• The Mandate/Tax Issue: 4th Circuit Preview

    Focusing for the moment on one of the tax issues in the Virginia individual mandate case (Commonwealth ex rel. Cuccinelli v. Sebelius).

    Jack Balkin (Yale), Gillian Metzger (Columbia) and Trevor Morrison (Columbia) argued that ACA §1501 was a constitutional exercise of the taxing power in an amicus brief filed in the Virginia case.  Erik Jensen at Case Western has argued in a forthcoming article that the ACA §1501 wasn’t properly structured as a tax (h/t to Mark Hall).

    I want to focus on the non-constitutional tax issue:  whether ACA §1501 (codified at §5000a of the Internal Revenue Code) qualifies as a tax for the purposes of the Tax Injunction Act, §7421 of the Internal Revenue Code.  As I blogged here last week, if it is, the payoff is significant:

    “…no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person…”  26 USC §7421(a).

    If the Tax Injunction Act applies, suits are delayed until 2014.  The remedy is to wait for the tax to be assessed and go to Tax Court, or pay the tax and sue for a refund.  In addition, if it is a tax for this federal statutory purpose, that might influence the constitutional question under the taxing power.

    The Tax Injunction Act in the 4th Circuit

    You may remember Maryland’s attempt in 2006 to penalize WalMart for having too many workers on Medicaid.  The Maryland Fair Share Health Care Fund Act was a large employer pay or play law, written in such a way that it only applied to WalMart.  The suit went to the 4th Circuit (the Virginia case will be appealed to the same circuit) and WalMart won in 2007, with ERISA pre-emption. (RILA v. Fielder)

    But the State of Maryland also claimed the protection of the Tax Injunction Act, so the 4th Circuit needed to decide whether the pay-or-play provision was a tax under 26 USC §7421(a).   All 3 judges thought it wasn’t a tax, because it was designed to apply only to WalMart and the company would increase health benefits rather than pay the penalty.  The law therefore probably wouldn’t raise any revenues. (Judge Niemeyer and Judge Traxler, at  pages 13-15)

    Judge Michael (writing separately) agreed that the Maryland law was not a tax, but gave different reasons.  His comments are worth repeating here:

    “In this case the Act was passed by the legislature and has revenue raising potential. Other indicators suggest, however, that the Act’s assessment scheme is more in the nature of a regulatory fee than a tax.  The Act applies to a very small group — only four employers. The assessment may generate revenue, but its primary purpose is punitive in nature. It assesses employers that provide substandard health benefits or none at all. Any revenue collected serves to recoup costs incurred by the state due to such behavior; collections are not deposited in the general fund. The regulatory purpose is further evidenced by the Act’s creation of a special fund administered by the Secretary of Labor, Licensing, and Regulation and dedicated to defraying the state’s Medicaid costs. These characteristics show the significant differences between the assessment imposed by the Act and a typical tax imposed on a large segment of the population and used to benefit the general public. See Valero, 205 F.3d at 135.” RILA v. Fielder, at 31.

    ACA § 1501 looks more like a tax protected by the Tax Injunction Act under Judge Michael’s rubric.  It was passed by Congress, placed in the Internal Revenue Code, and will raise revenue.  While it has a major regulatory purpose, it does not apply to a narrow group of persons, and the funds are paid to the general federal income tax account, in the same manner as all other income taxes and penalties.  I’ve summarized some of the factors below:

    Maryland Fair Share Act ACA § 1501
    Imposed by Maryland Legislature Congress
    Codified in Maryland Labor & Employment Law Internal Revenue Code (but not found in the “Revenue” provisions in Title IX of ACA)
    Raising revenue? Potentially Yes
    Imposed on WalMart Potentially millions of individuals
    Enforcement mechanism Sui generis – payments collected by the Maryland Secretary of Labor, Licensing and Regulation Imposed as a penalty on the individual income tax return, assessed and collected by the Internal Revenue Service as are all other income taxes and penalties
    Primary purpose Correct free riding Correct free riding
    Funds payable to Special state Medicaid fund General federal income tax receipts

    I’d like comments & correction on the chart, and input from tax lawyers on other interesting cases interpreting the Tax Injunction Act.

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    • While the individual mandate will likely raise revenue, it is clearly intended as a punitive measure. Those who pay the penalty rather than purchase insurance are likely to be few relative to the rest of the population. While the revenue will probably be greater than anything ever raised by Maryland, it will be extremely small compared to actual federal taxes. I believe the values for “Raising Revenue?” in the table should thus be the same for both acts.

      Also, §1501 is not “potentially” imposed on “millions of inviduals,” but rather is actually imposed on every US resident, minus some exceptions.