NFIB v. Sebelius and the transformation of the taxing power.

• Author: Cushman, Barry
• Position: Abstract through III. Taxing Power Arguments Before the Supreme Court, p. 133-161

ABSTRACT

In National Federation of Independent Business v. Sebelius, Chief Justice Roberts wrote for a majority of five Justices in holding that the "shared responsibility payment" required by the Patient Protection and Affordable Care Act ("ACA ") constituted an imposition of a "tax" rather than a "penalty." Thus, even though the Chief Justice and four other Justices had concluded that the provision was not a legitimate exercise of the commerce power, the Court held that it was a valid exercise of the taxing power.

The origin of the distinction between taxes and penalties in taxing power jurisprudence is found in the 1922 decision of Bailey v. Drexel Furniture Co., more commonly known as the Child Labor Tax Case. There the Court invalidated a provision of the Revenue Act of 1918 imposing an excise of ten percent on the net profits of all firms employing children under specified ages in various tasks, for longer than specified hours, or at night work. The Child Labor Tax Case was followed in other, similar cases in the 1920s and 1930s, and the Court continued to treat those precedents as good law throughout the remainder of the twentieth century.

Chief Justice Roberts did not reject the authority of the Child Labor Tax Case. Instead, he reviewed the features of the Child Labor Tax that had prompted Chief Justice Taft and his colleagues to conclude that the measure imposed a regulatory penalty, and then offered several distinctions between the ACA and the earlier exaction. But a review of the reaction of child labor reformers to the 1922 decision suggests that contemporaries would not have regarded those distinctions as constitutionally significant. For child labor advocates in the 1920s did not believe that if they revised the measure to remove those objectionable features, the tax would then pass constitutional muster. Instead, they regarded the idea of such a constitutional excise as hopeless, and turned their attention to an unsuccessful effort to amend the Constitution to permit Congress to enact federal child labor legislation.

This Article proceeds as follows: Part I provides an overview of the relevant twentieth-century taxing power precedents. Part II reviews the decisions of the lower federal courts concerning the construction and constitutionality of the ACA as a taxing measure. Part III canvasses the arguments made in the briefs submitted to the Court, observing that the decisive taxing power issue received scant attention from the parties. Part IV scrutinizes Chief Justice Roberts's efforts to distinguish the Child Labor Tax Case, concluding that if the assessment of that decision by contemporary observers was accurate, each of those distinctions is insufficient. Part V draws on the contemporaneous analysis of Professor Thomas Reed Powell to isolate the core principle emerging from the Child Labor Tax Case and its progeny: that a nominal tax is in fact a regulatory penalty where it imposes an exaction triggered by departure from a detailed and specified course of conduct, and the exaction is sufficiently onerous to induce those engaged in the targeted conduct generally to alter their behavior. Part VI presents an argument, not considered by the Court, that the A CA might be understood to impose a regulatory penalty so defined. If that understanding is correct, then the Court may have effectively overruled the Child Labor Tax Case and its progeny sub silentio, thereby substantially transforming taxing power doctrine. Part VII explores an alternative, albeit considerably less likely possibility: that contemporary child labor reformers misunderstood the Child Labor Tax Case, and could have successfully revised and defended a new Child Labor Tax by altering one or more of the distinguishing features identified by Chief Justice Roberts. If that is so, then that unfortunate generation of social activists squandered fifteen years in fruitless pursuit of a constitutional amendment authorizing Congress to regulate the labor of children, when a much easier and more expeditious solution lay right before their eyes.

INTRODUCTION

The Supreme Court has revived an old asymmetry in its jurisprudence of enumerated powers. In the late nineteenth century and during the first four decades of the twentieth, Congress frequently sought to achieve regulatory objectives it could not attain through its commerce power by imposing excise taxes designed to discourage disfavored activities. (1) Occasionally these exactions were challenged before the Supreme Court, and the Justices permitted this indirect fiscal regulation of such "local" activities as the production of oleomargarine colored to resemble butter, (2) the intrastate distribution of narcotics, (3) and the intrastate sale of machine guns and sawed-off shotguns. (4) For decades following the Court's 1942 decision in Wickard v. Filburn, (5) after which the commerce power was commonly thought to be virtually plenary, this asymmetry in the regulatory scope of these two enumerated powers was effaced. With the more recent decisions in United States v. Lopez (6) and United States v. Morrison, (7) however, the question of whether Congress's reach under its taxing power would again exceed its grasp under the Commerce Clause once again became salient.

