SCOTUS takes on tax/penalty issue in opening health reform arguments

With throngs of protesters and supporters gathered outside, the US Supreme Court on 26 March heard the first in a series of oral arguments scheduled over three days in the case challenging the constitutionality of the Patient Protection and Affordable Care Act – health care reform – with the justices appearing to reject the idea that an 1860s tax law would deprive them from making a judgment.

Some hoping to grab a seat inside the courtroom and be part of history had been camped outside the court for up to three days in a line that bent around the block.

While the row of lawyers from some of Washington's largest law firms seeking a prime seat was not as long as that for the public on the first day, Washington civil rights lawyer and "online organiser" Wamaid Mestey-Borges told Scrip she snagged her up-front spot 10 hours earlier – camping out all night in chilly temperatures near the Supreme Court's Southwest entrance.

Some who had queued up were actually law firm interns holding a spot for their bosses, who didn't want to brave the night on the cold concrete. Paid place holders also were charging up $50 per hour to hold spaces for lawyers and others.

"I am here to ensure the rights of workers are protected, and that they have access to quality, affordable health care," Ms Mestey-Borges said. "The welfare of millions of Americans hangs in the balance."

Before the Supreme Court can determine whether the 2010 health care is constitutional, the justices must decide if they have subject matter jurisdiction to rule on the case or whether the Anti-Injunction Act (AIA) – a law enacted in 1867 that requires Americans to pay first and litigate later when it comes to tax assessment and collection – bars the court from making a decision until later.

At issue is the word "tax" in the AIA and it pertains to Congress' intent of the penalty it included in the health reform law for taxpayers who fail to purchase health insurance.

Under the Affordable Care Act, US taxpayers making at least $18,000 annually must maintain minimum essential insurance coverage for themselves and their dependents by 2014 or pay a penalty of 1% of their family income or $95 per family member, whichever is greater, with that figure rising to 2% of income or $325 per family member in 2015, topping out at 2.5% of income or $695 per family member in subsequent years.

The Obama administration is arguing that Congress had the power under its taxing authority in the Commerce Clause of the US Constitution to mandate the insurance coverage and the penalty.

Florida and 25 other states and the National Federation of Independent Business (NFIB) and some individuals are arguing that Congress does not hold the power to compel American taxpayers to engage in commerce and that such authority does not exist.

Although it was the only court that said Congress does not have the authority to require the individual insurance mandate, the Eleventh Circuit in Atlanta did not address the AIA question (scripintelligence.com, 15 August 2011).

But the US Court of Appeals for the Fourth Circuit in Richmond on 8 September 2011 ruled that under the AIA, a monetary penalty cannot be challenged in court until that penalty takes effect – a decision that was counter to the verdicts by the Sixth Circuit in Cincinnati and the District of Columbia Circuit (scripintelligence.com, 12 September 2011, 9 November 2011).

With two courts on one side of the AIA question and another on the other side, the Supreme Court determined it needed to confront the issue, explained Washington lawyer Leon Sequeira, a senior counsel at Seyfarth Shaw.

Because the Obama administration and challengers of the health reform law agreed that the AIA did not bar the lawsuit, the high court appointed lawyer Robert Long, a partner with Washington law firm Covington & Burling, to argue that the AIA does bar the Supreme Court from ruling in the case until the penalty has taken effect.

"I find it hard to think that this is clear. Whatever else it is, it's easy to think that it's not clear," said Justice Antonin Scalia.

"I would not argue that this statute is a perfect model of clarity, but I do think the most reasonable way to read the entire statute is that it does impose a single obligation to pay a penalty if you are an applicable individual and you are not subject to an exemption," Mr Long contended.

He argued that the AIA applies not only to every tax in the US Internal Revenue Code but, "as far as I can tell, to every tax penalty in the code".

But Justice Ruth Bader Ginsburg insisted that the penalties Congress included in the health care reform law are not intended to raise revenue, so if the law is successful, "nobody will pay the penalty".

Mr Long, however, contended that the health reform penalty is expected to raise as much as $4 billion per year.

He noted that Congress directed that the individual insurance mandate's penalty "shall be assessed and collected in the same manner as taxes" and that lawmakers "provided that penalties are included in taxes for assessment purposes".

Mr Long also pointed out that the insurance mandate was codified into the Internal Revenue Code section 5000A.

The 5000A penalty, he said, "bears the key indicia of a tax".

But Justice Stephen Breyer asserted that "Congress has nowhere used the word 'tax.' What it says is penalty."

Moreover, he said, "this is not in the Internal Revenue Code "but for purposes of collection".

"I don't think the justices were buying that the AIA applies in this case," Maria Gonzalez Knavel, a partner with the Milwaukee offices of Foley & Lardner, told Scrip.

Seyfarth Shaw's Mr Sequeira said he was somewhat surprised that all of the justices appeared to be "hostile" to the idea that the AIA applies to the Affordable Care Act penalty.

He pointed out that even though US Solicitor General Donald Verrilli argued on the first day for the government that the monetary fine taxpayers failing to buy health insurance must pay is a penalty, on the second day, he will go before the court and arguing that Congress was exercising its taxing power by including the penalty.

Indeed, Justice Samuel Alito taunted Mr Verrilli that "today you are arguing that the penalty is not a tax. Tomorrow . . . you will be arguing that the penalty is a tax".

Jones Day lawyer Gregory Katsas, who argued on behalf of the NFIB, told reporters after the hearing that the government has put itself in an awkward position by arguing two different sides on the tax issue.

"I think this strengthens our case," he said.

During the first day, the justices also veered into some questions about Medicaid's expansion under the Affordable Care Act – which is one of the topics expected to be argued on 28 March.

Foley's Ms Gonzalez Knavel said she sensed the court already had felt it answered the jurisdiction question and was eager to move on.

The minimum coverage provision gets a full two hours of arguments on 27 March.

Along with the question of whether health reform's expansion of Medicaid violates US states' sovereignty by forcing them to spend more of their funds on the programme, the justices will weigh whether the individual mandate can be severed from the other measures in the health reform law during the 28 March session.

Monday's arguments, Ms Gonzalez Knavel said, were just the "warm-up" for the next two days.