Is the penalty for not buying health insurance a fee or a tax?

Who's winning, who's losing, and why.
Sept. 28 2009 7:41 PM

Tax Dodging

Why it matters whether we call the health insurance penalty a "tax" or a "fee."

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The definition also matters because taxes and fees have different legal meanings. Many states, for example, have special requirements for a tax hike: Some require a supermajority of legislators to vote for it or for multiple readings of the bill. In California, it requires voter approval. The distinction could also matter on the federal level. On Friday, Sen. Ensign pointed out that if the fee is indeed a tax, wouldn't someone who refused to pay it be considered a tax evader and therefore subject to an even larger fine? A representative from the Joint Committee on Taxation said that yes, the penalty for failing to pay the fee could be as high as $25,000 and up to a year in jail. The likelihood of every scofflaw paying that penalty is extremely low, says tax law professor Joseph Bankman of Stanford University: "There's no reason you'd have to stick with existing penalty structures." But it shows how a tax vs. a fee is a distinction with a difference.

That distinction could even have implications for the constitutionality of health care reform. Some lawyers have raised concerns that the individual mandate may overstep Congress' constitutional authority to regulate commerce and levy taxes. The flipside of that argument, however, is that, in the likely event of a court challenge, the administration wants as many defenses as possible. The first line of defense would be the commerce clause, which regulates the trade of goods and services across state lines. The administration could say that it applies to health care because when people don't buy health insurance, it affects everyone else, even in other states. The second argument, if necessary, would be that Congress has the right to tax the people. In which case, the administration might want to describe the individual mandate as a tax.

Naturally, politics will win out. Democrats will fight the "tax" label. And with good reason: If the bill can't get enough votes because of fears that it's a tax hike, Democrats won't even get a chance to test its constitutionality. And if a bill doesn't pass, Democrats up for re-election could pay the ultimate fee. I mean, tax.

Christopher Beam is a writer living in Beijing.