Health Care Law Challenge Should Not Be Barred — A Regulatory Penalty Is Not a Tax

March 5, 2012 • Commentary
This article appeared in National Law Journal on March 5, 2012.

Before reaching the issue of whether the federal government can constitutionally require people to buy health insurance, the U.S. Supreme Court will grapple with whether such a challenge can even be brought in light of an obscure statute called the Tax Anti‐​Injunction Act (AIA). Indeed, the Court recently added half an hour to the time allotted to this issue — 90 minutes total — on the first day of arguments in the case challenging the Affordable Care Act, March 26.

The AIA, first enacted in 1867 to protect courts from spurious tax protestors, bars lawsuits seeking to enjoin “any tax” before that tax is assessed or collected. One would think that such a law would have no application to the health care litigation because there are no taxes at issue: The individual mandate is a command to do something, and the penalty enforcing it is a punishment for not complying with that command. Accordingly, most of the courts to take up the issue have found the AIA to be inapplicable; the U.S. Court of Appeals for the 11th Circuit, whose ruling is the one before the Supreme Court, didn’t even consider it. Moreover, the government itself has long conceded that the AIA is inapplicable here.

A 4th Circuit majority and the dissenting judge, Brett Kavanaugh, in the D.C. Circuit, however, reached a contrary conclusion, reasoning that the AIA applies to all exactions processed via the Internal Revenue Code, including “penalties.” Out of an abundance of caution, and because the AIA may be a jurisdictional bar that the government cannot waive — itself a preliminary issue to this preliminary issue — the Supreme Court appointed an amicus curiae to argue for the position that the AIA bars these suits.

The plaintiffs have made many strong arguments as to why the AIA shouldn’t apply. First is my obvious point above that neither the mandate nor the penalty is a “tax.” Second, the lawsuit challenges the mandate, which has legal force even without the penalty. Third, if the AIA bars these claims, some plaintiffs will have no way of challenging the mandate because they will not be subject to its penalty. The state plaintiffs add that, regardless of whether the penalty can be a tax for AIA purposes, the statute can never apply to states. Although the Court can, and likely will, find the AIA inapplicable for any of these reasons, it really shouldn’t need to get past the first.

That is, the term “any tax” in the AIA is not a sort of shorthand for “anything codified in the Internal Revenue Code.” The argument that any penalty assessed under the Code is automatically subject to the AIA fundamentally departs from how federal courts have traditionally analyzed Code penalties.

The Supreme Court has long acknowledged that “penalties” are not interchangeable with “taxes” for AIA purposes. In Lipke v. Lederer (1922), for example, it held that the AIA did not bar a suit to enjoin the enforcement of a “tax” for violating the Prohibition Act because the exaction there was a penalty and not a tax. And in U.S. v. La Franca(1931), it defined a tax as “an enforced contribution to provide for the support of government,” while a penalty was “an exaction imposed by statute as punishment for an unlawful act.” No court before this litigation ever relied on the alternative argument that the Code’s grant of penalty‐​assessment authority to the Treasury Secretary is enough to make the AIA apply to penalties.

Moreover, with one exception, all the cases that have applied the AIA to penalties — all from the lower courts, there not being any Supreme Court rulings to that effect — concerned penalties that were statutorily defined as taxes. (The one exception is the 11th Circuit’s Mobile Republican Assembly v. U.S. (2003), which applied the AIA to penalties that enforce substantive tax provisions.) Tellingly, the court‐​appointed amicus, rather than arguing from this or other precedent, resorts to strained statutory constructions that have never been raised before this litigation.

In short, as the overwhelming majority of courts to consider the issue have concluded, the AIA cannot bar suits to enjoin the individual mandate penalty because that penalty neither is defined as a tax nor enforces a substantive tax provision. Much as we’d all love to spend another four years debating the individual mandate’s constitutionality — the earliest the Supreme Court would resolve a lawsuit brought by someone subject to the penalty — this merry go‐​round will stop in June.

About the Author
Ilya Shapiro

Ilya Shapiro is the director of the Robert A. Levy Center for Constitutional Studies at the Cato Institute and publisher of the Cato Supreme Court Review.