Archives: November, 2011

Obamacare’s Footnote Four

This post was co-authored by Cato legal associate Chaim Gordon.

Freedom-loving lawyers everywhere recoil in horror at the mere mention of “footnote four.” In that infamous citation in the 1938 case of Carolene Products, the Supreme Court officially renounced judicial review of laws that infringe on economic liberty. This week, in his dissent from the D.C. Circuit opinion that upheld the individual mandate on Commerce Clause grounds, Judge Brett Kavanaugh added his own dubious “footnote four.”

Judge Kavanaugh’s 65-page dissent was devoted to his parsimonious reading of various provisions in the Internal Revenue Code, culminating in the conclusion that the Anti-Injunction Act robbed federal courts of jurisdiction to hear the case until the mandate penalty is actually enforced. As Judge Kavanaugh noted, “the Tax Code is never a walk in the park.” But the Tax Code is even more grueling when you are given lousy legal advice. And that is why footnote four – in which Judge Kavanaugh inexplicably decides to publicly thank former IRS commissioners Mortimer Caplin and Sheldon Cohen and their counsel for their amicus brief – is so troubling. Here is his footnote four:

Both sides before us want this case decided now and contend that the Anti-Injunction Act does not bar this suit. The amicus brief of former IRS Commissioners Mortimer Caplin and Sheldon Cohen, submitted by able counsel Alan Morrison, cogently argued the opposite position. The Court is grateful to amici and counsel for their assistance.

But it is entirely unclear why Commissioners Caplin and Cohen and Counsel Morrison deserve the court’s thanks. For starters, the Caplin and Cohen brief was not advocating either of Judge Kavanaugh’s nuanced readings – be they correct or not – of various provisions in the Internal Revenue Code. (It did, however, make one of Kavanaugh’s main arguments in response to one of the government’s arguments toards the end of the brief.) Rather, the Caplin and Cohen brief broadly asserts that the AIA “prevents courts from reviewing all claims involving payments under the Code, not just those labeled taxes.”

The problem is that, in support of this broad, sweeping assertion, the Caplin and Cohen brief misleadingly cites cases that do not support its claim. That is, almost all the cases cited by the Caplin and Cohen brief specifically relied upon the fact that the penalties at issue were found in chapter 68 of the IRC or were part of a larger taxing scheme (as in the Mobile Republican case). But you would not know that from reading the Caplin and Cohen brief.

Take, for example, the Caplin and Cohen brief’s citation to Shaw v. United States and Botta v. Scanlon as “perhaps the best illustration of the breadth of the applicability of” the AIA. What the Caplin and Cohen brief does not say is that both of these cases specifically rely upon provisions in the IRC that define the penalty at issue in those cases (under section 6672) as taxes for the purposes of the AIA. Those provisions, by their own terms, only apply to penalties under chapter 68 of the Code, and the penalty for violating the individual mandate is in chapter 48.

This is really green-eyshade stuff, we know, but that’s what this litigation has come to – and it’s why tax lawyers are not suffering the higher rates of unemployment of their peers in other specialties.

To make matters worse, Caplin and Cohen filed essentially the same amicus brief with the Supreme Court in one of the cases that the Court will take up at its cert petition conference this week. This is especially alarming because the government has urged the Court to appoint an amicus counsel to argue for the position that the AIA applies to the penalty for violating the individual mandate (even though the government now agrees with the mandate’s challengers that the AIA does not apply).

We think the justices’ clerks are fully capable of advising their bosses on the pro-AIA arguments, which in any event does not apply to the 26 state plaintiffs in the Eleventh Circuit case.  Plus the Court has the Fourth Circuit’s and now Judge Kavanaugh’s thorough “briefs.” If the Court does decide to appoint an amicus to argue that issue, however, let’s hope that it receives better legal advice than the D.C. Circuit got from Caplin and Cohen.

Just How Much of the Mortgage Market Is Over $625,000?

On October 1st the maximum loan limit for Fannie Mae and Freddie Mac declined from around $729,000 to just over $625,000.  Not surprisingly the real estate industry and Fannie apologists are claiming that this would cause the housing market to crater.  It would seem to me that this claim would greatly depend upon just how much of the market will be impacted.

