Federal Court, Contrary To U.S. Supreme Court, Says ACA Individual Mandate Not a Tax

Overview

In Sissel v. United States Department of Health and Human Services, et al.,[1] a three-judge panel of the D.C. Circuit Court of Appeals upheld the individual mandate contained in the Affordable Care Act (ACA) against a constitutional challenge based in the Origination Clause.  The plaintiffs argued that because the individual mandate constituted a tax on persons that did not purchase government-approved health insurance, the bill containing it (ACA) was a bill to raise revenue that was required, under the Constitution, to originate in the U.S. House.  However, the ACA originated in the U.S. Senate when Senate leadership utilized an existing House bill, stripped out its language, and replaced it with the ACA provisions which the House later agreed to.  That technique, the plaintiffs argued, amounted to the bill originating in the Senate.  A few days after the ACA passed the Congress, the House and Senate approved a reconciliation bill that made certain amendments to the ACA.   The plaintiff’s argument that the mandate provision was a tax was grounded in the U.S. Supreme Court’s 2012 opinion in National Federal of Independent Business v. Sebelius,[2] where the Court’s majority, in an opinion authored by Justice Roberts, determined that that individual mandate should be upheld as constitutional as a tax.  However, the Circuit Court, in Sissel, determined that the individual mandate was not a tax, and that the Origination Clause had, therefore, not been violated.

U.S. Supreme Court Language

The Supreme Court was very clear that the ACA’s individual mandate is a tax.  The Court made the following statements:

• “Beginning in 2014, those who do not comply with the mandate must make a "[s]hared responsibility payment" to the Federal Government. § 5000A(b)(1). The Act provides that this "penalty" will be paid to the Internal Revenue Service with an individual's taxes, and "shall be assessed and collected in the same manner" as tax penalties. §§ 5000A(c), (g)(1).”

• “In pressing its taxing power argument, the Government asks the Court to view the mandate as imposing a tax on those who do not buy that product…”

• “According to the Government, even if Congress lacks the power to direct individuals to buy insurance, the only effect of the individual mandate is to raise taxes on those who do not do so, and thus the law may be upheld as a tax.”

• “The exaction the Affordable Care Act imposes on those without health insurance looks like a tax in many respects. The "[s]hared responsibility payment," as the statute entitles it, is paid into the Treasury by "tax-payer[s]" when they file their tax returns. 26 U. S. C. § 5000A(b). It does not apply to individuals who do not pay federal income taxes because their household income is less than the filing threshold in the Internal Revenue Code. § 5000A(e)(2). For taxpayers who do owe the payment, its amount is determined by such familiar factors as taxable income, number of dependents, and joint filing status. §§ 5000A(b)(3), (c)(2), (c)(4). The requirement to pay is found in the Internal Revenue Code and enforced by the IRS, which—as we previously explained—must assess and collect it "in the same manner as taxes” [citation omitted].  This process yields the essential feature of any tax: it produces at least some revenue for the Government.  United States v. Kahriger, 345 U. S. 22, 28, n. 4 (1953).  Indeed, the payment is expected to raise about $4 billion per year by 2017. Congressional Budget Office [CBO], Payments of Penalties for Being Uninsured Under the Patient Protection and Affordable Care Act (Apr. 30, 2010), in Selected CBO Publications Related to Health Care Legislation, 2009-2010, p. 71 (rev. 2010).”

• “The same analysis here suggests that the shared responsibility payment may for constitutional purposes be considered a tax, not a penalty…”.

• “No one would doubt that this law imposed a tax, and was within Congress's power to tax. That conclusion should not change simply because Congress used the word "penalty" to describe the payment. Interpreting such a law to be a tax would hardly "[i]mpos[e] a tax through judicial legislation"  [citation omitted].  Rather, it would give practical effect to the Legislature's enactment.”

• “The Affordable Care Act's requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

Tax Provisions Contained in Pub. L. No. 111-148[3]

The ACA contains numerous tax provisions in addition to the individual mandate issue that was before the Supreme Court in National Federation of Independent Business v. Sebelius.[4]  As noted above, the CBO has estimated that the tax provisions of the ACA will generate an additional $4 billion in revenue every year by 2017.

