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The individual insurance mandate contained in Obamacare might well be doomed, leaving experts to ponder how the government can achieve its dual goals of providing health coverage for all citizens and driving down the price of care without the threat of a legal challenge. From Bloomberg:

The alternative that comes closest to preserving the mandate would be to give tax credits to everyone who carries health insurance. That’s functionally the same as fining those who don’t have coverage, and less subject to constitutional challenge. It’s essentially the approach being advocated by House Budget Committee Chairman Paul Ryan, a Wisconsin Republican who would provide refundable tax credits, usable solely for buying health insurance, of $2,300 for individuals and $5,700 for families.

Of course, as Bloomberg astutely points out, if you can work around the constitutionality of a mandate by simply granting a tax credit instead of a penalty, it tends to trivialize the three days the Supreme Court spent debating Obamacare. Martin Sullivan at Tax.com further highlights the silliness of the situation:

The only difference between the mandate and your common tax incentive is that Congress framed the incentive as a tax penalty instead of a tax break. I recognize there might be a legal difference between the two approaches that is beyond my comprehension. But the Court, Congress, and the public should understand that economically the two approaches are exactly the same. Any tax penalty can easily be redesigned as a tax incentive. So, for example, a $1,000 tax penalty for not doing X could be replaced by a tax policy whereby all individuals’ taxes are raised by $1,000 and then they are given a tax credit of $1,000 for doing X.

Sullivan goes on to illustrate his point with the following chart (click to enlarge)

Assuming a tax credit isn’t an option, what else can be done to make sure we all get health insurance? Remember, the more people that are properly insured, in theory, the more the cost of insurance should come down for the masses.

Bloomberg offers a couple of choices:

If the credits don’t fly, another way to maneuver people into buying insurance without a mandate is to warn them that their premiums will go up if they put off getting covered. Medicare has late enrollment penalties for both Part B doctors’ and outpatient coverage and Part D prescription drug coverage. The Part D penalty is 1 percent of the premium for each month after age 65 that someone enrolls. 

A related idea, used in most company health plans, is to give people just one opportunity per year to sign up. That way they can’t game the system by waiting until they’re sick or hurt to rush to buy a policy. If they miss the deadline, they have to buy coverage at whatever price the market will bear — which could be prohibitively high for the seriously ill. That might be more punitive an idea than America can stomach.

And if all else fails, the government can always resort to simply paying professional athletes to tell us to buy insurance, because who better to take financial advice from then grown men with high school educations who’ve made exorbinant sums of money playing catch.  As silly as it sounds, it works.  In baseball-crazy (since 2004) Massachusetts, players from the Red Sox took time away from getting loaded in the clubhouse to urge people to get covered, and now more than 98 percent of state residents have health insurance.

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The opening day of the Supreme Court’s hearings on the Patient Protection and Affordable Care Act went pretty much as expected, with 90 minutes spent arguing semantics; specifically, whether the tax penalty imposed by I.R.C. § 5000A on individuals who fail to procure health insurance is more “tax” than “penalty.”  

As a reminder, today’s debate could have ended the highly anticipated hearing on the constitutionality of the individual insurance mandate before it began. If the I.R.C. § 5000A penalty was found to be a “tax,” then the Supreme Court would be barred from ruling on the  constitutionality of the insurance requirement by the Anti-Injunction Act — a 145-year old law — until after the tax has been imposed and collected — 2015 at the earliest. If the penalty is truly a “penalty,” however, then the Court can move forward with the argument everyone is longing to hear and determine the fate of Obamacare.

Well, we’ve perused the transcript from today, and while this is nothing more than our opinion, it appears that the majority of justices are in favor of settling the constitutionality debate sooner rather than later. If you’re scoring at home — and if you are, your loneliness saddens me — it would appear from the transcript that Justices Ginsburg, Scalia, Breyer, Kagan and Sotomayor are in favor of addressing whether Obamacare is constitutional now, while Justices Roberts and Alito would prefer to apply the Anti-Injunction Act and table any constitutionality discussion until 2015. It should be noted that it doesn’t appear that politics were the overriding motivation for any of the justice’s positions, as both conservative (Scalia) and liberal (Kagan) seemed to agree that the Anti-Injunction Act did not apply to I.R.C. § 5000A.