Fortunately one can try to answer that question.  According to Federal Reserve data, collected under the Home Mortgage Disclosure Act (HMDA), the percent of home purchase mortgages between $729,000 and $625,000 is less than 1% of the market.  So we are arguing over increasing mortgage rates for only 1% of the market?  I fail to see how such is going to have much of an adverse impact on the mortgage market.

If we were to go back to the pre-crisis loan limits of $417,000, we’d only have about 8% of the mortgage market not under the conforming loan limit.  So instead of talking about a decrease to $625.000 we should be at least talking about a decrease to $417,000.  Going even further to just over $200,000 would still leave Fannie and Freddie with a majority of the market.

For those that believe that declining loan limits unfairly hit “high cost” areas, then the solution to me would be to abandon any loan limits altogether and base eligibility on income, as we do in the Rural Housing Programs (which I believe have a limit of 115% of state median income).  Of course this sets aside the fact that many “high cost” areas are expensive because of their harmful and misguided land use policies.

A Misimpression of Constitutional Moment

A little bit of errant security information made its way into the Supreme Court’s oral argument in U.S. v. Jones this week. Justices Ginsburg, Kagan, and Breyer were testing the fairly narrow limits of the position advocated by Jones’ counsel. He focused on invasion of Jones’ “possessory interest” in his car when the government placed a GPS device on it.

If the Court were to find that attachment of a device invaded Jones’ Fourth Amendment interests, this wouldn’t protect him from a system of cameras that developed much the same information, noted Justice Ginsburg. Justice Kagan continued:

What is the difference really? I’m told — maybe this is wrong, but I’m told that if somebody goes to London, almost every place that person goes there is a camera taking pictures, so that the police can put together snapshots of where everybody is all the time. So why is this different from that.

Justice Breyer continued down this line:

And in fact, those cameras in London actually enabled them, if you watched them, I got the impression, to track the bomber who was going to blow up the airport in Glasgow and to stop him before he did. So there are many people who will say that that kind of surveillance is worthwhile, and there are others like you who will say, no, that’s a bad thing.

I’ve spent a lot of time examining terrorism incidents, and the scenario described by Justice Breyer does not sound familiar to me. There was an attack on the Glasgow airport in 2007. That attack was a qualified success—heavily qualified: one of the attackers incinerated himself in the course of causing minor injuries to a few standers-by and only modestly damaging the airport. I’ve found no report that surveillance cameras were involved in monitoring or apprehending the attackers—much less stopping the attack—or in stopping any similar-sounding attack.

Security cameras and surveillance generally are over-rated as preventives of crime and terrorism. They are some help in discovering information about crime after the fact. No help is needed when a major incident turns the eyes of an entire city or nation toward discovering what happened.

I doubt that the case will turn on Justice Breyer’s apparent error, but it clearly influences his thinking, and he shared it with other members of the Court. The people he counts as saying surveillance is worthwhile do not have prevention of an airport bombing in Glasgow to back them up.

High Tech Surveillance: Where to Draw the Line?

As Jim Harper noted yesterday, the questioning during yesterday’s oral arguments in United States v. Antoine Jones suggested to most observers that the Supreme Court is acutely concerned about the dangers of leaving police use of location tracking technology completely unregulated by the Fourth Amendment. “If you win this case,”  Justice Stephen Breyer told the government’s lawyer, “then there is nothing to prevent the police or government from monitoring, 24 hours a day, the public movement of every citizen of the United States…. You produce what sounds like Nineteen Eighty-Four.” Yet, as I observed in a previous post, the Court has a wide array of rationales to choose from if it decides to rule in favor of Antoine Jones, and each has different implications for the larger question of how the Constitution will limit a whole array of location tracking technologies.

