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PILLA TALKS TAXES - Featured Article
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FIFTH CIRCUIT DECLARES "INDIVIDUAL MANDATE" UNCONSTITUTIONAL

What is the Impact of the Decision?

On December 18, the Fifth Circuit Court of Appeals issued its decision in the case of Texas v. United States, Docket No. 1-10011 (5th Cir. Dec. 18, 2019). The decision strikes at a core element of the 2010 Patient Protection and Affordable Care Act (ACA). It held that the so-called “individual mandate” of Code §5000A is unconstitutional. 

Necessary Historical Background 

The ACA was intended to force all Americans to purchase government-approved health insurance, either through private insurance companies or through government-run insurance “Exchanges.” The idea was that by forcing generally healthy individuals and young people (who otherwise might choose not to purchase health insurance) into the medical insurance pool, the cost of insurance would go down overall. 

Of course, we know that didn’t happen. In fact, the opposite occurred. The cost of health insurance actually sky-rocketed due to massive government intervention into the health insurance market. The government now regulates a huge swath of the economy and imposes its will on tens of millions of Americans in the most intimate of all personal of decisions—healthcare decisions. 

Moreover, the cost to the government to provide “free health care” to those who cannot afford insurance is likewise sky-rocketing. For example, the Congressional Budget Office estimated that federal outlays for health insurance subsidies and related spending will rise by about 60% over the next ten years, from $58 billion in 2018 to $91 billion by 2028. CBO, The Budget and Economic Outlook: 2018 to 2028 at 51 (April 2018) (https://tinyurl.com/CBOBudgetEconOutlook-2018-2028). 

What is the “Individual Mandate”? 

One of the key elements of the ACA is the so-called “individual mandate.” The individual mandate—which was the subject of the Fifth Circuit’s analysis—requires individuals to purchase and maintain government-approved health insurance, referred to as “minimum essential coverage.” See: Code §5000A(a). 

If an individual fails to do so, he must pay a penalty to the IRS called a “shared responsibility payment.” Such payment is referred to in the statute specifically and expressly as a “penalty.” See: §5000A(b)(1). 

Certain exceptions are provided under §5000A(e), which are not the subject of this article. 

Attacks on the Constitutionality of the ACA 

Legal attacks against the ACA and the individual mandate started even before the ink was dry on the law. The Supreme Court’s decision in the case of National Federation of Indep. Businesses (NFIB) v. Sebelius, 567 U.S. 519, 538 (2012), constituted the initial culmination of those attacks. The plaintiff in that case challenged the constitutionality of the individual mandate, arguing that Congress had no authority to force people to buy a product or face a government-imposed penalty for failure to do so. The case ended up in the Supreme Court shortly after lower court review. 

In a bizarre opinion written by Chief Justice Roberts, the Court simply changed the language of the statute to support the conclusion that the individual mandate was constitutional. 

First, the Individual Mandate is Unconstitutional 

The NFIB decision clearly states that reviewing the “penalty” language of §5000A in its “most straightforward reading” was in fact a command “to purchase insurance,” and as such, it “would have rendered it unconstitutional.” The Court stated that such a power could not have been justified under the Constitution’s Commerce Clause because it would have done more than “regulate commerce . . . among the several states.” U.S. Const. art. I, § 8, cl. 3. Rather, it would have compelled people to enter into commerce in the first place, something that was never intended by the Constitution. See: NFIB, 567 U.S. at 557–58. 

Chief Justice Roberts opined that concluding otherwise would empower the government to compel Americans into all kinds of behavior that the government thinks is beneficial for them, including, for example, “compelling them to purchase broccoli.” See NFIB, 567 U.S. at 558 (Roberts, C.J.).

 For similar reasons, the Chief Justice concluded that this command to purchase insurance could not be sustained under the Constitution’s Necessary and Proper clause. The individual mandate was not “proper” because it expanded federal power, “vest[ing] Congress with the extraordinary ability to create the necessary predicate to the exercise of” its interstate commerce clause powers. Id. at 560. The “joint dissent” issued by Justices Scalia, Kennedy, Thomas, and Alito reached the same conclusions on both the Interstate Commerce clause and Necessary and Proper clause questions. NFIB at 65060 (joint dissent).

