As part of the Patient Protection and Affordable Care Act, P.L. 111-148, Congress enacted a provision that requires certain individuals to have a minimum level of health insurance. Covered individuals who fail to maintain sufficient coverage will be subject to a financial penalty beginning in 2014. Although the federal government provides health coverage for many individuals through federal programs such as Medicare, it had never before required individuals to purchase health insurance. There are various constitutional considerations relevant to the enactment of this provision. This report provides an analysis of constitutional issues raised by compelling individuals to purchase health insurance.
This report first analyzes the authority of Congress to pass a law of this nature, as well as how a court could analyze this provision in light of a constitutional challenge based on various provisions of the Fifth and Tenth Amendments. Finally, this report discusses whether the exceptions to the individual responsibility requirement to purchase health insurance satisfy First Amendment freedom of religion protections.
Under Section 1501 of PPACA, beginning in tax year 2014, some taxpayers will be assessed a monetary penalty for any months during which they or their dependents lack ?minimum essential? health coverage.6 ?Minimum essential coverage? includes coverage under a government-sponsored health care program (e.g., Medicaid, Part A of Medicare); an ?eligible? employer-sponsored plan; coverage under a plan offered in the individual market; a grandfathered health plan; and other health coverage as recognized by the Secretary of Health and Human Services.
The amount of the assessment for failing to meet the individual responsibility requirement, which can be prorated for partial compliance during the year, is determined by taking the greater of a flat dollar amount and a calculation based on a percentage of the taxpayer?s household income. The annual flat dollar amount is assessed per individual or dependent without coverage and will be phased in over three years. The amount is set at $95 for 2014; $325 for 2015; and $695 in 2016 and thereafter.7 This amount will also be adjusted for inflation beyond 2016. Although this is a fixed per-person amount, a taxpayer?s liability will not exceed three times this amount per year, regardless of the number of individuals who actually lack adequate coverage during the year. For example, a married couple filing jointly with two dependent children and no health insurance will have the same flat dollar assessment as a similarly situated married couple with three dependent children.
This flat dollar amount will be compared to a percentage of the extent to which the taxpayer?s household income exceeds the income tax filing threshold.8 Like the flat dollar amount, the applicable percentage to be used is phased in over three years, set at 1% for 2014, 2% for 2015, and 2.5% thereafter. The amount assessed on a taxpayer who lacks minimum essential coverage will be equal to the greater of the flat dollar amount or the calculated percentage of household income. However, this amount shall not exceed the national average of the annual premiums of a bronze level health insurance plan offered through an exchange created under PPACA.
Exemptions would apply to individuals with qualified religious exemptions, members of health care sharing ministries, unauthorized aliens, incarcerated individuals, qualified U.S. citizens and residents living abroad, and bona fide residents of the U.S. possessions. Additionally, no amounts would be assessed on individuals who could not afford coverage;9 taxpayers with income less than the filing threshold; members of Indian tribes; and individuals granted hardship exceptions. Finally, no amounts would be assessed for periods without coverage that last less than three months. This three-month exception could apply to only one continuous period without coverage during a calendar year.
Constitutional Authority to Require an Individual to Have Health Insurance
In analyzing the constitutionality of PPACA?s requirement to obtain health insurance, the first question is the congressional authority for this requirement based on Congress?s enumerated powers. While there is no specific enumerated power to regulate health care or establish an individual responsibility requirement, one can look to Congress?s other broad enumerated powers which have been used to justify social programs in the past. In the instant case, Congress?s taxing power could be applicable. In addition, Congress?s power to regulate interstate commerce may also be pertinent, especially given that Section 1501 of PPACA , as amended, provides numerous
findings about the correlation or the individual responsibility requirement to interstate commerce.
Article I, Section 8 of the Constitution states that ?Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…. ? The power to tax and spend for the general welfare is one of the broadest powers in the Constitution and affords the basis of government health programs in the Social Security Act, including Medicare, Medicaid, and the State Children?s Health Insurance Program.
Because Congress?s power to tax is extremely broad,10 a court might look to it as a legitimate source of power for Congress to impose the individual responsibility requirement. If so, the provision might be upheld as constitutional so long as it was found to comply with the constitutional restrictions imposed on direct and indirect taxes discussed below. In such case, a court might favorably compare the requirement to other examples of where Congress has used its taxing authority to create financial incentives for individuals to purchase health insurance.11 Similarly, if Congress were to require individuals to purchase health insurance, and then encourage compliance with this requirement by conditioning receipt of a tax benefit (e.g., a tax credit) on the purchase of health insurance, this incentive also could be seen as a legitimate exercise of Congress?s taxing authority.