The simplest and narrowest ruling against the government here – one that seemed to appeal to Justice Scalia – would focus not on the monitoring, but only on the physical intrusion on property involved in the installation of the tracking device.  That is, I think, absolutely right as far as it goes, but would only prolong the deeper questions, since there are many high-tech ways to track someone without physically attaching anything to their property, from the cell-phone tracking already in widespread use, to robotic surveillance insects in the foreseeable future. Many on the Court would seemingly prefer to avoid a game of technological whack-a-mole, and find a principle to regulate location monitoring itself. The appeals court in this case relied on what’s come to be called the Mosaic Theory, which holds that  prolonged monitoring may invade privacy, even if all the specific journeys – all the tiles in the “mosaic” – are public when considered in isolation.

The virtue of the Mosaic Theory is that it captures a deep underlying truth about our complex, socially embedded “reasonable expectations of privacy.” The defect is that courts and police need clear rules: Any principle that requires ad hoc assessment of complex and contextual social facts is a nonstarter. That’s why, after roasting the government’s attorney, the Court tried to force Jones’ lawyer to articulate some kind of bright line test that would distinguish permissible from impermissible monitoring. If tracking someone 24/7 for a month violates people’s expectation of privacy, but following them on a single trip doesn’t, how do you draw the line? Really, this is just a special case of the notoriously difficult “Sorites Problem” in philosophy: Sometimes you confront a gradient or continuum where things on one end obviously do have some property (like “being a privacy violation”), things on the other end don’t, but you can move in arbitrarily tiny steps from one end to the other, and it seems absurd to pick any particular point as a binary boundary.

But this doesn’t seem like it ought to be a problem if we’re thinking clearly – and the Court has already found a perfectly satisfactory way of dealing with it in another famous case: Kyllo v. United States. In ruling that the use of thermal imaging scanners to detect marijuana-growing lamps in a home violated the Fourth Amendment, Justice Scalia considered the objection that (much like GPS trackers), the scanners would often reveal only information that could have been obtained by ordinary observation from a public space:

The fact that equivalent information could sometimes be obtained by other means does not make lawful the use of means that violate the Fourth Amendment. The police might, for example, learn how many people are in a particular house by setting up year-round surveillance; but that does not make breaking and entering to find out the same information lawful.

The key point here is that there’s a difference between the information exposed by an investigative method, and the investigative method itself. The Court in Kyllo did not say that police may use thermal imaging scanners just to the extent that they reveal information about the home that could also, in principle, be obtained by some other legitimate method (though perhaps with greater difficulty or expense); they opted to regulate the technology categorically.  It may be that people knowingly expose their movements to the public, but that’s not what’s initially being monitored here. What police who use GPS tracking are monitoring is signals emitted by a surreptitiously installed tracking device. And that information was certainly not knowingly exposed to the public by Antoine Jones, or most drivers.

It’s an interesting question whether even ordinary visual surveillance in public – whether by a “tail” or by technologies in general public use, like video cameras – could become so prolonged and invasive as to trigger Fourth Amendment protection, but this isn’t ordinary visual surveillance, which relieves the Court of the need to answer that question here. They can regulate the technological method categorically, even if we can envision uses that would be practically equivalent to other, permissible methods in terms of the type and quantity of information obtained.  In those cases, of course, police are welcome to simply use those other methods.  The main appeal of GPS tracking, of course, is that it provides far more information than is feasible for most police departments to obtain by visual observation – and in those cases, a magistrate judge can make the specific decision about a “reasonable” duration of surveillance. Since the officers in this case actually did get a judicial warrant before installing their tracker – they just failed to install it before the warrant expired—there’s no reason to think that this constitutes some unreasonable burden.

