In National Federation of Independent Business v. Sebelius, the individual mandate of the Affordable Care Act was upheld under Congress’s taxing power rather than pursuant to the Commerce Clause. Although politically expedient, the salutary effect of the decision came at the expense of an undefined expansion of the taxing power. The Congressional Research Service concluded that, after Sebelius, the limits of the congressional taxing power are unknown. Accordingly, the congressional staff attorneys listed prior cases that ostensibly limit the taxing power and then predicted that future cases will be needed to define the limits going forward. This Article explains in detail why the health insurance penalty at issue in Sebelius was, in fact, a type of “capitation” tax. A direct federal capitation tax is barred by Article I, Section 2 of the Constitution. Article I, Section 9 is often cited as a separate authorizing provision for a federal capitation; it is however an apportionment provision specifying that apportionment to the states must be performed according to the Census. Thus, the Affordable Care Act’s mandated penalty for a lack of health insurance amounts to a head tax on individual persons that is not related to any action or property right. This is a capitation-type tax, notwithstanding the reasoning of the majority opinion in Sebelius. The possibilities that some persons might avoid the tax, or that the tax can vary in amount, do not change its categorization as a capitation tax. The tax types and levy methods of the federal taxing authority are summarized in a table provided herein.
The view that the Affordable Care Act’s individual mandate should be considered, in substance, a capitation tax, is further supported by the “effects-based” method of legal interpretation now applied by the Supreme Court in tax cases including Sebelius. Moreover, the regressive effect of the individual mandate penalty qua tax is highly characteristic of a capitation tax. The recent regressive history of taxation suggests that the expansive post-Sebelius federal taxing power is less likely to be used to authorize a federal wealth tax (as some progressives may have thought) and more likely to be used to authorize incremental federal insurance mandates directed primarily at lower-income persons, such as life- or disability-insurance mandates.
As background, mandatory tax payments for the general benefit of living under the protection of the state have substantial historical precedent dating back to Greek and Roman times. For 2016, the mandatory “head tax” is set at a flat rate of $695, but can be adjusted higher or lower. Many of the details of the calculation of the penalty, including the amount, were not specified in the Affordable Care Act and were left to federal agencies to determine. For those persons that comply with the mandate and purchase health insurance to avoid the penalty, the premium itself comprises a new type of tax. The amount of the new tax may be thought of as the gross insurance premium paid to the third-party insurance company less value received from the insurance policy, if any. This Article begins with an overview of the constitutional framework of taxing power and an analysis of how it has changed after Sebelius, with special attention to the Sixteenth Amendment’s modification to taxing power and the implications of mandatory payments to third-party insurance companies. Background is provided on capitation taxes including the possibility of indirectly levied capitation taxes. The Article concludes by discussing the Supreme Court’s effects-based approach to tax cases including the level of judicial scrutiny applied in Sebelius.
