Thinking about using tax law to enforce either an individual or employer mandate has led me down the dark paths of seldom-discussed constitutional provisions relating to excise, direct, and income taxes. At one surprising turn, I encountered the Murphy case from the D.C. Circuit, 460 F.3d 79 (D.C. Cir. 2006), rev’d on rehearing, 493 F.3d 170 (D.C. Cir. 2007). As Paul Caron tells the entire saga in his excellent Tax Stories (2d ed. 2009) book chapter, Murphy is an object lesson in how confusing and unpredictable this area of law can be.
In Murphy I, a panel of 3 led by Douglas Ginsburg struck down as unconstitutional the IRS’s attempt to tax emotional distress tort awards as income, because compensation for injury does not meet the 16th Amendment’s meaning of “income.” The decision sent shock waves through the tax law professoriate since it opened up vast expanses of potential constitutional challenges that previously had never been considered plausible (such as the wild argument made by some that wages don’t constitute income since they reflect the depletion of one’s time and energy rather than a true increase in wealth).
Murphy I should give health lawyers pause. Although the definition of income is not at issue for us, this case illustrates the troubling potential for new, untested theories of constitutional attack to receive a favorable hearing in the tax arena. As Stephen Bainbridge said at the time, ‘‘Let a 1000 lawsuits bloom. Every tax nut in the country is probably getting ready to file suit challenging some tax or another using Murphy as a template.’’ Or as Caron says in his chapter, “three of the nation’s most distinguished judges, on one of the country’s most influential courts, issued an opinion that blithely ignored large swaths of the constitutional tax landscape.”
Fortunately, the panel sua sponte ordered reconsideration and reversed it’s own decision, apparently influenced by the storm of criticism that immediately exploded in the blogosphere. Caron assembles these representative derisive comments from various tax professors:
“We law professors must not be doing our jobs right if three federal judges and their clerks can reach a conclusion like this one.’’ “It is impossible to overstate the potential damage caused by this decision—in my 15–plus years in this business, this decision takes the cake for judicial mischief.’’ “The ruling is startling, misguided, and wrong.’’
On re-argument, the same panel reversed itself – but not based on changing its mind on the meaning of “income.” Instead, it held that, even if tort awards do not fall within Congress’s 16th Amendment taxing power, they do come under Congress’ more general authority under Article I, Sec. 8 “to lay and collect Taxes, Duties, Imposts and Excises.” But, what about the Constitution’s equal-taxation provisions, which the 16th Amendment overcomes (but only for income tax)?
Murphy II reasoned that a tax on tort awards is “more like a tax upon a use of property, a privilege, an activity, or a transaction” than “a capitation or a tax upon one’s ownership of property.” Thus, it is an indirect “excise” tax that is not subject to the Constitution’s “apportionment” clause (equal amounts per person), only to its general uniformity clause (“all Duties, Imposts and Excises shall be uniform throughout the United States”). After some turmoil, order was thus restored in the land of tax.
This cautionary tale holds the following lessons for health care reform: 1) Don’t be surprised if courts are willing to entertain a constitutional challenge to enforcing an insurance mandate through tax law. 2) Even if these enforcing provisions can’t be defended as an extension of the income tax, they probably would not constitute a “direct” (or head) tax, only an excise tax. This is fairly reassuring, since the uniformity requirement has not been applied very strictly in the past – allowing rates to vary according to local conditions, for instance – a topic for another day (and perhaps another blogger who is better-versed in these matters).
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The views reflected in this blog 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.