You Say Tax, I Say Penalty

Why neither Obama nor Romney wants to linger on the semantics of a health care tax … I mean penalty.

Republican presidential candidate Mitt Romney addresses a campaign rally in Sterling, Virginia, June 27, 2012.
Republican presidential candidate Mitt Romney in Sterling, Va., on June 27.

Photo by Jim Watson/AFP/Getty Images.

Things have gotten so bad for Chief Justice John Roberts that Mitt Romney would rather agree with Barack Obama. In the wake of the Affordable Care Act ruling, the Obama administration and the Mitt Romney campaign have agreed to define the same taxlike object not as a tax but as a penalty. This rare act of bipartisan agreement likely denies Romney a potent tax argument against the president, but that may be wise since the argument can be used against Romney, too. 

Chief Justice Roberts saved the Affordable Care Act by finding that its individual mandate was constitutional under Congress’ power to tax. “Hurray!,” said White House aides, but also: Don’t you dare call it a tax. The enforcement mechanism that pushes people to buy insurance should be called a penalty. It only acts as a tax on those who don’t buy insurance. That’s likely to be only 1 percent of the public, so it shouldn’t be considered a tax.

Republican leaders reacted to this line of reasoning: Nuts to that. Even if the distinction between penalty and tax were legally valid enough to convince a majority of five justices, the argument could never survive in the political arena. If John Roberts conveyed legitimacy of the law by upholding it, then surely he conveyed the same legitimacy upon the idea that the Affordable Care Act was a secret tax increase, despite the president’s insistence to the contrary (here, here, and here).

Republican super PACs such as American Crossroads and Americans for Prosperity launched million-dollar campaigns hitting Obama on the tax. “Now it’s official: Obama increased taxes on struggling families,” one ad says. Senate Minority Leader Mitch McConnell, arguing that the president’s health care law was one long string of deceptions, said that the court’s decision about taxation was:

… powerful confirmation of what may have been the biggest deception of all. For years, the President and his Democrat allies in Congress have sworn up and down that failing to comply with the individual mandate did not result in a tax on individuals or families. And the reason was obvious: if Americans knew that failure to comply resulted in a tax hike, it never would have passed. And the President wouldn’t be able to claim his health care bill didn’t raise taxes on the middle class, as he did, again, and again, and again. Well, yesterday the court blew the President’s cover. It narrowly upheld this law on one basis only: that the penalty associated with the individual mandate is a tax.

On Sunday, the clever McConnell offered one more strategic benefit to the tax interpretation. Since Roberts had upheld the law on tax grounds, it meant that repealing the dreaded individual mandate would be easier. Under Senate rules for reconciliation, only 51 votes are required to pass a vote if it has budgetary impact. A mere penalty would not have such impact and require 60 votes. But now that Roberts had ruled, the lower threshold to overturning the legislation could now be used.

The president’s opponents were helped in the early rounds because White House aides had worked themselves into contortions trying to argue that the concept of taxation that had saved the law did not apply to the law once it had been saved. Schrödinger’s Tax: It is both a tax and not a tax. 

Mitt Romney’s campaign aides said the president was now in a box. He had to decide whether the individual mandate was a constitutional tax or an unconstitutional penalty. If the president were to cop to the tax, he’d embrace the big-taxing-liberal label. Cop to the penalty label, and he invalidates his own law. 

The problem with this reasoning was Mitt Romney’s advocacy for his health care law in Massachusetts. That law relies on a mechanism to enforce the individual mandate similar to the one in Obama’s law. If a Massachusetts resident cannot prove on his tax forms that he has insurance, and is not eligible for a subsidy, he pays a higher tax rate. Gov. Romney doesn’t talk about his health care law a lot now, but it was once considered his signature legislative accomplishment. When he talked about it, he repeatedly referred to this enforcement mechanism as a tax, not as a penalty. (See, for example, here, here, here, and here).

He boasted about this tax because in his view, it was in keeping with a fundamental Republican notion about personal behavior. ” Using tax penalties, as we did, or tax credits, as others have proposed, encourages “free riders” to take responsibility for themselves rather than pass their medical costs on to others.” 

If Mitch McConnell was right and Barack Obama was a sneaky promulgator of tax hikes, then Mitt Romney was an unapologetic tax raiser.

On Monday, Romney’s top adviser, Eric Fehrnstrom, changed the definition of Romney’s Massachusetts plan. Though Romney had repeatedly called his Massachusetts provision a tax, Fehrnstrom was now calling it a penalty. With the move, the idea that such labels were interchangeable became less laughable. Obama aides seemed a little silly when they used search and replace to swap penalty for tax, but then Romney’s man stepped in and performed the exact opposite switcheroo. GOP leaders have long suggested that once a thing had been called a tax, it must forever be known as such. But their party nominee was proving it was possible for one person to call a thing a tax and another to call the same thing a penalty. In Mitt Romney’s case, the two opinions were being held by the same person: Mitt Romney. That significantly undermined the political argument.

Though Romney’s past gums up the politics a bit for Republicans, as a legal matter he is still on firm ground. Romney can still argue that he was justified in imposing a tax, I mean penalty, because he had that authority as a governor. The Massachusetts courts found that in the only significant challenge to Romney’s 2006 law. It focused on this penalty, I mean tax, and the courts threw it out, ruling it was allowed under the state’s “police power” to put such laws in place

Alas, you can imagine why it might be politically difficult for Romney to turn this legal support for his position into a winning boast on the campaign trail: I passed a penalty to ensure the individual mandate using police power! Still, states are allowed such broad power under the 10th Amendment. A president and Congress don’t have that kind of latitude to tell people what to do. Unless, of course, you think of it as a tax.