 Both Justice Roberts in the Opinion of the Court and the dissenters agreed that a reading of the Commerce Clause to include a power to create commerce would make a Leviathan of the federal government, “everywhere extending the sphere of its activity and drawing all power into its impetuous vortex.” NFIB, at 554 (Roberts, C.J.) The Chief Justice was quoting The Federalist No. 48, written by James  Madison.

 Justice Scalia, writing for the joint dissenters, likewise stated that such a broad, expansive reading of the Commerce Clause would render that provision a “fount of unlimited power.” NFIB at 653. And, quoting Alexander Hamilton writing in The Federalist No. 33, Justice Scalia declared the government would become a “hideous monster whose devouring jaws . . . spare neither sex nor age, nor high nor low, nor sacred nor profane.” 

It’s Unconstitutional. But Wait. It’s Constitutional! 

So how, in light of the harsh criticism from the various justices, was it possible to in fact find that the individual mandate is indeed constitutional? The answer: Chief Justice Roberts simply changed the language of the statute. 

Rather than giving the law its “most straightforward reading,” using its plain and simple terms, as imposing a “penalty” for not purchasing insurance, he altered it to hold that it was merely a “tax” on the “decision” to not purchase insurance—terms that are simply not found in the statute. 

He then justified the statutory contortion by saying, “The question is not whether that is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.” NFIB, at 562; citations omitted. 

So Much for the Integrity of the Supreme Court

In the NFIB arguments, the Federal government asserted that the mandate could be read not as a “command” to buy insurance, but rather as an option to purchase insurance. That is to say, one had the free choice to buy insurance or pay a “tax.” And if it was indeed a voluntary choice on the part of the taxpayer to buy insurance or merely pay a tax, the provision would be found to be constitutional. 

Chief Justice Roberts bought that argument. He then strained mightily to conclude that §5000A could be read as a legitimate exercise of Congress’s taxing power, rather than a penalty, which the statute plainly says it is. He pointed to four reasons justifying his conclusion. It is worthy to note that this portion of Roberts’ Opinion was joined by no other Justice of the Court. That is, Justice Roberts was standing alone on this ground. 

First, Roberts reasoned that the shared-responsibility payment reflected “the essential feature of any tax: It produce[d] at least some revenue for the Government.” NFIB at 564. Second, he pointed out that the shared-responsibility payment was “paid into the Treasury by taxpayers when they file their tax returns.” Id. at 563. Third, he observed that the amount owed under the ACA was “determined by such familiar factors as taxable income, number of dependents, and joint filing status.” Id. Fourth and finally, he said “[t]he requirement to pay [was] found in the Internal Revenue Code and enforced by the IRS, which . . . collect[ed] it in the same manner as taxes.” Id. at 563–64. 

Given all this, and regardless of the fact that the statute uses the word “penalty” in the context of not purchasing insurance, the Court ruled that it is indeed a tax on the voluntary decision to not buy insurance in the first place. Roberts concluded that “[t]he Federal Government does have the power to impose a tax on those without health insurance.” Id. at 575. As such, under the Constitution’s taxing authority (Art I, sec. 8), the individual mandate is in fact constitutional. 

First, It Was Unconstitutional. But Then It was Constitutional. Now, It’s Unconstitutional Again! 

So if the Supreme Court’s NFIB decision held the individual mandate to be constitutional (even though a plain reading of the statute would render it unconstitutional), how can the Fifth Circuit (a lower court) now hold that it is indeed unconstitutional? 

The answer: fundamental circumstances have changed. 

As part of the Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in December 2017, Congress amended §5000A as to the “shared responsibility payment” amount. Specifically, the amount a person must pay for failing to comply with the individual mandate is figured as the “lesser” of “zero percent” of one’s household income or “$0.” This amendment is effective January 2019. Pub. L. No. 115- 97, § 11081, see also Code §5000A(c). 

However, it is important to note that the individual mandate is still on the books as an affirmative duty for all Americans. It still consists of the same three fundamental components it always featured, which are:

1. Subsection (a) prescribes that certain individuals “shall . . . ensure” that they and their dependents are “covered under minimum essential coverage.” Code §5000A(a). 

2. Subsection (b) “impose[s] . . . a penalty” called a “[s]hared responsibility payment” on those who fail to ensure they have minimum essential coverage. Code §5000A(b). 

