Not the Power to Destroy: An Effects Theory of the Tax Power

The Supreme Court’s “new federalism” decisions impose modest limits on the regulatory authority of Congress under the Commerce Clause. According to those decisions, the Commerce Clause empowers Congress to use penalties to regulate interstate commerce, but not to regulate noncommercial conduct. What prevents Congress from penalizing non-commercial 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 Article I, Section 8. In National Federation of Independent Business v. Sebelius (NFIB), 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 buy health insurance or make a payment to the Internal Revenue Service. Writing for the Court, Chief Justice Roberts concluded that the minimum coverage payment is a tax for constitutional purposes, even though Congress called it a penalty.

This Article develops an effects theory to distinguish between penalties and taxes. We believe that it provides the best theoretical justification of the tax-power holding in NFIB. 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 opposing characteristics of an exaction give incentives for preventing or dampening conduct, and thus provide criteria for distinguishing between penalties and taxes. A pure penalty condemns the actor for wrongdoing; she must pay more than the usual gain from the forbidden conduct; and she must pay at an increasing rate with intentional or repeated violations. Condemnation coerces expressively and relatively high rates with enhancements coerce materially. Alternatively, a pure tax permits a person to engage in the taxed conduct; she must pay an exaction that is less than the usual gain from the taxed conduct; and intentional or repeated conduct does not enhance the rate. Permission does not coerce expressively and relatively low rates without enhancements do not coerce materially.

The ACA’s required payment for non-insurance has a penalty’s expression and a tax’s materiality. Its constitutional identity depends on 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 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, the Congressional Budget Office predicts that the exaction for non-insurance will dampen uninsured behavior but not prevent it, thereby raising several billion dollars in revenue each year. Accordingly, the exaction is a tax for purposes of the tax power.