5th Circuit invalidates health care law’s individual mandate

By Sally P. Schreiber, J.D.

The Fifth Circuit held on Wednesday that the “individual mandate” under Sec. 5000A, which imposes a “shared responsibility payment” on taxpayers who do not obtain health insurance that provides at least minimum essential coverage, is unconstitutional now that the payment amount has been reduced to zero (Texas, No. 19-10011 (5th Cir. 12/18/19)).

The individual mandate was held to be constitutional by the Supreme Court in its decision in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012). In that case, the Supreme Court, in a 5–4 decision, held that Sec. 5000A shared-responsibility payments are not a penalty, but are a tax and are therefore allowed under Congress’s power to tax in Article 1 of the Constitution. In 2017, the law known as the Tax Cuts and Jobs Act, P.L. 115-97, reduced the amount of the Sec. 5000A payment to zero, effective after 2018.

The plaintiffs in the Texas case decided Wednesday include 18 states and two individuals. Sixteen states, the District of Columbia, and the U.S. House of Representatives entered the case as intervenors.

The Fifth Circuit held as a preliminary matter that the plaintiffs had standing to pursue the case because there was a “live case or controversy” (slip op. at 3) as a result of the harm to the individual plaintiffs, who were forced to buy health insurance to comply with the individual mandate, and because the states showed that the health care law caused them “fiscal injury” by imposing reporting requirements on them.

The Fifth Circuit then examined the constitutionality of the individual mandate and found that the Supreme Court had held that the individual mandate was “a legitimate exercise of Congress’ taxing power for four reasons” (slip op. at 37). The court found that those four reasons no longer apply now that the mandate penalty is set at zero.

First, the court found that “the provision no longer yields the ‘essential feature of any tax’ because it does not produce ‘at least some revenue for the Government’” (slip op. at 38, internal citations omitted). Now that the provision no longer produces revenue, it lacks the three other characteristics that the Supreme Court decided made the provision a tax. It is “no longer ‘paid into the Treasury by taxpayer[s] when they file their tax returns’ because no one pays the tax” (id.). The payment amount is no longer “determined by such familiar factors as taxable income, number of dependents, and joint filing status” (id.). Finally, the IRS no longer collects the payment because nothing is due.

Because the shared-responsibility payments now lack these “four critical aspects,” the court held that it could no longer be considered a constitutional exercise of Congress’s taxing power. However, while the district court had held that the individual mandate was not severable from the rest of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, which enacted Sec. 5000A, and therefore the entire PPACA was unconstitutional, the Fifth Circuit remanded the case to the district court for further consideration of whether and to what extent any of the health care law can be severed from the Sec. 5000A individual mandate, or if the PPACA is unseverable and therefore unconstitutional.

Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

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