The New Health Dialogue

This continues our series of posts on the various constitutional challenges to the individual mandate, by Tony Cardona, an attorney who is doing some work with New America's health policy program. Read his post about the Commerce Clause here.

The President stares out the windows of the Oval Office into a cold January. He can do nothing but wait; it’s now up to the courts. Overwhelmed by a divided Congress and high unemployment, the President looks on as the agenda he muscled through Congress with political savvy is debated and challenged.  Meanwhile, the economy washes slowly and tepidly forward, seemingly on the verge of receding back into the deep, dark water. The law suits begin to surface and the President’s agenda is attacked with concern at best and contempt at worst. Ultimately, it is brought before the Nine. These represent the final judgment not only for the law, but also, possibly, for the President. Everybody waits, not knowing whether Congress has exceeded its powers. Justice Roberts sits in his chamber and drafts his opinion, joined by six other justices. His decision rejects the new Act, declares it invasive of State sovereignty, and finds that Congress has no Constitutional authority to impose such a mandate on the populace. The law is a failure. The President sits down, wondering whether his moment has passed.

Such was the scene in 1936, when Justice Owen Roberts struck down President Roosevelt’s Agricultural Adjustment Act (AAA) in the case United States v. Butler, dealing a blow to the New Deal farm policy. Justice Roberts argued that Congress cannot use its taxing and spending powers to “purchase compliance” from farmers for a regulatory purpose, where that regulation was the sole jurisdiction of the states. Although the Court established the precedent that the taxing power is valid under the general welfare clause, its regulatory effect in Butler removed it from Congress’ constitutional control.  Relying on the Child Labor Tax Case, the Court decided that the AAA was an improper exercise of the federal taxing power since it was designed as a statutory plan to regulate and control agricultural production.

United States v. Butler was decided in the final years of what is now referred to as the Lochner Era, when courts severely constrained federal regulation. However, following the 1937 decision of West Coast Hotel v. Parrish and Justice Robert's infamous switch, the Court shifted to a less restrictive view of economic regulation and FDR’s New Deal moved forward. The Court’s decisions in Steward Machine Co. v. Davis and Wickard v. Filburn (which I explained in Part 1 on the commerce clause) made Butler nearly irrelevant and the new Agricultural Adjustment Act of 1938 was found valid under the commerce clause. FDR’s policies shaped a nation emerging from an economic collapse and established a structure still relied upon today. Butler, once vibrant on a cold January day, faded.

Butler is back. In a previous post I noted that the White House changed course slightly and argued that the individual mandate was constitutional, pursuant to the power to tax. Though most legal scholars agree that the commerce clause is a sufficient source of power for the mandate, the taxing power introduces new challenges on both sides. Congressional power “to lay and collect taxes . . . for the general welfare” under Article 1 section 8 is broad, but not entire. Despite a “presumption of constitutionality,” Congress is subject to some limitations. In the current challenges to the individual mandate, the Commonwealth of Virginia has resurrected Butler to claim that these limitations, though rare, are alive and controlling.

Under current case law, the power to tax is upheld under an analysis of two factors: (1) the tax must be a genuine revenue-raising device, and (2) any regulatory effects must have a reasonable relation to the statute’s taxing purpose. For example, the government could not tax machine guns if they had already made it illegal to possess them since the regulatory purpose would be essentially irrelevant and no tax nexus would remain. Additionally, if the tax infringes on a fundamental right or is not for the general welfare it may be struck down as unconstitutional. Regardless, Courts will generally not look “into the hidden motives which may move Congress” to exercise a tax, so long as the tax, on its face is constitutional. This idea that a tax can still be legitimate despite having a regulatory effect or penalizing behavior argued in Sonzinsky v. United States (1937) and heavily relied upon by the President Obama’s lawyers, is symbolic of the post Lochner Era. However, Congress cannot regulate through taxation that which it has no power to otherwise regulate. This is Butler and this is the current tax power debate for the individual mandate.

In Commonwealth of Virginia v. Sebelius (the current lawsuit by Virginia Attorney General Cuccinelli against the individual mandate), the administration’s lawyers maintain that the Minimum Essential Coverage Provision (sec. 5000A) is a genuine revenue-raising device that is directly related to “the goal of requiring every individual to pay for the medical services they receive.”  However, Virginia argues that the tax (referred to as a “penalty” in sec. 5000A) is intended not to generate revenue but to regulate conduct. Since it would generate little if any revenue and is a penalty rather than a tax, Virginia argues, Congressional authority must be from an enumerated power -- otherwise, the provision interferes with state regulation.

The fight over the Minimum Essential Coverage Provision thus largely depends on the resolution of two crucial decisions: (1) whether the “penalty” can stand alone as a genuine tax, and (2) if not, whether Congress has the authority under the Commerce Clause to regulate economic inactivity through a tax. The government has a much tougher challenge in arguing that the penalty is a tax. In addition to President Obama’s repeated statements that the penalty is not a tax, the deliberate use of the word penalty in sec. 5000A rather than tax (tax is used in other areas of the bill to mean tax) gives the Commonwealth’s argument more credibility. Recently, Judge Hudson determined that in Commonwealth of Virginia v. Sebelius, the question whether “Congress has the power to regulate—and tax—a citizen’s decision not to participate in interstate commerce” is novel and merits a further hearing. 

The law is still on the side of reform. Courts have permitted taxes that raise only ‘negligible’ revenue. Additionally, the courts have permitted a tax even though it discourages or deters activities and thus has regulatory purpose. Taxes must only raise some revenue and be for the general welfare of the nation. If that is met, the federal government and not the individual states maintains the power. Decided five months after Butler and two months after Sonzinsky, Judge Cardozo explains in Helvering v. Davis:

“One might ask . . . whether the system of protective tariffs is to be set aside at will in one state or another whenever local policy prefers the rules of laissez faire. The issue is a closed one. It was fought long ago. When money is spent to promote the general welfare, the concept of welfare or the opposite is shaped by Congress, not the states. So the concept be not arbitrary, the locality must yield.”