Is the “shared responsibility payment” in the Affordable Care Act—the money you have to fork over to the government if you choose not to buy health insurance—a tax or a penalty? Maybe it’s both. It’s a sin tax. In fact, it’s a sin-of-omission tax.
Since the Supreme Court handed down its ruling on the ACA—rejecting the responsibility payment as a penalty but upholding it as a tax—we’ve tied ourselves in knots debating these terms. For political purposes, Democrats call the payment a penalty, while Republicans call it a tax. For constitutional purposes, Republicans portray it as a penalty, while Democrats portray it as a tax. We need a simpler model for understanding what we’re talking about. That model is sin taxes.
The court is as confused about taxes and penalties as we are. Here’s how Chief Justice John Roberts, author of the controlling opinion in the ACA case, distinguished them. Taxes, unlike penalties, entail no criminal sanctions. As long as you pay your taxes, you won’t be punished. Penalties, unlike taxes, depend on whether you knew you knew what you were doing. And penalties, unlike taxes, can be onerous to the point of destruction.
The court’s four dissenting conservatives drew the line differently: Any money the government extracts for failure to follow a legal requirement is a penalty, not a tax. They agreed that taxes have to generate revenue. But they argued, contrary to Roberts, that penalties, like taxes, can be proportionate to wealth, can apply to inadvertent violations, and can be enforced by the IRS.
In some ways, these definitions fit our intuitions about what’s a tax and what’s a penalty. In other ways, they’re a mess. Roberts’ definition of a tax seems to let the government use the tax code to push you to do whatever it wants. And the dissenters’ formulation—defining “penalty” as the sanction for “unlawful” behavior, and “unlawful” behavior as what’s punished by a “penalty”—is a useless tautology.
The political debate over these terms is less formal than the judicial debate, but it’s actually cleaner. Let’s start with the Democrats. Here’s White House press secretary Jay Carney, discussing the ACA payment on Friday:
It is not a broad-based tax. It affects 1 percent, by CBO estimates, of the population. It is not something that you assess like an income tax. … It's a penalty because you have a choice. You don’t have a choice to pay your taxes, right? … So if you don't buy [insurance], and you can afford it, it is an irresponsible thing to do to ask the rest of America’s taxpayers to pay for your care when you go to the emergency room.
That’s a pretty clear list of criteria. Unlike income or sales taxes, the payment applies only to a small subset of the population. That subset is defined by behavior, and the rationale for targeting this behavior is the financial burden it imposes on others. If you read what other Democrats have said over the past few days, you’ll see the same pattern. Here’s White House Chief of Staff Jack Lew on Fox News Sunday:
Chris Wallace: This is a tax increase on the middle class of $27 billion over the next 10 years.
Lew: No, what this is, this is a law that says if you can afford insurance and you choose not to buy it and you choose to have your health costs be a burden to others, you will pay a penalty so that you will pay your fair share. … For the 99 percent of the people who buy insurance or get it through the tax cuts that are in this act, they are not going to be affected.
Wallace cites the total figure and defines the affected population by class. Lew replies that nearly everyone is unaffected, and he defines the targeted population by behavior and burden. Gov. Martin O’Malley, D-Md., chairman of the Democratic Governors Association, delivered the same message on Face the Nation: “The ‘massive-so-called tax increase’ they`re talking about is the freeloader penalty, which would affect at most 1 percent to 2 percent of people that could afford health care and instead want to be freeloaders on the rest of us.” So did former Gov. Jennifer Granholm, D-Mich., on State of the Union: “Republicans have long gone after welfare cheats, tax cheats. Why not go after health care cheats for those who can afford health care and foist that cost on the rest of us?”
The three criteria Democrats keep invoking—breadth, behavior, burden—do indeed correspond to Republican intuitions. The Republican House and Senate leaders, John Boehner and Mitch McConnell, frame the ACA payment as a tax only in aggregate terms. By contrast, at the individual level, the GOP’s de facto presidential nominee, Mitt Romney, has defended a similar payment in Massachusetts—which he signed into law—on grounds identical to those asserted by Democrats. Here’s Romney at a Republican presidential debate in January 2008:
If somebody can afford insurance and decides not to buy it, and then they get sick, they ought to pay their own way, as opposed to expect the government to pay their way. And that’s an American principle. That’s a principle of personal responsibility. … Don’t be free riders and pass on the cost to your health care to everybody else.
Video of a 2006 press conference shows Romney drawing a similar distinction between payroll taxes and his health-care “assessment” on employers:
It’s not a tax hike. It is a fee. It’s an assessment. … It applies to people who are abusing the free-care pool and are excessively using the free-care pool, and some incentive to avoid that is appropriate. But it’s not a tax. It’s not a broad-based program.
When you put together these various statements from leaders of both parties, you get a fairly consistent definition of “taxes” as they’re commonly understood and loathed. They’re broad-based and unavoidable. They don’t reward responsibility, and they arguably punish it, by confiscating the fruit of your labor. But not all taxes fit this definition. Some taxes—sin taxes—defy it.
Roberts, in his ACA opinion, cited an example: “Today, federal and state taxes can compose more than half the retail price of cigarettes, not just to raise more money, but to encourage people to quit smoking.” Such taxes, he noted, have been routinely upheld: “Taxes that seek to influence conduct are nothing new.”
Sin taxes are vastly more popular than regular taxes. Look at Gallup’s data. Only 3 percent of Americans think federal income taxes are too low, and only 5 percent want them to be increased. Those numbers haven’t budged in decades. But in 2005, the most recent year in which Gallup asked about cigarette taxes, 25 percent of Americans said such taxes were too low (another 35 percent said they were “about right”), and 53 percent said cigarette taxes should be “raised by substantial amounts in order to help state and local governments pay for the health costs related to smoking.” The public rejected anti-smoking mandates: 83 percent said smoking shouldn’t be outlawed in the United States, and 60 percent said it shouldn’t be banned in all public places. But 64 percent said “it would be justified … to set higher health insurance rates for people who smoke.”
In short, the public, like politicians, sees distinctions between mandates, broad-based taxes, and sin taxes. It hates mandates and dislikes taxes, but it favors sin taxes, as long as the behavior they target burdens other people. What’s notable about the ACA is that it extends this principle from activity to inactivity. It punishes a sin of omission. Are we OK with that? Does the “burden” principle—the premise that behavior can be targeted only if it burdens others—adequately restrict this extension of sin taxes? That’s a question for the court to debate constitutionally, and for the rest of us to debate politically. But it’ll be a lot easier to get on with that debate if we stop talking about penalties and start talking about sin taxes.