Florida Challenge to “ObamaCare” Fleshes Out Tax vs. Penalty Constitutional Issue

Guest Commentary

Professor Steven J. Willis, University of Florida Levin College of Law*

 In a victory last week for states challenging certain parts of ObamaCare, Judge Roger Vinson wrote a solid memorandum opinion in Florida v. United States, (W. D. Fla., 2010), ruling against various government motions, including a motion to dismiss the case.  The court will likely decide the merits of the suit soon in response to motions for summary judgment.

Because my field of expertise is tax law, my analysis is limited to the tax portions of the 65-page opinion, which comprise approximately twenty pages.  The tax analysis has three main issues:

1.  Whether the Act imposes a “penalty” or a “tax.” 

2.  Whether the Anti-Injunction Act precludes jurisdiction.

3.  Whether the “penalty,” if a tax, is unconstitutional.

Judge Vinson wrote convincingly on all three issues, finding that the enforcement mechanism is a “penalty” rather than a tax; that the Anti-Injunction Act does not apply to “penalties;” and if the “penalty” is a “tax,” it is likely an unconstitutional un-apportioned direct tax.

My research focuses more on the reasons the penalty would be unconstitutional if it is a tax.  IRC section 5000A is neither a proper excise nor a tax on “derived income” under the 16^th Amendment.  The only remaining tax issue involves capitation and other direct taxes, which require apportionment; however, The Patient Protection and Affordable Care Act fails that test.  Hence, Judge Vinson is correct: if this is a tax, it is unconstitutional.

The court explains the more traditional dichotomy between regulatory penalties on commerce and taxes.  The former are more “sanctions” and the latter focus more on “revenue.”  Labels and congressional intent also matter.  As the courts documents, Congress justified the “penalty” under its power to regulate commerce and largely avoided denominating it a “tax.”  Under traditional, established jurisprudence, the court is correct: this is a penalty and not a “tax.” 

Judge Vinson raises two concerns regarding the “tax” versus “penalty” issue.  First, he describes Congress’s Commerce Powers as more limited than its Taxing Powers. Second, he expresses substantial concerns regarding the Anti-Injunction Act – IRC section 7421, which prohibits suits “by any person” to enjoin the assessment or collection of a tax. 

Judge Vinson is correct in suggesting Congress’s power to regulate commerce is limited and the mandate, as well as the penalty appear to exceed that power.  As I’ve argued, the penalty also violates the taxing power, an argument the judge agreed with.  But I would also argue that the Taxing Power is quite limited.  Too many academics seem to believe the “general welfare” limitation is the only serious restriction on the taxing power.  They are wrong.  Taxes must also either be uniform, apportioned, or on derived income.  Those are three serious hurdles for the mandate.  If I have any criticism of the opinion—with which I overwhelmingly agree—it is to suggest the court overly minimizes the seriousness of the Taxing Power limitations.

On the second issue, regarding the Anti-Injunction Act, Judge Vinson is ultimately correct in holding the Act does not deprive the court of jurisdiction.  I believe, however, this analysis is incomplete.  First, the Act applies only to suits by “persons.”  The case has 23 plaintiffs: two humans, one entity, and twenty states.  The two humans and the entity are “persons” as defined by IRC section 7701(a)(1).  Their claims are arguably subject to the Anti-Injunction Act.  The states, however, are not “persons” for purposes of the Internal Revenue Code; hence, section 7421 is inapplicable to them. 

Second, the Act is arguably not a problem even for the three persons, at least to the extent they seek declaratory relief, which includes a finding the mandate and the “penalty/tax” are unconstitutional.  Section 7421 has nothing to do with enjoining the mandate, which is not a tax; instead, at most it applies to the penalty/tax.  As Judge Steeh found in Thomas Moore v. Obama, (E. D. Mich. 2010), the Anti-Injunction Act does not bar declaratory relief.  While Judge Steeh ultimately dismissed the challenge to the Health Care Act—a decision with which I disagree—he correctly analyzed the Anti-Injunction Act.  Thus, on this single issue, I would side with the Michigan Court over the Florida Court. 

*Professor Willis was one of fourteen legal scholars that joined Washington Legal Foundation on its amicus brief supporting the Commonwealth of Virginia’s challenge to various provisions of the federal Affordable Care Act.