Under the Articles of Confederation, Congress lacked the power to protect the states from military warfare waged by foreigners and from commercial warfare waged by one another. The states proved unable to solve these difficulties on their own. They acted individually when they needed to act collectively, and the Framers of the United States Constitution concluded that the states cannot reliably accomplish an objective when doing so requires them to cooperate.
Arguably the most severe problem facing the young nation under the Articles was that the national government had no power to tax individuals directly; indeed, it had no effective way of raising money at all. Instead, it was limited to “requisitioning” (that is, asking) the states to contribute their fair share of tax revenue to the national treasury in order to repay the Revolutionary War debts and fund the national government. Instead of complying with these requests, states free rode off the contributions of sister states. The consequence was that the national government was severely underfunded, which (among other things) gravely threatened national security.
The solution to the collective action failures of the Articles lay with the establishment of a more powerful and comprehensive unit of government—a national government with the authority to tax, raise and support a military, regulate interstate and international commerce, and act directly on individuals. The Taxing Clause of Article I, Section 8, is listed first for a reason: the Framers decided, and the ratifiers of the Constitution agreed, that Congress must itself possess the power “to lay and collect Taxes . . . to pay the Debts and provide for the common Defence and general Welfare of the United States.” Congress was given the power to assess, levy, and collect taxes without any need of assistance from the states, and Congress’s taxing power was not limited to repayment of the Revolutionary War debts—it was prospective as well.
After the Constitution was ratified, Alexander Hamilton (representing the Federalist Party) and James Madison (representing the Democratic Republican Party) debated the scope of the Taxing Clause. According to Hamilton, Congress possessed a robust power to tax (and spend) regardless of whether the tax (or expenditure) could plausibly be viewed as carrying out another enumerated power of Congress, such as regulating interstate commerce or raising and supporting a military. Madison argued that Congress had no independent power to tax and spend in pursuit of its conception of the general welfare; rather, Madison contended, the constitutional meaning of the phrase “general Welfare” is defined and limited by the specific grants of authority in the rest of Section 8. The Supreme Court did not weigh in on this longstanding debate over the scope of the federal taxing and spending powers until 1936, in United States v. Butler (1936), when it sided with Hamilton. Ever since, the law has been that Congress can use the Taxing Clause without tying such use to another of its constitutional powers.
What are the constitutional limits on Congress’s authority to use the Taxing Clause? It is clearly established that such power is limited by constitutional provisions protecting individual rights. For example, it would undoubtedly violate the Free Speech Clause if Congress taxed people just because they criticized the federal government.
More controversial is whether there are internal limits on the Taxing Clause, and whether they may be enforced by courts. Relatively early in American history, the Supreme Court suggested, in McCulloch v. Maryland (1819), that redress for misuse of the taxing power lies with the political process, where unhappy citizens can vote politicians out of office. Later, the Court suggested that courts, too, may enforce the limits on the Taxing Clause, and that Congress exceeds its power when it imposes monetary payments that have the primary purpose of regulating people’s behavior, not of raising revenue, even when Congress labels the payment a “tax,” not a “penalty.” Child Labor Tax Case (Bailey v. Drexel Furniture Co.) (1922). In more recent times, the Court sustained the constitutionality of required payments just because they raised at least some revenue. Sonzinsky v. United States (1937); United States v. Kahriger (1953). Because decisions from one era deviated from earlier decisions without overruling them, the Court’s Taxing Clause jurisprudence was for a long time difficult to sort out.
In 2012, in NFIB v. Sebelius (the Health Care Case), the Court clarified much of the confusion. It rejected a focus on the primary purpose of the required payment at issue, observing that in America, “taxes that seek to influence conduct are nothing new. Some of our earliest federal taxes sought to deter the purchase of imported manufactured goods in order to foster the growth of domestic industry.” Instead of asking about the primary purpose of the required payment, the Court adopted a “functional approach,” and made whether the payment was a tax or a penalty turn on the “practical characteristics” and likely effects of the payment.
Specifically, the Court held that the so-called “individual mandate” in the federal health care law (the requirement to either obtain health insurance or make a payment to the federal government) was within the scope of the Taxing Clause—even though Congress labeled the payment a “penalty,” not a “tax”—primarily because it was likely to have a relatively modest impact on people’s behavior. The Court reasoned that the required payment would likely discourage people from going without insurance without preventing them from doing so, which is why it was expected to raise several billion dollars in revenue each year. The Court’s holding in NFIB on the scope of the Taxing Clause is today the law of the land.
The Taxing Clause solved perhaps the single greatest collective action failure of the states under the Articles of Confederation: the serial inability of the several states to adequately fund the national government in light of free riding by sister states. See, e.g., Robert D. Cooter & Neil S. Siegel, Collective Action Federalism: A General Theory of Article I, Section 8, 63 Stanford Law Review 115 (2010). This failure caused serious financial problems for the young, vulnerable nation and raised grave national security concerns. Where the colonists had insisted that “taxation without representation” was illegitimate, Americans under the Articles learned that taxation with representation was indispensable.