On the other hand, opponents of the individual responsibility requirement may note that the enacted individual responsibility requirement differs in that it creates a financial disincentive for failing to obtain health insurance. As the tax is imposed conditionally and may be avoided by compliance with regulations set out in the statute, some might argue that it may also be accurately described as a penalty and, therefore, the taxing power alone might not provide Congress the constitutional authority to impose the requirement.12 A court analyzing this argument might look to cases where the Supreme Court has examined whether Congress has the authority, independent of its taxing authority, to regulate the underlying subject matter. If such regulation is authorized under a provision of the Constitution other than the taxing power, the exaction may be sustained as an appropriate enforcement mechanism.13 But, in the absence of such independent authority, a tax triggered by the failure to comply with federal standards has been held to be invalid.14
A court that found it necessary to determine whether the character of the individual responsibility payment is that of a tax or penalty would likely examine congressional intent. The Court has noted that the difference between a tax and a penalty is sometimes difficult to define and yet the consequences of the distinction in the required method of their collection often are important…. Taxes are occasionally imposed in the discretion of the legislature on proper subjects with the primary motive of obtaining revenue from them and with the incidental motive of discouraging them by making their continuance onerous. They do not lose their character as taxes because of the incidental motive. But there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.15
Here, enforcement of this provision would likely result in revenue for the federal government, and a court might find this to be a sufficient purpose to be a valid exercise of the taxing power. But, it may be difficult for a court to ignore the larger context of health insurance reform in which the provision has arisen. To the extent that this context indicates that a primary motive of the provision is to encourage compliance with a federal requirement that individuals maintain some form of health insurance, a court may characterize it as a penalty rather than a tax.
For example, a court might look to any legislative findings accompanying the individual responsibility requirement. Notably, Congress found that
[t]he [individual responsibility] requirement regulates activity that is commercial and economic in nature: economic and financial decisions about how and when health care is paid for, and when health insurance is purchased.16
The language Congress itself uses to refer to the provision may also influence its characterization. On one hand, simply because Congress has labeled a provision as a tax, a court is not bound by that label.17 However, neither would a court be prohibited from using Congress?s description of the provision as a penalty as evidence of Congress?s intent.
Other factors can be gleaned from the Court?s jurisprudence distinguishing taxes and penalties. Factors which suggest that a provision might actually be a penalty include (1) the absence of a correlation between the amount of tax and the magnitude by which an individual?s conduct deviates from the conduct which is exempt from taxation; (2) a limitation that the tax only fall on individuals that knowingly deviate from the exempt conduct; and (3) the possibility of enforcement by government entities not traditionally charged with the enforcement of taxes.18
Application of these three factors to the instant provision would appear to support its characterization as a tax. First, the amount of the penalty is roughly proportional to the length of time during the year that the taxpayer and his or her dependents lacked coverage. Second, knowledge is not a necessary element to assess the penalty. Third, it appears that the provision will be enforced by the Internal Revenue Service, an entity traditionally charged with the enforcement of taxes. However, this list comprises only those factors the Court found present in the case before it, and may not represent an exhaustive list of what a court might consider as indicia of taxes.
If a court were to classify the provision as a penalty, this would not be determinative of its constitutional validity, but would merely establish that Congress?s authority to enact such a provision must be found in something other than its power to levy taxes. In other words, the constitutionality of the individual responsibility requirement, if determined to be a penalty, would depend upon whether Congress has the authority under a power other than the taxing power to impose a financial burden on individuals that lack health insurance. As discussed below, one potential source of such authority may be the Commerce Clause.
Limits on the Taxing Power
Even where Congress has the general authority to levy a tax, the Constitution may impose additional requirements on the form of such taxes. For constitutional purposes,19 taxes are understood to be either
- direct taxes, subject to apportionment among the states based on population,20 or
- indirect taxes (i.e., duties, imposts, and excises), subject to the Uniformity Clause.21
Additionally, under the Sixteenth Amendment, taxes on income, from whatever source, are not required to be apportioned,22 even if such taxes are direct. The amendment itself does not classify income taxes as direct or indirect.
Here, it appears the individual responsibility requirement would raise constitutional concerns under these provisions only if it was found to be a direct tax that was not a tax on income. This is because it would then be subject to the requirement of apportionment, and there is no indication it will be apportioned among the states based on population. If, however, the requirement was found to be a tax on income, it would fall under the protection of the Sixteenth Amendment and its lack of apportionment would raise no constitutional concerns. Similarly, it appears no constitutional issues would arise if the requirement was found to be an indirect tax since it would appear to
satisfy the requirement of uniformity since it is geographically neutral on its face.23
Some have argued that the individual responsibility requirement is in fact a direct tax, and, consequently, must be apportioned. The exact scope of the term ?direct taxes? is undetermined, but the Court has construed it to be relatively narrow. The Constitution does not define the term other than specifying that it includes capitations (a capitation, or head tax, is a fixed tax imposed
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