Tax Analysts Blog

An Easy Fix to the Questioned Constitutionality of the Individual Mandate

Posted on Feb 15, 2011

As seasoned observer of tax policy, I can only stare in slack-jawed wonder at all the hubbub over the constitutionality of the so-called “individual mandate.” Congress has decided to provide a tax incentive for people to buy health insurance. How can this be an issue? Using the tax code to provide economic incentives is as routine on Capitol Hill as a Thursday afternoon recess.

So what’s the problem? Apparently Congress framed the incentive as a tax penalty instead of a tax break. If you don’t buy insurance, you pay an extra tax when you file your annual income tax return. According to critics of the new law, this additional tax burden is a violation of fundamental freedoms sought by our founding fathers. The Federal Government can’t force you to buy things you don’t want.

Whatever the merits of the critics’ argument, it can all be sidestepped. Precisely the same economic incentive could have been formulated as a tax break instead of a penalty. Here’s how: Congress could have imposed a national health care “surtax” or “excise tax” (equal to the current penalty) to help fund Medicaid, research and disease control, etc., and the at the same time have provided “credits” to anybody who purchased insurance directly or through their employer, or did not have adequate resources, or qualified for any other exemptions under current law.

Encouraging citizens to buy certain things (houses and energy efficient cars) or engage in certain activities (go to college, adopt a child, or contribute to a church or other nonprofit) is long-cherished Washington tradition favored equally by both parties. If our proposed tax-with-credit structure is considered unconstitutional, Congress would have to repeal large portions of the Internal Revenue Code. (That’s an issue for another day.)

As a practical matter the courts should recognize the equivalence of tax incentives--whether fashioned as a tax break or a tax penalty. If they cannot, Congress may have to wait—for some time—for a second bite at the apple, but when the opportunity does arise it could re-enact essentially the same law without all the constitutional friction by adopting my simple alternative.

There would be one hitch: packaging for politics. Supporters of health care reform would have to admit that, as a starting point, they are imposing a new broad-based tax. During the long health care debate Democrats tried to move past their tax-and-spend reputations. But in so doing they jumped out of one political frying pan and into the constitutional fire.

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