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More on Taxation

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The 1502 page legislative language of the Senate Finance bill became available yesterday on the Senate Finance Committee website. One of the many legal issues raised by this legislation relates to my October 8 post on the constitutionality of taxation. As you may recall, the Constitution requires that “Duties, Imposts and Excises,” generally called indirect taxes, must be uniform throughout the United States (Art. I, sec. 8, cl. 1). One of the widely publicized revenue provisions of the Senate Finance bill is the “excise tax on high-cost employer-sponsored health coverage,” to so-called “Cadillac plan” tax.

This tax is clearly an excise tax. The legislation provides, however, that, for the first three years the tax is in effect, the threshold value of a high-cost plan, above which the tax will be imposed, will be higher (and thus the tax lower) in 17 high-cost states to be identified by HHS. This would seem on its face to not be a uniform tax. Is it therefore unconstitutional?

Probably not. Although the Supreme Court has long held that the uniformity called for by Art. 1, sec. 8 is geographical uniformity among the states, in 1983 the Supreme Court upheld a windfall profits tax that excluded Alaskan oil ( U.S. v. Ptasynski), i.e. that clearly imposed a geographically nonuniform tax.

The Court noted initially that it has long been clear that the constitutional prohibition does not limit the ability of Congress to draw distinctions in defining objects to be taxed as long as taxes are geographically uniform. However, the Court concluded, the provision does not absolutely preclude Congress from applying a geographical classification when 1) the classification is justified, as it was in that case, by “ample evidence of the disproportionate costs and difficulties” attendant to pursuing a taxed activity in a particular location, and 2) Congress does not extend an undue preference to one state at the expense of others, contrary to the intent of the statute. A similar argument could probably be raised with respect to the immediate imposition of the excise tax in states with high health insurance costs, although the issue could probably not be disposed of by a motion to dismiss if anyone cared to (and had standing to) raise it.

This does not, of course, mean that the excise tax is a good idea. There are many reasons why some employers pay for health insurance than others, including the age, gender, and geographical location of their employees. A Cadillac plan may in fact provide Chevy benefits. Moreover, taxing the benefits of some insureds may not be the best way of paying for benefits for others. But the tax can probably be defended as constitutional.

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The views reflected in this expert column are those of the individual authors and do not necessarily represent those of the O’Neill Institute for National and Global Health Law or Georgetown University. This blog is solely informational in nature, and not intended as a substitute for competent legal advice from a licensed and retained attorney in your state or country.

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