Well, now we know the answer. The individual mandate in the Patient Protection and Affordable Care Act, which the Administration has variously said was a both a tax and not a tax, is, in fact, a tax. That’s what the Supreme Court has called it, as a reason for finding it constitutional.
The Court voted by a narrow 5-4 margin to uphold the mandate, without which most of the funding for the provisions of the Act would dry up. It found that the mandate is not constitutional under the government’s commerce power.
However, according to Chief Justice John Roberts, “The exaction [penalty] the Affordable Care Act imposes on those without health insurance looks like a tax in many respects. The ‘shared responsibility payment,’ as the statute entitles it, is paid into the Treasury by ‘taxpayers’ when they file their tax returns. … The requirement to pay is found in the Internal Revenue Code and enforced by the IRS, which—as we previously explained—must assess and collect it ‘in the same manner as taxes.’ This process yields the essential feature of any tax: it produces at least some revenue for the government.”
Since we now know that it is a tax, it makes sense for the IRS to be the agency that enforces it.
“It’s not just a health bill, it’s a tax bill,” observed Padgett Business Services president Roger Harris. “No one should be surprised that it will be enforced by the IRS. Somebody’s got to enforce it, and if you’re going to have mandates and taxes and revenue to be collected, who else would do it?”
As far as its effect on the possibility of tax reform, it’s a mixed bag. Had the court voted to strike down the legislation, the attention of both houses of Congress would be concentrated on reform. And if President Obama is re-elected, reform efforts could go forward, since there would be no possibility of legislation passing to repeal the Act. But if the Republicans take the White House, much energy that would go into planning for reform would be spent on repealing certain parts, or all, of the Act. Just this week, a joint House-Senate hearing to consider capital gains in the context of tax reform, scheduled for June 28, 2012, was postponed “until further notice.”
For its effect on hiring and the economy in general, we’ll have to wait and see. In a Gallup survey released in February, nearly half of the small business owners who aren’t hiring cited fear about the potential cost of health care as a reason.
“I thought they would find it unconstitutional,” said Amy Gordon, a partner in the employee benefits group of Chicago-based McDermott Will & Emery LLP. “It’s interesting that they would conclude that it’s not constitutional under the Commerce Clause or the Necessary and Proper Clause, but that it is a fair use of power under the Tax Clause. It looks as though they felt a duty to somehow find it constitutional given the money that insurers have already spent in taking steps to comply.”
However, the consequences will be costly for employers, Gordon believes. “In the past it was always an option on whether to provide health coverage,” she said. “Now it’s a mandate, and with every mandate there are costs involved. It’s burdensome for smaller employers who are anticipating the pay or play penalties that will go into effect in 2014. These apply to employers with more than 50 employees. I can envision smaller employers coming close to the 50-employee threshold and thinking twice about hiring more people, knowing that this will saddle them with an additional tax burden.”
Under the pay or play penalties, a non-deductible excise tax will apply to employers with more than 50 employees that provide no health coverage to their employees, Gordon observed. “If an employer chooses to offer no coverage to employees, a penalty of $2,000 per full-time employee in excess of 30 employees will be assessed if one full-time employee obtains a tax credit or cost-sharing assistance from the government and buys coverage on the exchange. So if the employer has 100 full-time employees, it will pay 70 (100 minus 30) times $2,000, or $140,000.”
Large employers who provide “unaffordable coverage” will pay a penalty equal to the lesser of $3,000 per full-time employee, or $2,000 per full time employee in excess of 30 employees. Coverage is unaffordable if it exceeds 9.5 percent of the individual’s household income, the employee falls within 100 percent to 400 percent of the federal poverty level, and the plan’s share of allowed costs under the plan is less than 60 percent.
“Many employers are spending a lot more than the penalties,” Gordon noted. “So my concern is that the pay or play penalty will be an incentive for employers to not participate in health coverage, and send their employees to the health care exchanges that the Act envisions. And I’m not confident that the exchanges will be adequate to provide coverage to all the employees who get sent there.”
But there’s a silver lining behind the cloud of increased complexity, at least for tax preparers. The provisions of the law are complex enough and the penalties draconian enough to send more taxpayers to a professional preparer.
As Kathy Pickering, vice president of H&R Block Government Relations and executive director of The Tax Institute at H&R Block, stated, “The health care law upheld by the Supreme Court will have enormous ramifications for how Americans file taxes each year going forward. Today’s ruling that the individual mandate is a tax underscores how the law is being enacted through the tax system. Taxpayers will need additional guidance to understand the real-life implications.”
