The Taxing Power, the ACA, Religion, and Line-Drawing

-- Posted by Neil H. Buchanan

I recently watched a TV panel discussion about tax complexity, in which an economist made an interesting point about the "individual mandate" of the ACA and the sophistry of the activity/inactivity distinction.  She noted that the mortgage interest deduction -- that most sacrosanct of tax breaks -- can readily be characterized as a mandate to buy houses.  How?  If a person does not want to engage in the activity of owning a home, then that person will end up paying more in taxes than if he decides to engage in that activity.  This logic extends at least to all "tax expenditures" (that is, the tax-based government subsidies so popular among Republicans and Democrats alike), if not all tax rules more generally, because the system is set up to make taxes higher -- a tax penalty -- for those who do not take advantage of the tax-favored behavior.

Of course, this argument is not exactly new, or even all that different from many arguments that I have read elsewhere.  Indeed, as Professor Dorf wrote on Verdict after the Supreme Court's hearings in March on the ACA, Justice Sotomayor made exactly this kind of form-versus-substance argument, showing that the activity/inactivity distinction can easily be reduced to the empty phrasing that it is.  If we can recharacterize the ACA's individual mandate as nothing more than a tax cut for people who choose to buy health insurance, how in the world is it a dangerous extension of the government's scary powers to force people to do things that they would otherwise not do?

Although none of this is new, the economist's construction of the argument does seem to cut through the nonsense in a way that is better than I have seen elsewhere.  I could not help thinking about how one would construct a constitutional argument against the mortgage interest deduction.  Congress did not call the mandate a "tax."  Indeed, they called it a "tax deduction," which is (somehow) different.  Unless we force Congress to admit that it is forcing people to do things, then we are on a dangerous road to allowing them to stealthily take away our liberty.  (See how easy it is to abuse this language?)

So, to prevent Congress from abusing its power, a limitation must be derivd from the Commerce Clause, right?  And here, the argument that Congress can regulate housing is much weaker than the argument that it can regulate health care.  Although it is true that everyone must live somewhere, choosing not to live in a dwelling that one owns is not inevitable.  That is, the ACA's backers have defended the mandate on the basis that people who choose not to buy health insurance are only temporarily sitting out of a market into which they will all ultimately be forced to enter.  We will almost all end up in emergency rooms or doctors' offices at some point, and Congress has the power to set rules to make that market work better.  By contrast, people who do not buy homes might never buy homes.  Yet the mortgage interest deduction forces them to pay a penalty to stay out of that market.

There is even a decent claim (by the standards of this debate) that housing is not interstate commerce.  A person can only live in one place at a time, and if she stays in one state for her whole life, then she is not engaged in interstate commerce.  Of course, as a fan of Wickard v. Filburn, I find that fatuous, because it is easy to see how local decisions have national implications.  Again, however, the point here is that housing decisions can only be characterized as interstate commerce by reference to the effects of local decisions on home prices, mortgage rates, and so on, which affect people in other states.

All of which brings to mind another tax-based oddity of constitutional law.  As noted above, we know that tax deductions (and other tax incentives) amount to a government subsidy.  That is generally the point.  We want to make life easier for families, so we pass the Child Tax Credit, as an alternative to simply sending people a check to help cover the cost of raising children.  This means that the government is giving money to people with children.  Obviously, this logic applies equally to personal exemptions, which are a per-person subsidy received by all taxpayers.

The Supreme Court has noted that the charitable deduction also amounts to government subsidization of the tax-exempt recipients of donated funds.  If I am in the 25% income tax bracket, a $100 donation to the Church of the Fonz costs me $75, while it costs the government $25.  We approve of this subsidy by lauding the decentralized nature of the decision making.  So long as we do not subsidy extremely unacceptable behavior (such as the university rules against interracial dating in the Bob Jones University case), then each person in the country is empowered to be her own little Appropriations Committee, deciding to put some of her own money up with some government funds to support a favored charity.  Let a thousand flowers bloom!

As many have noted, of course, the uncomfortable extension of this logic is that the charitable deduction violates the Establishment Clause.  We (including, especially, the Supreme Court) look the other way when the government's tax rules allow money to be diverted from the Treasury to religious organizations.

There are surely good reasons to maintain legal fictions and to draw arbitrary lines.  For purely political reasons, polite people simply never bring up the Establishment Clause problem with the charitable deduction.  Even so, the basic logic of how taxes work -- and the ease with which one can flip back and forth between viewing any tax rule as a penalty or a benefit -- makes it utterly arbitrary to describe some tax rules as violations of liberty, while we view others as virtuous methods to encourage civic engagement.