The Tiny Distinction That Saved Obamacare: Why the Penalty Is a Tax

What's in a name? That which we call a health insurance penalty would by any other name raise money, John Roberts concluded. Even if you can't regulate the lack of commerce, you can always tax it.


In the two years since the Affordable Care Act was passed, the small penalty for those who don't buy health insurance had been one of the least-discussed elements of the law. The famous insurance regulations? They were the administration's darlings. The expensive subsidies for low-income families and Medicaid expansion? Those were the conservatives' and deficit hawks' biggest nightmare. And the individual mandate? That was the keystone of controversy.

But this morning, when the Supreme Court upheld the ACA, it was the often-ignored penalty that played a leading role in Chief Justice John Roberts' opinion. Because the small fee "looks like a tax," he wrote, the individual mandate could stand on the basis of Congress' broad power to tax.

But does that make any sense? How can a penalty also be a tax?

It can't.

That was the simple, stark conclusion from the dissenting Justices: Scalia, Kennedy, Alito, and Thomas. "We have never held--never--that a penalty imposed for violation of the law was so trivial as to be in effect a tax," they wrote. "We have never held that any exaction imposed for violation of the law is an exercise of Congress' taxing power--even when the statute calls it a tax." The two are mutually exclusive, they said.

Roberts disagreed -- and his distinction swung the case. Roberts argued that the penalty resembled a tax in a few ways. First, it raises money (about $4 billion a year according to the IRS) just like a tax. Second, it's paid to Treasury when households file their tax returns. Third, the fee is calculated based on taxable income and number of dependents, like taxes.

Those are three small ways the penalty is like a tax. Here is one big way: Congress has the power to tax our behavior. Do you pay a mortgage? There's a mortgage interest deduction for you. Do you have kids? There's a child tax credit.

Those are tax credits for activities. It's harder to think of an example of a tax on inactivity.* There are laws, for example, against not feeding your child, which is an example of inactivity, but that's a crime, whereas not buying insurance under ACA is not. So the credits above reward behavior by reducing our tax bill, whereas the Affordable Care Act would discourage inactivity (the failure to buy health insurance) by increasing our tax bill.

Ironically, if you go back to the oral arguments from May, Justice Scalia said something that made Roberts' point, and Justice Ginsburg said something that made the minority's point.

"The federal government could have simply said, without all of the rest of this legislation, everybody who doesn't buy health insurance at a certain age will be taxed so much money," Justice Scalia said, summing up a sentiment that's close to what Roberts ultimately concluded. But here's Ginsburg drawing a distinction she sees between taxes (which are designed to raise money) and penalties (which are purely to sway behavior):

A tax is to raise revenue, tax is a revenue-raising device, and the purpose of this exaction is to get people into the health care risk -- risk pool before they need medical care. And so it will be successful if it doesn't raise any revenue, if it gets people to buy the insurance, that's -- that's what this penalty is -- this penalty is designed to affect conduct.

Three years ago, when the health care debate was raging, Obama could have proposed a small tax increase on everybody combined with an offsetting credit for those with proof of health insurance. The effect would have been the same as the individual mandate -- no new taxes for the vast majority of households, and a "penalty" for those without insurance. Obama didn't do that, because announcing health care reform as a universal tax would have shattered the fragile support he had. But, in the end, the law on the books, now stamped with Supreme Court approval, will likely have the very same effect. The tax and the penalty are one and the same.


*Unless you take the perspective that I am being implicitly taxed by not buying a home (inactivity) since I don't have a mortgage interest to deduct.

Read The Atlantic's full coverage of the Supreme Court's health-care decision.