And so the Constitution confers upon Congress robust taxing authority. Congress was granted the power in the initial clause of Article I, Section 8, “to lay and collect Taxes” not just to repay the Revolutionary War debts—the most immediate concern of the country at the time—but more broadly and prospectively to “provide for the common Defence and general Welfare of the United States.”
Are there any internal constitutional limits on Congress’s authority to use the Taxing Clause—limits that courts should be prepared to enforce? Many progressive constitutionalists would say “no.” They would follow Chief Justice John Marshall’s suggestion in McCulloch v. Maryland (1819), that the power to tax, where it exists, “is the power to destroy.” On this view, redress for misuse of the federal taxing power lies with the political process, where angry citizens who feel overtaxed can “vote the bums out.” Progressive constitutionalists often believe in political safeguards, not judicial safeguards, to limit the exercise of legislative power by the federal government.
My own view is closer to that of Justice Oliver Wendell Holmes, who famously wrote (at a much later date in American history) that the power to tax, while broad, “is not the power to destroy while this Court sits.” Panhandle Oil Co. v. Mississippi ex rel. Knox (1928) (Holmes, J., dissenting). The text of the Taxing Clause is best read to require that exercises of the taxing power be consistent with revenue-raising, regardless of whether raising revenue—as opposed to regulating human behavior—is Congress’s primary purpose. (The Taxing Clause, unlike the Origination Clause of Article I, Section 7, does not require that Congress’s purpose be “for raising Revenue.”)
Moreover, without any enforceable limits on the Taxing Clause, Congress could readily circumvent even very modest limits on the scope of the Commerce Clause. For example, the Supreme Court has held for more than two decades that the Commerce Clause empowers Congress to use penalties to regulate economic conduct that substantially affects interstate commerce, but not to regulate noneconomic conduct. What prevents Congress from penalizing non-economic conduct by calling a penalty a tax and invoking the Taxing Clause? The only obstacle is the distinction between a penalty and a tax for purposes of the federal tax power.
This essay is part of a discussion about the Taxing Clause with Steven J. Willis, Professor of Law, University of Florida Levin College of Law. Read the full discussion here.
In NFIB v. Sebelius (2012), the Court considered whether the minimum coverage provision in the Patient Protection and Affordable Care Act (ACA) imposes a penalty or a tax by requiring most individuals to either obtain health insurance or make a payment to the Internal Revenue Service. Writing for the Court, Chief Justice Roberts concluded that this “shared responsibility payment” for going without insurance is a tax for purposes of the Taxing Clause, even though Congress called it a penalty.
Along with Robert Cooter, I have developed an effects theory of the federal tax power in order to distinguish between penalties and taxes. See Robert D. Cooter & Neil S. Siegel, Not the Power to Destroy: An Effects Theory of the Tax Power, 98 Virginia Law Review 1195 (2012). We believe that the Court’s tax-power ruling in NFIB is correct, and that our effects theory provides the best theoretical justification for it.
The effect of a penalty is to prevent conduct, thereby raising little revenue, whereas the effect of a tax is to dampen conduct, thereby raising revenue. Three characteristics of a mandatory payment create incentives that either prevent or dampen conduct. These characteristics provide criteria for distinguishing between penalties and taxes. A pure penalty (1) condemns the actor for wrongdoing; (2) she must pay more than the usual gain from the forbidden conduct; and (3) she must pay at an increasing rate with intentional or repeated violations. Thus, a penalty expressively coerces a person by condemning her conduct, and it materially coerces a person with relatively high rates and enhancements for repeated violations. Alternatively, a pure tax (1) permits a person to engage in the taxed conduct; (2) she must pay an amount that is less than the usual gain from the taxed conduct; and (3) intentional or repeated conduct does not enhance the rate. A tax does not coerce expressively because it permits the person to engage in the taxed conduct. And it does not coerce materially because relatively low rates without enhancements leave the person with a reasonable financial choice to engage in the taxed conduct.
The ACA’s required payment for remaining uninsured has the expression of a penalty and the material characteristics of a tax (the Court in NFIB called them “practical characteristics”). The constitutional identity of this required payment for purposes of the Taxing Clause depends upon the reasonable expectations of Congress concerning its effect. If Congress could have reasonably concluded that the exaction will dampen—but not prevent—the general class of conduct subject to it (people going without health insurance) and thereby raise revenue, then courts should interpret it as a tax regardless of what the statute calls it. If Congress could have reasonably concluded only that the exaction will prevent the conduct of almost all people subject to it and thereby raise little or no revenue, then courts should interpret it as a penalty.
In the case of the minimum coverage provision in the ACA, the non-partisan Congressional Budget Office predicted that the required payment for non-insurance would dampen uninsured behavior but not prevent it, thereby raising several billion dollars in revenue each year. Accordingly, the payment is a tax for purposes of the Taxing Clause.