To this question we now have our answer. Beginning in 2014, the Patient Protection and Affordable Care Act ("ACA') will require every "applicable individual" who has not secured "minimum essential [health insurance] coverage" to make a "shared responsibility payment" to the Internal Revenue Service. (8) In National Federation of Independent Business v. Sebelius, (9) five Justices held that this "individual mandate" could not be sustained as an exercise of the commerce power. Another group of five Justices, however, held that the provision was a valid exercise of Congress's Article I, Section 8 power to "lay and collect Taxes, Duties, Imposts and Excises." (10) The deciding vote in each instance was cast by Chief Justice Roberts.

No lower federal court had upheld the mandate as a tax, (11) and the parties understandably lavished considerably more attention on the Commerce Clause issue, which they anticipated would be decisive. As a taxing power case, the challenge to the ACA presented two distinct issues that often seemed to bleed together. The first was an issue of statutory construction: whether the language of the statute, which purported to rely upon the commerce power rather than the taxing power, expressed the regulatory objective of inducing people to purchase insurance rather than a fiscal purpose to raise revenue, and referred to the payment as a "penalty" rather than as a "tax," could properly be construed to impose a tax. The second issue was whether, assuming that the statute's language was properly so construed, the measure imposed a true tax rather than a penalty for purposes of constitutional analysis. The second issue, in other words, was this: suppose that we were to imagine that in enacting the statute Congress had purported to rely on its taxing power rather than on its commerce power, had expressed no regulatory objective but instead had stated that the law's purpose was to raise revenue, and had termed the payment a "tax" rather than a "penalty." Under those circumstances, would the exaction be a tax within the meaning of Article I of the Constitution?

The lower federal courts uniformly had concluded that the mandate could not properly be construed to impose a tax, (12) and the dissenting Justices in Sebelius agreed that several of the statute's features precluded such a construction. (13) Chief Justice Roberts, by contrast, offered a generous "saving construction" of the statute as a tax, (14) leaving the dissenters astonished and indignant. (15) As to the second issue, both Chief Justice Roberts and the dissenting Justices critically agreed on the test to be applied. Each of them relied upon a definition articulated by Justice Sutherland in a Double Jeopardy case decided in 1931. (16) "A tax," Sutherland explained, "is an enforced contribution to provide for the support of government; a penalty, as the word is here used, is an exaction imposed by statute as punishment for an unlawful act." (17) Employing this test, the question was whether the ACA made the failure to acquire qualifying health insurance unlawful. The dissenters concluded that it did; (18) Chief Justice Roberts concluded that under the ACA it was perfectly legal not to secure such insurance, so long as one paid the tax imposed for failing to do so. (19)

This should not have been the end of the matter, for there were decisions that both Chief Justice Roberts and the dissenting Justices recognized as good authority in which the Court had declared a putative tax to be a regulatory penalty even though the conduct triggering the tax was not unlawful. Indeed, one finds the very genesis of the tax/penalty distinction in just such a case: the 1922 decision of Bailey v. Drexel Furniture Co., more commonly known as the Child Labor Tax Case. (20) There the Court had invalidated a provision of the Revenue Act of 1918 imposing an excise of ten percent on the net profits of all firms employing children under specified ages in various tasks, for longer than specified hours, or at night work. (21) The Child Labor Tax Case was followed in other, similar cases in the 1920s and 1930s, and none of these decisions has been formally overruled. (22)

Chief Justice Roberts did not ignore the Child Labor Tax Case. He reviewed the features of the Child Labor Tax that prompted Chief Justice Taft and his colleagues to conclude that the measure imposed a regulatory penalty, and then offered several distinctions between the ACA and the earlier exaction. (23) But a review of the reaction of child labor reformers to the 1922 decision suggests that contemporaries would not have regarded those distinctions as constitutionally significant. For child labor...