups. If it’s a fine, then the government has to defend it on those merits alone. (Thus raising questions about the limits of its power to regulate interstate commerce; perhaps the government is on firm footing there, but it seems less certain than a straightforward power-to-tax argument.) In poker, that means the government has fewer “outs” - fewer ways for it to win the hand.