04/05/2012 11:21 am ET Updated Jun 05, 2012

Litigation Choices Matter: The Affordable Care Act Example

Shortly after the constitutional challenges to the individual mandate in the Affordable Care Act (ACA) were filed, the Department of Justice filed oppositions arguing that the law was constitutional, but also claiming that a law well-known to tax practitioners, but not to almost anyone else -- the Anti-Injunction Act -- prevented the suits from going forward until 2015. That defense was rejected by the district courts, and the Administration changed its mind and abandoned that roué to avoid reaching the merits. The reasons behind that choice have never been publicly explained, but that decision might have fatal consequences for the defense of the mandate. Here's why.

Many healthy individuals do not buy health insurance, hoping not to need it, thereby driving up the costs of those who do buy it. The individual mandate is designed to induce those without health insurance to purchase it by imposing what the law labeled a "penalty" if they do not have insurance starting in 2014. Although called a penalty, it and the mandate are included in the Tax Code, compliance will be reported only on the individual's federal tax return, the amount is based in part on taxable income, and any amount owed is collected by the IRS. It seems clear that, but for the "tax phobia" of Congress and the Administration, the amount owed for non-compliance with the mandate would have been called a tax. It is doubtful that anyone, especially opponents of the law, were fooled by the label, but that is the hand that the Administration had to play in defending the law.

Supporters of the mandate defend its constitutionality on two grounds. First, it is part of the national health care and health insurance system and as such may be imposed by Congress under its power to regulate interstate commerce. The principal response to that is that the mandate regulates inactivity -- the failure to obtain insurance -- and if the Commerce Clause extended that far, it would enable Congress to impose almost any obligation on Americans, such as buying cars or eating broccoli. The second argument is that the penalty imposed for non-compliance is, in effect, a tax, and as such it can be upheld under Congress's very broad power to tax. Opponents agree that Congress could have imposed a tax to accomplish this goal, that a tax would not have had the "broccoli" problem, and indeed that Congress could have required everyone to pay the tax, even those who are exempt from the ACA's mandate. The problem, they argue, is that Congress called it a penalty and that, somehow, makes a constitutional difference.

Here's where the litigation choice to abandon the Anti-Injunction Act matters. If the AIA is applicable, it forbids even constitutional challenges such as these and requires that suits be brought only after the tax has been paid or is due. The AIA uses the phrase "any tax," but the courts have not limited it to payments labeled taxes, and instead have extended it to wide range of penalties as well as other exactments under the Tax Code. To be sure, there are highly technical readings of the law that argue against the application of the AIA in this case, and so the decision of the Administration to abandon the AIA because Congress called this a penalty, not a tax, had some legal basis. The problems created by that decision, however, extended beyond the narrow AIA question and go the heart of the defense of the mandate.

The most serious problem was evident from a question raised by Justice Samuel Alito to Solicitor General Donald Verrilli who was defending the inapplicability of the AIA on the ground that it is a penalty, not a tax: "General Verrilli, today you are arguing that the penalty is not a tax. Tomorrow you are going to be back and you will be arguing that the penalty is a tax. Has the Court ever held that something that is a tax for purposes of the taxing power under the Constitution is not a tax under the Anti-Injunction Act?" The response -- that the two tests are not the same -- may be sound legally, but it was at the least a very awkward moment, caused by a decision made well before the Solicitor General assumed his post. Moreover, the next day, when the issue was the constitutional basis for the mandate, the Solicitor General focused on what seems to many to be the more difficult Commerce Clause justification, in contrast to the tax justification, which is not beset with the problem of what limiting principle should be applied, because the Court has allowed Congress to impose taxes like these without restrictions.

There is a further reason why prevailing on the AIA would have made it easier for the Court to uphold the mandate. The third day of arguments focused on what parts of the ACA would remain if the mandate were unconstitutional. The Justices were very troubled by how to answer that question, in part because some parts of the law were already in effect. But suppose that the case came to the Court in 2016, after a taxpayer had paid the penalty and sued for a refund. Think of how much more reluctant the Court would be to strike down the mandate and unscramble the severable from the non-severable, when most of the ACA's benefits would currently be enjoyed by millions of Americans. In theory, the legal issues would be the same as they are now, but the Supreme Court is not completely immune from the real world implications of its rulings. Thus, at least for some Justices, having to set aside a major law that was already in full operation would be a tougher call than doing that now.

Of course, the Court might reject the Government's argument and still find the AIA applicable. Or it could uphold the mandate, despite the doubts that were expressed at oral argument. But if it finds that the mandate is unconstitutional, the decision to abandon the AIA may be at least one cause of that outcome.

The writer filed an amicus brief in the Supreme Court arguing that the Anti-Injunction Act, discussed in this essay, applied to the challenge to the individual mandate.