Update: Health insurance credits and penalties

by havoc

In a post a couple months ago I argued that a given financial effect on an individual could be called a “tax increase plus a tax credit for doing XYZ,” or a “tax penalty for not doing XYZ,” and that the two are identical in terms of how many dollars all parties involved end up with. Based on that, I was wondering why a tax penalty for not buying insurance would be legally different from the existing, longstanding tax credits for buying insurance.

Two of the judges in the recent Sixth Circuit opinion upholding the law addressed this issue, though the court as a whole declined to rule on taxing power grounds (because they upheld the law on commerce clause grounds anyway).

First reaction: wow, the Sixth Circuit reads my blog and answers my questions! Nice!  (Note to the thick: kidding.)

I was arguing (as a non-lawyer) that the government shouldn’t have the power to do something, or lack that power, based purely on what label they stick on it. Surely if the individual mandate were unconstitutional, the government could not fix the constitutional problem with a rewording that would have no practical effect. Should abridging free speech or skipping due process become OK as long as we use the right words to describe them?

(A small twist that might merit a footnote: due to a special rule in the health care bill, the IRS isn’t allowed to enforce the individual mandate’s penalty as strongly as they can enforce falsely claiming a credit. That’s a small practical difference between the penalty and a credit, but one that makes the penalty a weaker infringement on individual rights than the existing credits.)

In the Sixth Circuit opinion, the two judges addressing the tax issue write (see page 29 for the relevant stuff):

…it is easy to envision a system of national health care, including one with a minimum-essential-coverage provision, permissibly premised on the taxing power. Congress might have raised taxes on everyone in an amount equivalent to the current penalty, then offered credits to those with minimum essential insurance. Or it might have imposed a lower tax rate on people with health insurance than those without it.

That is, they agree with me that the tax increase plus the credit would have been the same thing as the penalty, economically speaking. (“Economically speaking” = the same parties end up with the same number of dollars in the same situations.)

But they go on and say it matters what you call it. In other words, they argue the taxing power does not include tax penalties for XYZ, but does include tax credits for not-XYZ.

I thought that was an absurdity proving either 1) the penalty is allowed or 2) the credits are not allowed, depending on your political bent. They embraced the position I found absurd. Lawyers! (eye roll) (Sorry, lawyer friends.)

I see a big gap between those who are all for, or up in arms about, the individual mandate (everyone cites political-philosophy-oriented arguments), and what the two judges are arguing here. Those I’ve heard arguing about political philosophy would be against both penalty and credit, or for both penalty and credit. I don’t know of a philosophical argument where the labeling makes the difference.

Relabeling something doesn’t change what rights an individual has, or what rights a state has, in practice. The distinction, if any, is legalistic.

I’m imagining the founding fathers: “Call it a credit rather than a penalty, or give me death!”

I’m blown away that a law with such huge practical effects — some will say positive, some will say negative, not the point — can be in limbo over this. Neither advocates nor opponents of reform would consider the wording of the bill “what’s at issue,” but it could be what the courts base a decision on. Congress, break out your thesaurus next time.

(As with the previous post, spare us the generic debate about health care reform in the comments, we’ve all heard it before. I haven’t heard much discussion of this very specific legal topic though, insights are welcome on that.)