The following is a list of the most significant tax provisions included in the ACA (by effective date):

Retroactive Provisions (effective for tax years beginning after 2009)

• Refundable adoption tax credit (applies to both handicapped and non-handicapped adoptions, and indexed for inflation for tax years beginning after 2010);
• Small business insurance tax credit;
• $500,000 salary cap placed on tax deduction (via I.R.C. §162(m)) for salaries of health insurance companies – except for deferred compensation (effective remuneration paid in tax years beginning after 2012 with respect to services performed after 2009);
• Therapy tax credit (for amounts paid or incurred after 2008 in tax years beginning after 2008 and effective for 2009 and 2010);
• Elimination of the tax deduction for Blue Cross and Blue Shield companies if they don’t spend at least 85 percent of premiums on clinical services;
• Repeal of cellulosic biodiesel credit for “Black Liquor” and other unprocessed fuels.

Provisions Effective Upon Signing

• Codification of the economic substance doctrine;
• Excise tax of $50,000 imposed on each charitable hospital failing to meet Department of Health and Human Service regulations;
• Amendment of I.R.C. §105(b) with respect to exclusion from income for reimbursements for medical care expenses;
• Amends the IRC to incorporate the group market health insurance coverage requirements to the Public Health Service Act into ERISA and the IRC such that coverage is available for an adult child who is not married until the child reaches age 26.

Provision Effective July 1, 2010

• Imposes a 10 percent excise tax on persons using indoor tanning services.

Provisions Effective Jan. 1, 2011

• Requirement that employers file Form W-2 reporting the value of health benefits for each employee that the employer sponsors;
• Additional penalty on non-qualified health savings account withdrawals;
• Elimination of deduction for over-the-counter medicines (except insulin) and disallowance of use of a flexible spending arrangement for nonprescription drugs;
• Lower ceiling on flex-spending accounts that can be used to reimburse (in a tax-favored manner) incurred medical expenses of an employee, the employee’s dependents and any other beneficiaries of the employee.

Provisions Effective January 1, 2012

• Extension of Form 1099 reporting to corporate payees (subsequently repealed).

Provisions Effective in 2013

• Additional 0.9 percent Medicare tax on wages and self-employment income;
• Additional 3.8 percent Medicare tax on “unearned” income;
• Increase in itemized deduction floor for medical expenses;
• Elimination of deduction for employers who maintain prescription drug coverage for their Medicare Part-D-eligible employees;
• Additional 2.3 percent excise tax on medical device makers.

Provisions Effective in 2014

• Penalty tax for failing to acquire government-mandate health insurance;
• Individual premium assistance tax credit;
• Non-deductible excise tax on brand-name pharmaceuticals;
• Penalty tax on employers with 50 or more employees that fail to provide government-approved health coverage (later delayed until 2015 and 2016)
• Insurers (and employers that self-insure) that provide insurance coverage must report coverage information to the IRS.

Provisions Effective in 2018

• 40 percent (nondeductible) excise tax on annual premiums associated with “Cadillac” health care plans.

Circuit Court Opinion

The Circuit Court in Sissel, however, determined that the individual mandate was not a tax.  The court referenced an 1897 U.S. Supreme Court opinion for the proposition 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.”[5]  The court also found that the “paramount aim of the Affordable Care Act” was to increase the number of persons covered by health insurance and decrease the cost of health care and not to raise revenue via the individual mandate. That, the court held, made the ACA a non-tax/revenue bill that need not originate in the U.S. House. 

Conclusion

The Circuit Court’s opinion flies in the face of the Supreme Court’s opinion in National Federation of Business, the government’s arguments in that case that the individual mandate is a tax, and the reality that the ACA is projected to raise over $4 billion every year by 2017 due to the many tax provisions that it contains (one of the largest tax increases in U.S. history). 

It is likely that the full D.C. Circuit will be asked to reconsider the panel’s decision.  In lieu of the full court reversing the panel’s decision, the case will likely wind up before the U.S. Supreme Court.  If that happens, in order to uphold the D.C. Circuit, the Supreme Court will have to find that the individual mandate is not a tax.  When it said the individual mandate was a tax in its 2012 opinion, the Court said that was the only way it could uphold the mandate as constitutional.  Thus, the Supreme Court could be in an interesting bind.  The Court will be faced with the decision to reverse the D.C. Circuit and find the individual mandate to be a tax (consistent with its 2012 opinion), which means that the ACA itself is likely to be determined to be a bill to raise revenue that was required to originate in the House or to uphold the D.C. Circuit.  That would require the Court to take the next step and analyze the method in which the ACA was put together and moved through the Congress.  Or, the Court could uphold the D.C. Circuit and hold that the individual mandate is not a tax, which would be contrary to the Court’s 2012 opinion, and would eliminate the only manner in which the Court upheld the individual mandate as constitutional in 2012.