3. Subsection (c) sets the amount of that payment. 

All Congress did through the TCJA was change the amount of the penalty in subsection (c) to zero dollars. See: Code §5000A(c). 

Along Comes the Fifth Circuit in Texas v. United States 

The Fifth Circuit points out in its decision that the four essential elements of §5000A, which, in the opinion of Chief Justice Roberts, made it a “tax” rather than a penalty, were fundamentally changed by the TCJA amendment. Specifically, the Fifth Circuit pointed out: 

The four central attributes that once saved the statute because it could be read as a tax no longer exist. Most fundamentally, the provision no longer yields the “essential feature of any tax” because it does not produce “at least some revenue for the Government.” Id. at 564. Because the provision no longer produces revenue, it necessarily lacks the three other characteristics that once rendered the provision a tax. The shared-responsibility payment is no longer “paid into the Treasury by taxpayer[s] when they file their tax returns” because the payment is no longer paid by anyone. Id. at 563 (alteration in original and internal quotation marks omitted). The payment amount is no longer “determined by such familiar factors as taxable income, number of dependents, and joint filing status.” Id. The amount is zero for everyone, without regard to any of these factors. The IRS no longer collects the payment “in the same manner as taxes” because the IRS cannot collect it at all. Id. at 563–64 (internal quotation marks omitted). Texas v. United States, Slip Op. at 38. 

Because the provision no longer yields any revenue, it cannot be saved by Chief Justice Roberts’ legal gymnastics holding that it is a “tax.” In light of that, the Fifth Circuit declared: 

The proper application of NFIB to the new version of the statute is to interpret it according to what Chief Justice Roberts—and four other Justices of the Court—said was the “most straightforward” reading of that provision: a command to purchase insurance. NFIB at 562 (Roberts, C.J.). As the district court properly observed, “the only reading available is the most natural one.” Under that reading, the individual mandate is unconstitutional because, under NFIB, it finds no constitutional footing in either the Interstate Commerce Clause or the Necessary and Proper Clause. Id. at 546–61 (Roberts, C.J.); id. at 650–60 (joint dissent). Id. at 39.

 The Fifth Circuit went on in its analysis to reject various other, equally strained, arguments offered by the various states that intervened in the case to save the statute. One such argument is that the mandate “does not even need constitutional justification because it is merely a suggestion, not binding legislative action.” Id. at 40. 

The Fifth Circuit recognized this for the fraud that it is. It pointed out that the Supreme Court in NFIB “already held that the ‘most straightforward’ reading of the individual mandate—which emphatically demands that individuals ‘shall’ buy insurance, 26 U.S.C. § 5000A(a)—is a command to purchase health insurance.” Id. at 41. Apart from the “tax” twist put on the law by Chief Justice Roberts, such a mandate was ruled unconstitutional under any other provision. 

The Fifth Circuit concluded: 

Now that the shared responsibility payment has been zeroed out, the only logical conclusion under NFIB is to read the individual mandate as a command. . . . It is an individual mandate, not an individual suggestion. Id. at 41; emphasis in original. 

As a stand-alone command to purchase a product in the market place, without the essential elements of a “tax” attached to it, is it unconstitutional. This reading is consistent with Chief Justice Roberts’ reasoning in NFIB in the first place. 

Is the ACA Now Dead? 

The next question, and where there seems to be a great deal of confusion in the news, is what does the Fifth Circuit’s decision do to the entirety of the ACA? Recall that the individual mandate is just one small part of a very large, highly invasive healthcare reform law. Is the entire law now considered unconstitutional because one component was declared so? 

The short answer is no, because of the legal doctrine of “severability.” If other elements of the ACA are “inseverable from the individual mandate,” those elements would likewise be deemed unconstitutional. Id. at 44. If any separate element of the law can stand alone without the individual mandate, such element would be considered constitutional in its own right. 

The Fifth Circuit remanded the case to the district court to undertake the process of answering that complicated question. 

Thus, there is substantially more litigation in the offing to reach a final conclusion. In the meantime, there is no “penalty” for not having individual health insurance.

This is  an article from the December 2019 issue of Pilla Talks Taxes Newsletter. Subscribers to Pilla Talks Taxes are able to read complete articles as well as the rest of the newsletter when they log into their subscription account on their non mobile device. http://taxhelponline.com/subscriber-login.html 

      

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