The apparent problem with this approach is that the Court’s opinion in Knotts seems to have rejected such categorical regulation. But, as no less an authority than the inventor of GPS himself stressed in an amicus brief filed by the Center for Democracy and Technology, the tracking “beepers” at issue in Knotts are a fundamentally different technology from GPS trackers. Though they actually monitor radio signals rather than visual impressions – just as GPS does – they are best thought of as augmenting ordinary visual observation by officers who are physically present in a nearby car or aircraft. It might be true in a particular case that police could not effectively tail a suspect without risking detection but for the beeper, because they’d have to follow too closely, but the central method of surveillance here is still ordinary visual observation. The beeper, in this case, is more like a flashlight than a thermal imager. GPS does not augment visual observation; it replaces visual observation. That, I think, means that there’s just no need to puzzle over the permissible quantity of information that can be obtained as though we were still talking about a physical tail with a little technological boost.  We’re not. It’s an utterly different method that can be regulated categorically, and without regard to whether some different and unregulated method might yield some of the same information. It’s true that the reason you want to regulate this method is that it has the capability to gather more information, more easily and cheaply, in a way that exceeds people’s reasonable expectations.  But that doesn’t mean you have to solve the Sorites Problem and pick some particular marginal quantum of information as the boundary, where monitoring below that level is consistent with social expectations of privacy, and monitoring above that level is not. Rather, you can say that because of its capacity for such intrusive monitoring, people reasonably expect not to be subject to that method at all. The Fourth Amendment, recall, does not just protect against unreasonable searches, but the right to be “secure” against unreasonable searches—and that security would hardly be protected if a method intrinsically capable of “unreasonable” intrusiveness were permitted without a warrant, and all of us had to trust police to determine the point at which its application in each particular case crossed into “unreasonableness.”

The fuzziness of the boundary here, in other words, is no argument at all for deference. It’s an argument for imposing a categorical warrant requirement on a class of technologies and letting the issuing magistrate evaluate the bounds of reasonableness in the instance.  As in Kyllo, you draw the bright constitutional line by looking at the capabilities of a technological type, not by trying to craft an impossible rule that permits specific uses of the type that are informationally equivalent to other, permissible methods. It is the capability of the technology to reveal an intrusive “mosaic” that justifies its categorical treatment as a search, and as long as it’s clear that many typical uses of that technology would fall on the wrong side of “reasonable,” the tough question of “exactly how many tiles does it take?” is one the Court can happily decline to answer.

GOP Fingerprints on the ‘Christmas Tree Tax’

The Drudge Report’s headlining of a Heritage Foundation story titled “Obama Couldn’t Wait: His New Christmas Tree Tax” has created quite a stir. In fact, it is being reported that the administration is now going to delay its implementation due to the outcry. Conservatives and Republicans are particularly incensed. However, it appears that they might want to rethink their Obama-as-Grinch narrative.

The National Taxpayer Union’s Demian Brady posted a link on his Facebook page to the 1996 bill that enabled the U.S. Department of Agriculture to implement a “Christmas Tree Tax.” As it turns out, the legislation was sponsored by then Rep. Pat Roberts – a Kansas Republican. John Boehner, the current Republican Speaker of the House, was one of the bill’s co-sponsors. The vote in the House was 318 to 89 with most of the “no” votes coming from Democrats. In the Senate, the vote was 74 to 26. Sen. John McCain was the only Republican to vote “no.”

As for the “Christmas Tree Tax” itself, my colleague Jim Harper is correct that it is indeed a tax (see also Ilya Shapiro’s post). It’s another example of how special interests – in this case, the Christmas tree lobby (!) – dominate policymaking in Washington, regardless of which party is in control. I would argue that there is no good practical, moral, or constitutional justification for the federal government to be involved in the marketing campaigns of business interests. Unfortunately, certain people saw the “Christmas Tree Tax” as an opportunity to further partisan aims rather than provoke a discussion and debate on the proper role of the federal government.

Farm Subsidies and ‘Risk Management’

There has been much written recently about the so-called shallow loss proposals to provide subsidies for farms in cases when farm revenues fall slightly below the record high levels of the past few years.  The proposals come from a bi-partisan collection of influential farm state legislators, such as Rep. Collin Peterson (D., MN) and Senator Richard Lugar (R, IN) et al., and commodity groups such as the National Cotton Council. (The Congressional Research Service has prepared a helpful summary of the proposals). All suggest that new and expanded subsidy programs are needed to help farmers manage untoward risks of farming.  These ideas have even gotten support from some long time advocates for farm policy reform such as the distinguished former Agriculture Secretary and U.S. Trade Representative Clayton Yeutter.