Perhaps the most fascinating aspect of the day was the unenviable position in which the government’s attorney -U.S. Solicitor General Donald Verrilli — found himself. Today, Verrilli vehemently argued that the I.R.C. § 5000A charge was not a tax but a penalty, and thus the Supreme Court was not prohibited from ruling on the provision’s constitutionality prior to the date the tax is collected. Verilli’s argument was made all the more difficult by the fact that everyone in attendance was keenly aware that tomorrow, when justifying the insurance mandate as constitutional, Verrilli would be back in the very same court room arguing that the I.R.C. § 5000A charge is in fact a tax, and is imposed as part of Congress’s taxing authority. Verrilli articulated his dueling positions thusly:  

Congress has authority under the taxing power to enact a measure not labeled as a tax, and it did so when it put section 5000A into the Internal Revenue Code. But for purposes of the Anti-Injunction Act, the precise language Congress used [calling it a penalty, rather than a tax] is determinative.

Verrilli wasn’t the only one in a tough spot on Monday. While the various states challenging the law are chomping at the bit to challenge the constitutionality of the insurance mandate, because both sides would prefer to determine the fate of Obamacare soon, no one was jumping at the chance to argue that the I.R.C. § 5000A tax penalty is in fact a tax, and thus subject to the Anti-Injunction Act. So to facilitate debate, the Supreme Court brought in their own attorney to do so, Robert Long.

Mr. Long — likely longing for his care-free days as a member of the popular rap group Black Sheep[i] — was stuck spending 30 minutes trying to convince some of the brightest people on the planet of something they appeared to have already decided they wouldn’t be convinced of. To be fair, the justices went easy on him., but there can’t be anything fun about getting hired to engage in an argument you know you can’t win.

Up today is the main event: the discussion of whether Congress has overstepped its taxing authority in requiring all American’s to obtain health insurance or suffer a tax…penalty…whatever. We’ll let you know how it goes.


[i] Not verified. May be an entirely different Mr. Long.

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The U.S. Supreme Court is typically charged with determining the victor of the country’s most important debates, such as Roe v. Wade, religion v. science or, which shape marshmallow should be added to boxes of Lucky Charms. So when the high court goes slumming, setting aside three days to hear debate with potentially major implications on the tax law, it’s incumbent upon every CPA to stand up and take notice.

Of course, it’s a rather busy time of year, and given the pile of Form 1040s overwhelming your desk, the events transpiring in D.C. are probably the least of your concerns. So as a bit of a public service, we’ve put together the following “heads up” for our industry peers, hopefully giving you the information you’ll need when your clients inevitably ask you for your take on the Supreme Court’s review of “Obamacare.” You can thank us after the 17th.

Q: What’s Obamacare? It sounds like a charitable organization to which I don’t contribute.  

A: On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, a 2700-page bill that took aim squarely at the country’s health care practices. The reform would extend health insurance to an additional 32 million Americans while revamping one of the nation’s largest industries: prohibiting insurance companies from denying coverage due to preexisting conditions, expanding the Medicaid threshold to 133% of the poverty line, and eliminating the ability of insurers to cap an insured’s “lifetime limit” of benefits.

Q: I didn’t hear anything about tax in there, so why do I care?

A: The Act also contained several major tax provisions, one of which set off a firestorm of debate regarding its constitutionality. Beginning in 2014, I.R.C. § 5000A will require taxpayers to purchase or retain health insurance that qualifies as minimum essential coverage, and to report this information on their federal tax returns, subject to certain codified exceptions. If the taxpayer fails to maintain adequate insurance, a monthly “penalty” is imposed equal to the greater of a flat dollar amount (phased in starting at $95 in 2014) or a percentage of the taxpayer‘s income (phased in starting at 1% in 2014).

