Health Law

VIRGINIA HEALTHCARE REFORM DECISION: TAX OR PENALTY, INDIVIDUAL RIGHTS OR COLLECTIVE RESPONSIBILITY?

By Greg Piche'

      One of the interesting components of the evisceration of the the ?Minimum Essential Coverage? provision in the health care reform bill, (?ACA?) by Virginia Federal District Court Judge Henry E. Hudson, recently is his rejection of the government?s assertion that the ?penalty? contained in Section 1501 of the ACA for the failure to purchase health insurance was not a viable ?excise tax? under the Constitution.  The Taxation Power of the Congress is as broad as any of its enumerated powers.  Article I, Section 8, Cause 1 gives the Congress the power to lay and collect taxes and judicial review of the Congressional power to lay and collect taxes is narrow and limited.

        Excise taxes are sometimes called ?sin? taxes because they attempt to extract revenue to cover public expense occasioned by the activity taxed. Taxes on alcohol, cigarettes, highway usage and other grounds have been around at least as long as the ?Whiskey Rebellion? following the American revolution. The taxation of ?inactivity? or failures to follow active direction by the Congress as a basis for imposing excise taxes is rare.  Historically the courts have made a distinction between revenue raising taxes and pure ?penalties.?

        The government, in Commonwealth of Virginia v. Sebelius, in the United States District Court for the Eastern District of Virginia (2010) argued that the distinction between taxes and penalties were essentially an anachronism in the law with the jurisprudence on the issue largely superannuated. It referred to the penalty as a ?tax penalty.?  It asserted that every tax to some extent has a regulatory purpose. It?s position was and is that if the measure is revenue raising (here $4Billion) and rationally related the the requirement that everybody pay for health care services received then that is the ?end of the ballgame.?

        Virginia, by contrast, perhaps metaphorically summoning the words of Yogi Berra, that ?its not over until its over,? stressed that the scope of the undertaking is without a modern counterpart and that the cases from the twenties and thirties dealing with the distinction between tax and penalty were still viable, although infrequently summoned. The Court agreed that the provision had only the ?incidental effect? of raising revenue and that the tax argument was a ?transparent afterthought.? It noted that the term ?tax? in section 1501 was changed by the Congress to ?penalty,? while other provisions referred specifically to ?taxes? indicating an intention by Congress that the penalty be treated as something other than a tax.

      While the penalty provision is listed in the section referred to as ?miscellaneous excise taxes,? the Court suggested that the term was merely ?docked in a convenient harbor.? The Court also rejected what it referred to as the ?criticism of constitutional scholars regarding the non-viability of the earlier tax cases. Judge Hudson found that the ?penalty? was not a tax and that the absence of a constitutionally viable exercise of the Commerce clause was fatal to the sanction for non-compliance. He also noted that there is no precedent for the regulation of a person?s decision not to purchase a product.

?The unchecked expansion of congressional power to the limits suggested by the Minimum Essential Coverage Provision would invite unbridled exercise of federal police powers. At its core, this dispute is not  simply about regulating the business of insurance - or crafting a scheme of universal health  insurance coverage - its about an individual?s right to choose to participate.?

       It thus seems to come down to the ongoing and historic tension between individual rights and collective responsibility.  Can an individual under a claim of individual perquisites elect to?game the system? by not purchasing health insurance when he or she can purchase insurance in the event of illness or injury in the future or at minimum appear in a hospital emergency room for urgent treatment where they cannot be turned away for failure to pay. If the individual were able to accept and be personally and exclusively responsible for all of the financial and human ramifications if his or her failure to maintain insurance in the future without burdening the public and collective safety net, this argument would be easy to resolve in favor of individual rights. Unfortunately that is not the case here. 

Full post as published by Healthcare Law Blog on December 16, 2010 (boomark / email).