Kellogg School of Management at Northwestern University

US Supreme Court

This morning, the Supreme Court upheld Affordable Care Act’s individual mandate. While the biggest surprise was Chief Justice John Roberts’s siding with the majority in the case, a close second was how the majority interpreted the constitutionality of the of the mandate. They said the mandate is a tax, not an extension of the Commerce Clause.

Confused as to what exactly that means? I asked Thomas Brennan, an associate professor of law at Northwestern with a joint appointment in finance at the Kellogg School, to clarify things.

Brennan said the main question before the Supreme Court was which part of the Constitution allowed Congress to penalize people who don’t get health insurance. There were two main possibilities, the Commerce Clause, which gives Congress the right to regulate commerce between states, and the 16th Amendment, which grants Congress the power to levy taxes without doling it out to the states or basing it on Census results.

That the taxation argument won caught people by surprise. The Commerce Clause has been why many laws enacted by Congress have passed legal muster, including the Civil Rights Act of 1964 and various parts of the New Deal. It was also seen as the part of the Constitution on which the mandate would be either upheld or struck down.

The taxation issue “was not briefed or argued in nearly as much detail as the Commerce Clause issue, and I don’t think that most people thought it would carry the day for the new law,” Brennan said.

Part of that surprise stems from the Commerce Clause’s wide applicability. “Over the years, the nature of what exactly constitutes ‘Commerce’ for this purpose has been broadened considerably,” Brennan said.

In the Affordable Care Act case, “One argument was that the penalty provision now came within its scope as well. Another argument was that this was far beyond the intended meaning of the Commerce Clause, particularly because it charged people a penalty for inaction rather than for action. The Supreme Court decided, essentially, that this latter argument was more correct—the Commerce Clause does not go this far. As a result, today’s opinion can be seen as reining in, to a degree, the expansion of the Commerce Clause to new areas.”

While four of the five in the majority supported the mandate under the Commerce Clause, Justice Roberts did not. Yet even though he didn’t support the Commerce Clause argument, he didn’t invalidate the mandate, either. Instead, he said the mandate acted as a tax on the people who have to pay it, which is within Congresses powers.

But as with many aspects of law, there’s a lot more to this decision than meets the layperson’s eye. “The tricky thing here is that the constitution requires ‘capitations’ and ‘direct taxes’ to be apportioned among the states, which means that the amounts collected need to be pro rata across the states according to the populations of the states as recorded by the Census,” Brennan said.

“There is a critical question here of what a ‘capitation’ or ‘direct tax’ is, and it is murky and complicated,” he continued. “The relevant prior Supreme Court cases that deal with the issue are over 100 years old, and some of them over 200 years old. The answer is not completely clear, but it seemed very plausible that the penalty might be a ‘capitation’ or ‘direct tax’ and thus be subject to apportionment. This would have eliminated the taxing power as a basis for upholding the penalty provision, since apportionment among the states was not what the law was doing.

“What the Supreme Court did today, though, was to really significantly simplify and expand the interpretation of what things are neither ‘capitations’ nor ‘direct taxes’ and thus are things which Congress has the power to collect from people under its taxing power, without apportionment.”

In the last century or so, few Supreme Court rulings have limited the expansion of the Commerce Clause. This ruling went against that trend. “But that was significantly offset by a new door to Congressional power that was opened by reading the taxing power as far more broad than it had previously been understood to be,” Brennan said.

Brennan also noted that while today’s ruling was influential, he’s not sure how it will affect legislation or court rulings in the future. “In principle, it opens up the door to many other things being deemed taxes that are not subject to apportionment and letting Congress collect penalties or taxes from people for all sorts of things,” he said. “For right now, though, it simply means that the penalty provision of the health care law has been upheld.”

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