Let us take a step back and put these proposed programs in context.  First, since the middle of the last decade farm prices for the major grains, oil seeds and cotton have doubled or more than doubled and are expected to remain elevated.  This has meant that the long-standing support programs with their fixed congressionally mandated support prices no longer trigger payments.  Projections for the next decade suggest that prices are unlikely to drop back to below the established support prices.  Since there is no support for simply raising the government set minimum prices, and simply paying farmers and farmland owners based on their history of having political clout (as was established in 1996) now seems infeasible, commodity groups needed another formulation to continue to receive significant government payments.

One way to ratchet up supports and lock in high revenues is to tie payments not to price per se, but to revenue.  Hence the new proposals each include variants of the idea that when revenue declines by 5 or ten percent below what farmers of a particular commodity have come to expect, the taxpayer would make payments to fill the gap.  Thus, this year, with harvest time price of soybeans about 10 percent below the futures price established last winter, government payments would kick in under some proposals.  Even now under subsidized crop insurance programs, farms or county yields as little as 5 percent below average would be enough to trigger crop insurance payments in some cases. Notice this would happen with a price of soybeans of more than $12 per bushel when the average farm price from 2004 to 2006 (not a particularly low-price period) was below $6.00 per bushel. In other words, historically high prices have become the new “benchmark” for support. Talk about a ratchet effect.

We can use insurance information to get a sense of how much the proposed programs are designed to satisfy farmers latent demand for “risk management.” Under the current crop insurance program with more than 50% premium subsidies, additional subsidies for program delivery, and subsidies to cover losses of insurance companies, relatively few farmers buy insurance to cover losses above 20 percent.  And, as premium subsidies decline farmers abandon insurance altogether. Farmers employ many risk management strategies from diversification and crop rotation to storage and use of forward contracts. Given these options, they do not choose to buy more risk management when asked to pay a major share of the costs. The opportunity to lock in high revenues with expected payoffs likely to be in the billions of dollars is not about risk but about higher returns, and no operation can afford to turn down higher returns with little or no risk.

Finally, there are two further problems with the argument that farming is especially risky and therefore taxpayers must continue to provide payments whenever revenue targets are not met.

First, notice that this idea only seems to apply to that subset of farm commodities that have received the traditional farm subsidies since the 1930s. There are no proposals for massive “shallow loss” subsidies for industries such as fruits, vegetables, tree nuts, broilers, hay, hogs, beef cattle, greenhouse and nursery products, eggs or seeds. These industries are at least as risky as corn and soybeans, but they have not traditionally been subsidized to the degree to which some crops have become accustomed. (As an aside, there is no evidence that the long term prosperity or productivity of the heavily subsidized industries is higher than the less subsidized farm commodity industries.)

Second, the debt to equity ratio of the subsidized farm sectors does not make them particularly vulnerable. In fact farm debt is well below 15 percent of equity. Moreover, most farms have substantial non-farm income and most farmers work off the farm or get retirement income from non-farm occupations. The farmers that are least likely to work off the farm operate the largest farms and practice a number of risk management strategies. Thus, relatively few farms are in danger going under. Farming is a risky business, but, given how they are organized, there is nothing particularly risky about farming compared to other businesses.

Under the new “risk management” proposals, any individual farm would gain from access to government payments when market revenue falls below some recent average or pre-set target. That said, there is simply no evidence or consistent reasoning for subsidies whether rationalized by “risk management” or one of the other dozen or so common claims (see page 12 of this book by Stanford University’s Woods Institute). Furthermore, there is no evidence that the long term prosperity of agriculture is enhanced by government subsidies or that U.S. farming is more productive or that Americans eat better because we have spent trillions of dollars on farm subsidies over the past seven decades. The best argument for farm subsidies is that we have always had them and change is hard. But, that argument has been stretched a bit thin and this period of record farm profits and record government budget deficits is an ideal time to finally cut the cord.

(Other papers critical of recent “risk management” proposals and well worth your time are a piece written by Bruce Babcock for the Environmental Working Group and one by Barry Goodwin and Vince Smith for AEI. For a recent broader evaluation of farm subsidies visit my paper written jointly with Barry and Vince and published by AEI).