A 'Brave New World' of Tax Policy

July 11, 2012

On Tuesday, House Ways and Means chairman David Camp (R., Mich.) called the recent Supreme Court decision upholding the Affordable Care Act a "brave new world" of tax policy.

"This is the first indirect tax on inactivity in American history," Camp said. The Supreme Court’s ruling defends the new idea "that absence of action is taxable and that the government can compel individuals to act."

Three legal experts agreed with Camp.

Steven G. Bradbury, a partner with international law firm Dechert LLP, testified that the Court’s ruling would likely lead more Americans to accept a tax instead of purchasing insurance.

"The Congressional Budget Office [CBO] projected that approximately 3.9 million Americans would opt to pay the penalty rather than comply with the mandate," Bradbury said, a projection that relied "on the assumption that most Americans would naturally feel a strong moral imperative to comply with the law."

Since the penalty has been ruled a tax, however, more Americans "will choose to pay the tax rather than purchase insurance." If fewer people buy insurance, he continued, "we can expect Congress to ratchet up the tax."

Carrie Severino, chief counsel and policy director for the Judicial Crisis Network, agreed.

"The majority’s opinion on the taxing power creates a previously unheard-of form of tax that is triggered by inactivity," she said. In this way, the Supreme Court ruling "triggers the most damaging consequence…a massive expansion of the federal tax power."

With this power, Severino argued, Congress could tax citizens for not buying products completely unrelated to healthcare, like guns or solar panels.

Lee A. Casey, a partner with the law firm Baker Hostetler, also called this taxation of inactivity "a breathtaking new power for Congress." The national legislature can now "tax the mere failure to take a course of action," he explained. "The court continues to acknowledge that there are limits to the taxing power, at least in theory. …The real world viability of these limitations remains very much in doubt."

Walter Dellinger, a partner at O’Melveny & Myers LLP, disagreed. When Rep. Sam Johnson (R., Tex.) asked him if America ever had a tax levied "for failure to engage in an activity," Dellinger said, "Yes we have, in the form of higher tax bills."

When asked what sort of tax the mandate penalty would be, Dellinger said, "It is, on the face of it, an amendment to the internal revenue code." He compared it to taxes on education, saying, "it operates no differently than the tax incentives in the law."

Bradbury, Severino, and Casey agreed that it was a direct tax, but Dellinger argued that it was not a direct tax, because it would not apply to every citizen. He compared the question to "asking whether a member [of Congress] who is fishing is a member or a fisherman."

Representative Dave Reichert (R., Wash.) responded to Dellinger’s comment. The American people don’t care whether lawmakers call it a tax or a mandate, he said, "all they know is the federal government has its hand in their pocket."

He listed other tax increases in the Affordable Care Act, including a Medicare 3.8% tax, a 2.3% tax on medical devices, and a 40% tax on "Cadillac" healthcare plans.

Severino said, "nomenclature is important," referencing free speech in First Amendment court decisions.