As people debate the Constitutionality of the individual mandate, a common argument I hear is that because the penalty is done through taxes, its perfectly legitimate. The belief is that if it were Unconstitutional, it would only be because of the Tenth Amendment, which states that the Congress doesn’t have any powers that aren’t specifically enumerated for it. Since the Congress clearly has the power to levy taxes, penalizing people through the tax code would be by that means acceptable.

E.J. Dionne says the following in a Washington Post editorial:

“It would take a rashly activist court to find the individual mandate unconstitutional because it is structured as a tax. No one will go to jail for not buying insurance. Starting in 2014, people who refuse will have to pay a penalty to the federal government, administered by the IRS. There are subsidies for those who cannot afford coverage on their own, as well as hardship exemptions.”

But penalizing people through taxes doesn’t solve the Constitutional issue, it just makes it sharper.

Students of American history should know that the reason that the income tax had to be established through an amendment is because the Constitution places limits on the way Congress can tax. Specifically, the Constitution has a set of provisions that restrict the way in which direct taxes, rather than indirect taxes, can be levied. One states,

No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.

In legal terms, the distinction is that a direct tax is simply a tax imposed on a person or property which meets a certain condition, while an indirect tax requires a transaction or other act — such as an act of commerce — to take place. In that sense, direct taxes are harder to avoid.  To avoid an indirect tax, all you need to do is not engage in such an action, while to avoid a direct tax, you have to go through additional hoops. For instance, if its a property tax, you need to sell your property.  The language was put in to prevent the federal government from enacting taxes that would unequally affect certain states over others. So — the Northern states, for instance, couldn’t impose crippling taxes on the cotton industry in the South. It was also generally felt that that taxes on things like property were the purview of local governments, not the federal government. It was none of the federal government’s business what someone owned or didn’t own.

Because the Supreme Court decided that an income tax was a form of direct tax, supporters had to start a process of amending the Constitution, and the Sixteenth Amendment was ratified in 1913:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

As can be seen from the wording, the amendment doesn’t wave the requirement just on any form of direct taxation, only such done on income, and has been so interpreted by the Supreme Court. A tax penalty for failure to buy insurance, should — by all means — be considered a direct tax, because its not taxing a transaction, but taxing a class of people who have failed to undergo a transaction. Now, if this can be considered acceptable by the Sixteenth Amendment, simply because its on an income tax form, any direct tax can be considered acceptable in the same way. If, say, the Congress wants to do a national property tax — which would otherwise be Unconstitutional — all it would have to do is attach it to the income tax form and frame it as a ‘tax penalty for property ownership’. It would render those provisions in the Constitution null and void. The Attorney General of Florida has filed suit on that reasoning:

“The individual mandate, whether levied as a tax or as a tax penalty, is a capitation or direct tax that is not apportioned evenly among the states as is constitutionally required…  “While affected citizens of every state may pursue judicial relief from the individual mandate provisions, states have standing to sue the federal government to protect their sovereign and quasi-sovereign interests.”

The Congress could fix this issue by instead of imposing a penalty on those who don’t buy insurance, offering a credit to those who do buy it. While the distinction might seem minimal, the credit wouldn’t go against Constitutional language, and maybe its important that with a credit, it would be harder to raise taxes. The Congress would have to do a general tax hike, and then increase the credit to match that. With a penalty, all they would have to do is increase the penalty amount, and with most people choosing to buy insurance, such a bill might go by unnoticed.

My guess is that’s one reason Democrats chose the route of a penalty. They want to make the health care bill seem like its raising money without the criticism that they’re raising taxes. In fact, the bill tries to avoid using the term ‘tax’ altogether, opting for language like ‘penalty’, ‘fee’, and ‘fine’.