Q: Where does the “constitutionality” come in?  

A: Twenty-eight states have filed suit seeking to overturn this individual insurance mandate, challenging whether Congress is overstepping its taxing powers by imposing a penalty on individuals for failing to obtain insurance. In 2010, a Virginia federal court ruled the individual mandate unconstitutional, striking it from the Patient Protection Act but allowing the rest of the act to stand. The case was later overturned on appeal.

In early 2011, however, a Florida district court also held the individual insurance mandate unconstitutional, but refused to sever the provision from the rest of the Act, rending the entire Act unconstitutional. This time, on appeal, the verdict stood, but the appeals court disagreed on the severability of the individual mandate, allowing the rest of the Act to remain. The Department of Justice asked the Supreme Court to hear the case, which brings us to today.

Q: So what’s the Supreme Court going to decide?

A: Over the next three days, the U.S. Supreme Court will begin its review of Obamacare, an unprecedented act in the sense that it is the first time the high court has considered striking down a president’ signature legislation in the midst of his re-election campaign.  Here’s how the next few days are expected to shake out:

Today: Before the discussion of constitutionality can even get off the ground, the Supreme Court must determine whether the “penalty” under I.R.C. § 5000A for filing to obtain insurance is a “tax” or a “penalty.” If it’s truly a tax, then the current debate might be over before it gets started, courtesy of this old-timey law as explained by Bloomberg:

A 145-year-old law, the Anti-Injunction Act, says courts can’t rule on the legality of federal taxes until they are imposed. For the no-insurance penalty in the 2010 health care law, which takes effect in stages, that comes in 2015. The justices may decide it’s too soon to rule on the health law’s constitutionality.

In other words, if the penalty under I.R.C. § 5001A is held to constitute a tax, the Supreme Court might be barred from deciding the constitutionality of the insurance tax until it is actually imposed beginning in 2015.

Tomorrow: Assuming today’s hearings don’t render the remaining debate moot, tomorrow is likely to contain the most spirited arguments, as the Supreme Court will hear debate on whether the Constitution allows the government to require Americans to either get insurance, or pay a penalty.

Q: What will each side be arguing?

A: Similar to the state courts, the argument is likely to consist of the following positions:

On one side, detractors of the Patient Protection Act will insist that Congress has no authority to order someone to give up their own desire not to buy a commercial product and force them into a market they do not want to enter. The federal government, on the other hand, will defend the new law as being allowable under the Commerce Clause, the Necessary and Proper Clause, and the taxation power of the General Welfare Clause.

Q: What’s left to hear on Wednesday?

A: Wednesday could actually have far-reaching effects on the tax world. The court will hear debate about what should happen to the rest of Obamacare should the individual insurance mandate be found unconstitutional. If the Supreme Court were to strike down the entire Patient and Protection Act because the individual insurance mandate was found unconstitutional, the remaining tax provisions would die with it. As a reminder, some of the other significant tax provisions found in the Patient Protection and Affordable Care Act include the following:

  •  Starting in 2014, pursuant to I.R.C. § 4980H,  applicable large employers must provide minimum essential coverage to each full-time employee and their dependents. Failure to comply with the employer mandate will result in a penalty equal to one-twelfth of $3,000 for each month multiplied by the applicable number of full-time employees. In general, an “applicable large employer” is any employer with a work force in excess of fifty full-time employees.
  • Higher Medicare taxes will be imposed upon wealthy taxpayers beginning in 2013. Section 3101(b)(2)will be amended to include an additional tax of 0.9 percent on all income in excess of $200,000 or $250,000 for joint filers.
  • 2013 will also add to the Code I.R.C. § 1411, which creates a 3.8 percent Medicare tax on investment income in excess of $250,000 for joint filers, $125,000 for married filing separately, and $200,000 ―in any other case.

We’ll do our best to keep you apprised of any big developments.

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