Without the power to tax, a government will have few resources to do anything. It cannot effectively police its citizens, protect its people from foreign invaders, or regulate commerce because it cannot pay the associated costs. Discarding the Articles of Confederation—which merely allowed Congress to ask states for money—the drafters effectively adopted a taxing document – the U.S. Constitution. The Constitution gave Congress the power to lay taxes and also to collect them. Taxes—more precisely, the money they provide—make all other government actions possible. One might think about that in relation to present-day loose confederations such as the United Nations, NATO, and the European Union. Without the enforceable power to tax, they are necessarily subject to the potentially fleeting willingness of members to contribute.
The U.S. taxing power, while very broad, has important limitations. First, direct taxes must be apportioned, a very difficult requirement. Second, duties, imposts, and excises must be uniform—an easy-to-meet standard, but one which, if ignored, can be fatal to a statute. See, Steven J. Willis & Hans G. Tanzler IV, Affordable Care Act Fails for Lack of Uniformity, 27 U. Fla. J. Law Pub. Pol’y 81 (2016). Third, bills for “raising revenue” must originate in the House. Although “raising revenue” and “taxing” are not fully the same, the overlap is substantial and can have important consequences. See, Steven J. Willis & Hans G. Tanzler IV, The Wrong House: Why “Obamacare” Violates the U.S. Constitution’s Origination Clause, Wash. Leg. Found. Critical Legal Issues Number 190 (2015).
Fourth, under the Sixteenth Amendment, “income taxes” apply only to “income” “derived” “from a source.” What constitutes an “income tax,” let alone “income,” and what “derived” “from a source” means have been subject to more than one hundred years of debate. Essentially, a taxpayer must experience an “accession to wealth” from an event such as a sale, exchange, or receipt. See, Steven J. Willis & Nakku Chung, Of Constitutional Decapitation and Healthcare, 128 Tax Notes 169, 189-93 (2010). A mere increase in value is not “income” and thus cannot be taxed to humans. For entities, such as corporations, however, a tax on value increases is not an income tax; instead, it is an excise subject merely to uniformity. Flint v. Stone Tracy Co. (1911). To summarize: the power to tax humans differs substantially from the power to tax entities.
Fifth, taxes exist in the presence of various power limitations and personal rights found in the Constitution. Although the application of a tax surely cannot violate the Equal Protection Clause, the Supreme Court has more generally held that the Due Process Clause does not restrict the taxing power. A. Magnano Co. v. Hamilton (1934) (“Except in rare and special instances, the due process of law clause contained in the Fifth Amendment is not a limitation upon the taxing power conferred upon Congress by the Constitution. Brushaber v. Union Pacific Railroad Co. (1916). And no reason exists for applying a different rule against a state in the case of the Fourteenth Amendment.”) Recognizing the lack of constitutional due process protections, Congress statutorily created “collection due process” limitations. See, Steven J. Willis & Nakku Chung, No Healthcare Penalty? No Problem: No Due Process, 38 Am. J. Law & Med. 516 (2013). Those important protections, however, are subject to the whim of future Congresses.
This essay is part of a discussion about the Taxing Clause with Neil S. Siegel, David W. Ichel Professor of Law and Professor of Political Science, Duke Law School. Read the full discussion here.
Sixth, arguably taxes must be imposed “for the general welfare.” A close reading of Article One, Section Eight suggests the limitation actually restricts the spending power rather than the taxing power. Interestingly, in NFIB v. Sebelius (2012), Justice Ginsburg spoke of the general welfare restriction as applying both to taxing and spending. In contrast, Chief Justice Roberts twice discussed the restriction, but only in terms of the spending power. In any event, this restriction is easily met and thus largely inconsequential.
Lastly, the reach of taxing power limitations remains partially unclear, even 225 years after the adoption of the Constitution. The Federalist Papers spoke of two broad tax categories: direct and indirect, with direct being subject to apportionment and indirect being subject to uniformity. The Constitution, however, does not quite say that. Instead, it first grants Congress broad taxing power. It then requires that direct taxes be apportioned. Next, it requires that duties, imposts, and excises be uniform. It never uses the term “indirect.” This leaves open the question of whether some other type of tax is possible, which need be neither apportioned nor uniform. In 1796, the Supreme Court suggested, but did not hold, that any such “other” tax must be uniform. Hylton v. United States (1796) (Chase, J.). Over the past two hundred years, the Court has routinely spoken of taxes as being either direct or indirect; however, it has yet to consider a case holding “indirect taxes” as encompassing duties, imposts, and excises and nothing more. As a result, the question remains at least technically unresolved.
Arguably, the Affordable Care Act tax is just that: a newly found type of tax. In NFIB, the Supreme Court held it was a tax, but not a direct one. Traditionally, duties, imposts, and excises each involve some activity: duties and imposts involve imports and transactions, while excises involve an activity, the use of something, or the exercise of a privilege. Not having health insurance does not seem to fit within any of those categories because it involves not doing something rather than doing something. The commerce clause holding in NFIB rested on inactivity not being “commerce.” Whether the Court will apply analogous reasoning to the meaning of “duties, imposts, and excises” is uncertain but plausible. The ACA tax on the lack of insurance need not be apportioned because the Court said so in 2012. The tax appears not to be uniform; however, whether it must be uniform is less clear and remains to be litigated.
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