Tax or penalty? Tax law enters Supreme Court debate on health reform

A post-Civil War era law took a pivotal role in whether the Supreme Court has the authority to consider the health reform law. The Supreme Court justices listened to arguments March 26 about whether they have jurisdiction in the lawsuit brought by 26 states  against the federal government over the constitutionality of the health reform law.

At front and center was the Anti-Injunction Act, passed in 1867, which bars bringing a lawsuit against a tax before it takes effect and payment is enforced. The justices could, if they so rule, end up delaying the decision of the historic battle over health reform until after the November elections.

Under the Patient Protection and Affordable Care Act (ACA), individuals who do not obtain health coverage as part of the individual mandate risk having to pay a penalty when they submit their annual tax returns.  That means it will be 2015, and after the elections, before a penalty is enforced, and a lawsuit could be considered.

The justices must decide if the individual mandate fine is indeed a tax or a penalty, and if the Anti-Injunction Act applies in this situation.

[See also: Ruling on health reform expected to impact healthcare market.]

During the 90 minutes of technical legal arguments, the justices asked questions of the attorneys that indicated that their arguments were not altogether clear and definitive.

Robert Long is the attorney appointed by the Supreme Court to argue that the Anti-Injunction Act applies because neither the federal government nor the states recommended that the justices invoke the act. “Everyone agrees that the penalty will be assessed and collected like a tax,” Long said.

“But Congress did not use the word tax in writing the statute (ACA),” although it is evident what they wanted to do, said Justice Stephen Breyer.

The federal government and the states bringing the lawsuit agree that the Anti-Injunction Act does not apply, but for different reasons, and that the Supreme Court has jurisdiction here.

The federal government considers the insurance mandate consequence a penalty for the purposes of the Anti-Injunction Act and a tax for consideration of the individual mandate, said Donald Verrilli Jr., the Solicitor General.

“The nature of the inquiry is different tomorrow [for the insurance mandate] than the inquiry today,” he said. 

The only consequence for not obtaining health insurance is the penalty collected at tax time, and the penalty is not in the IRS tax code but is being used as a collector, he said.