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Supreme Court upholds argument that "penalty" is a tax
The U.S. Supreme Court handed down its ruling on the Affordable Care Act. The U.S. Supreme Court handed down its ruling on the Affordable Care Act.

The U.S. Supreme Court handed down its ruling on the Affordable Care Act.

By W. Gardner Selby June 28, 2012

In upholding the health care overhaul signed into law by President Obama, Chief Justice Justice John Roberts agreed a penalty in the law against those who fail to obtain health coverage amounts to a tax.

We looked more closely at this topic in an August 2010 fact check of a claim by the Republican Party of Texas, which accused the president of lying when he said that the then-new federal mandate requiring individuals to have health insurance was not a tax.

"You lie!" the party tweeted July 19, 2010. "Obama said O-care mandate wasn't a tax. Now Obama admin says it is a tax."

Did the Obama administration originally talk one way and then the other?

Per the legislation that Obama signed into law in March 2010, most people will be required to have health insurance starting in 2014. There are exceptions, but individuals who aren't exempt and refuse to join a plan will be required to pay an annual penalty of $695 per person, up to a maximum of $2,085 per family, or 2.5 percent of household income, whichever is greater. The health care law calls the fine individuals must pay if they don't have insurance a "penalty."

In a Sept. 20, 2009, interview with ABC's George Stephanopoulos, Obama denied that the mandate to buy health insurance was equivalent to a tax. "For us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase," Obama said. He noted that Americans are required to have auto insurance, but nobody considers that a tax increase. (Auto insurance is a state mandate, but all the states except New Hampshire require it of resident drivers.)

When Stephanopoulos pressed Obama on whether the mandate was a tax, Obama said: "I absolutely reject that notion."

However, on July 16, 2010, The New York Times published a story that seemed to vindicate opponents of the health care overhaul who argued that the insurance requirement was a tax. The headline: "Changing stance, administration now defends insurance mandate as a tax."

Texas was among states that challenged the law's constitutionality in court, but Virginia was the first to face the federal government in a July 2010 hearing on its lawsuit. The New York Times pointed to a brief filed in that case by the U.S. Department of Justice defending the individual mandate as "a valid exercise" of the federal government's "power to lay and collect taxes." Congress can impose taxes to provide for the "general welfare" under Article I of the Constitution.

From the health-care law: "The requirement regulates activity that is commercial and economic in nature: economic and financial decisions about how and when health care is paid for, and when health insurance is purchased." The law then says that national health spending is projected to increase from $2.5 trillion — 17.6 percent of the economy — in 2009, to $4.7 trillion in 2019.

In its legal brief, the department says the penalty is also a tax because it will raise revenue — $4 billion a year by 2017, according to the nonpartisan Congressional Budget Office — and because it's imposed and collected under the Internal Revenue Code. Individuals who refuse to obtain health insurance and are penalized will have to report the fine "as an addition to income tax liability," the brief says.

The health care law itself doesn't mention Congress' taxing authority, instead noting that the mandate is protected under the Constitution's Article I "commerce clause," which lets Congress regulate commercial activity that has a substantial effect on the national economy.

"The tax argument is the strongest argument," the Times quoted Jack Balkin, a professor at Yale Law School who supports the law, saying. "This bill is a tax. Because it's a tax, it's completely constitutional." Balkin is also quoted saying that Obama "has not been honest with the American people about the nature of the bill."

White House spokesman Matt Lehrich defended the law both ways last week, telling us: "We believe that the Commerce Clause provides ample constitutional authority for the individual mandate. If anyone has any doubts about that — and we don’t think they should — it’s also clear that that the mandate is constitutional under Congress’s power to tax."

Similarly, Steven Schwinn, an associate professor of constitutional law at the John Marshall Law School in Chicago, pointed out on his blog July 18, 2010, that the Obama administration has consistently defended the mandate in court primarily under the Commerce Clause, and secondarily under Congress' taxing power to promote the general welfare.

Henry Aaron, a scholar who specializes in health care and tax policy at the liberal-leaning Brookings Institution, told us in 2010 that Obama was correct to say the mandate isn't a tax. "A mandate is meaningless unless it is backed up by some 'or else,' as in 'obey the mandate or else,' " Aaron said. "The administration asserted the legal power to impose a mandate. The mandate is backed up by a tax that has to be paid if the mandate is violated. You obey the mandate or you pay the tax."

Upshot: In his interview with Stephanopoulos, Obama insisted the mandate to purchase health coverage is not a tax. But in defending its legality, the Justice Department argues in part that the mandate is a valid exercise of Congress' taxing power.

Our judgment at the time was that Obama was trying to make a political point; the Justice Department, a legal one.

That said, we rated the GOP's recap of Obama's early position and his administration's defense of the law in court as Mostly True.


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Supreme Court upholds argument that "penalty" is a tax