Obamacare’s Tangled Web of Taxes

Published May 31, 2016

“Oh! what a tangled web we weave

When first we practise to deceive!”


This quotation from Sir Walter Scott’s poem Marmion is particularly applicable to the U.S. Department of Justice’s new legal position that the penalties payable under Obamacare by individuals who fail to buy health insurance—called the individual mandate—are constitutional because they are a federal tax.

Change in Position

This is an important change in position for the administration, because President Barack Obama insisted over and over again last year, including during a September 2009 interview with ABC’s George Stephanopoulos, that the individual mandate is not a tax:

“STEPHANOPOULOS:  But you reject that it’s a tax increase?

“OBAMA:  I absolutely reject that notion.”

In passing Obamacare, both Obama and Congress insisted it can penalize individuals who fail to buy health insurance, citing the Commerce Clause of the U.S. Consitution, which authorizes Congress to pass laws regulating commerce “among the several states.”

There are two problems with the Commerce Clause argument, however.

First, there is no health insurance market “among the several states.” Health insurance is sold entirely within each state, so there is no national market for Congress to regulate. Second, Congress has never sought to penalize “doing nothing,” such as a failure to purchase health insurance, nor has it ever sought to coerce Americans into buying something.


Justice Shifted Argument

In responding to lawsuits by about 20 state attorneys general, DOJ evidently recognized these weaknesses in the Commerce Clause justification. As a result, it is now arguing, in the two cases brought by state attorneys general—one in Florida and another in Virginia—that federal taxing powers also authorize the individual mandate penalties. This sounds like a simple enough question, but legal wrangling over federal taxing powers, which dates to the late 1700s, is a tangled legal web.

Under the Constitution, Congress has the power to levy either direct or indirect taxes, as Professor Steven J. Willis of the University of Florida Levin College of Law, and Nakku Chung, a recent graduate of that law school, write in Constitutional Decapitation and Healthcare, in the legal journal Tax Notes.

Direct taxes usually fall on a person or, sometimes, on property, they write, and must be apportioned by population among the states. Indirect taxes, which include duties, imposts, and excise taxes, need not be apportioned, but they must be uniform. They usually are levied on property or an activity. Another factor is the 16th Amendment to the Constitution, which created an income tax. This is a direct tax, but under the amendment it need not be apportioned.


Complicated Question

The legal wrangling over whether a particular tax is direct or indirect, as Willis and Chung discuss, has been complicated and persistent for more than two centuries. In 1794, for example, Congress passed a tax on carriages, which opponents considered a direct tax and thus invalid because it was not apportioned by population. The Supreme Court found it was an indirect tax on the use of carriages, valid so long as it was uniform.

Obamacare imposes an annual penalty of $95 per adult, or 1 percent of income, whichever is greater, in 2014. The annual penalties are the greater of $325 or two percent of income in 2015 and the greater of $695 or 2.5 percent of income in 2016 and subsequent years.

Willis and Chung argue these are not indirect, but instead direct taxes, unconstitutional because they are not apportioned by population. It could also be argued, though, this provision is a mixed bag. The fixed annual penalty portion, for example, could be viewed as indirect and uniform and thus constitutional, while the income percentage amounts could be deemed direct but not apportioned and thus unconstitutional.

The tax could therefore be unconstitutional for those who pay income percentages but constitutional for those who pay a fixed penalty. This maybe a ridiculous and unprecedented view, but it does illustrate the complexity of this issue—leaving us with a tangled legal web indeed.

Maureen Martin, an attorney ([email protected]), is senior fellow for legal affairs at The Heartland Institute.


Internet Resources

“Obama: Mandate is Not a Tax”: http://blogs.abcnews.com/george/2009/09/obama-mandate-is-not-a-tax.html

“Tax Notes: Constitutional Decapitation and Healthcare”: http://ssrn.com/abstract=1589190