Sunday, June 5, 2011

Is the individual mandate penalty a tax? Analysis of the 4th Circuit briefs regarding the Anti Injunction Act

In originally proposing the individual mandate as part of the PPACA, Congress and the President took great pains to ensure that no portion of the bill be referred to (or enacted as) a tax.  Of course once threatened litigation hit the Federal Courts lawyers for the Federal government argued that the penalty for not obtaining insurance pursuant to the individual mandate is a tax.  This is because the penalty pursuant to the individual mandate is more likely to be considered Constitutional if it is a tax, than if it is a mere regulatory penalty promulgated pursuant to the commerce clause in Article I § 8 of the Constitution.

On May 23, 2011, nearly two weeks after oral argument in the two Virginia cases (Commonwealth v. Sebelius and Liberty U. v. Geithner ), the Fourth Circuit ordered additional briefing on the application of the Anti Injunction Act [AIA], and if the penalty for meeting the terms of the individual mandate constitutes a tax under the AIA.  This was a strong signal that the Fourth Circuit panel that heard oral argument not only believes the penalty is a tax, but that the parties are not allowed to come to court to challenge that tax until after the tax is assessed and collected in another couple years.

Virginia, and the Liberty U. Plaintiffs submitted substantially different briefs due to the procedural effects on each party of the AIA.  The Federal government submitted a nearly identical brief in both cases, and argued something quite surprising.

Below is an analysis of the briefs submitted on May 31, 2011, and the potential effect they will have on each case.

Virginia’s brief correctly lays out the inapplicability of the AIA

The AIA does not apply to Virginia in this type of situation.  As I laid out here on May 24, 2011, and here on May 26, 2011, The AIA, for the most part, does not apply to states.  In short, the AIA does not apply to Virginia, as there is no alternative remedy given by the AIA.  Further, the AIA generally does not apply to the states under traditional statutory construction principles.  On pages 2-4 of the brief Virginia applies a version of my analysis from May 24, 2011, and on pages 4-6 Virginia applies a version of my May 26, 2011 analysis.  Both are accurate and controlling, and the Fourth Circuit panel will likely find the AIA simply does not apply to Virginia.  Unfortunately, as I indicated on May 10, 2011 I believe Virginia is likely to lose at the Fourth Circuit due to standing.

Liberty U.’s brief impressively lays out not only a major exception to the AIA, but also how the penalty truly is not a tax

In a simple summary the brief starts, in part, with the following:

“The AIA deprives a court of jurisdiction only if the suit seeks to restrain the assessment or collection of a tax. Even then, the AIA does not apply if (1) it is clear that under no circumstances could the Government ultimately prevail, and (2) equity jurisdiction exists otherwise.”
Equity jurisdiction in this instance is injunctive relief based on a court ordered declaration that the PPACA is unconstitutional.  The first part of the test is self explanatory.  Nonetheless, I presume the Fourth Circuit panel still feels the penalty is Constitutional.   

And the Federal government capitulates?

Far and away the most surprising arguments came from the Federal government.  On page 2 of each brief they state:

“In the district courts, the government argued for dismissal of these actions under the AIA. On further reflection, and on consideration of the decisions rendered thus far in the ACA litigation, the United States has concluded that the AIA does not foreclose the exercise of jurisdiction in these cases.”
The Federal Government expressly attempts to waive the argument of the applicability of the AIA.  They go to great lengths to reemphasize that the penalty is Constitutional as it is a tax.  Later on page seven they argue:

“. . .Congress delayed the effective date of the minimum coverage provision, thus dramatically mitigating the risk of disruption to ongoing administration of the tax code that the AIA is intended to prevent. The AIA’s purpose is to prevent anyone from interfering with the federal government’s administration of the Tax Code, from forcing it by judicial fiat to treat a particular taxpayer or group of taxpayers differently than others, and from compelling it to stop or alter the ongoing business of tax enforcement. This broad challenge to the constitutionality of the minimum coverage provision, which was brought nearly four years before the minimum coverage provision is to be implemented, five years before any tax is to be paid and the IRS begins assessing and collecting those taxes, and well before the IRS has even set up the systems to administer the provision, poses no realistic threat of such disruption -- in contrast to the threat of disruption to the administration of the ACA that postponing review would raise.”
In short, they want this issue resolved well in advance to avoid disruption of the PPACA years down the road.

But isn’t this a change of heart?  In my opinion, yes.  The Federal government has changed its strategy, but not because of fear of disruption in 2015.  I believe the strategy, up until now has been to delay as long as possible, even if that means procedural dismissals (such as a dismissal based on standing or ripeness) in order for the PPACA be too far along for courts to want to disrupt implementation.  But, given the makeup of this Fourth Circuit panel, the Federal government wants a substantive (rather than procedural) victory to carry to the 6th and 11th Circuits to support their other cases.

The result

The Fourth Circuit could ignore all the briefs and rule as it deems fit.  Unfortunately, given the not so subtle signals from the Federal Government I fear we are headed towards a dismissal of Virginia’s claim based on standing, and a loss for the Liberty U. Plaintiffs on the substance of the PPACA.

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