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When Will Anyone Notice That Obamacare's "Individual Mandate" Doesn't Exist?

By Jim Edwards

Updated on: October 18, 2011 / 2:50 PM EDT / MoneyWatch

The most important part of the Obama Administration's request that the U.S. Supreme Court review the healthcare reform law is buried on page 26, where it discusses whether the "individual mandate" that all Americans obtain some form of healthcare coverage is constitutional.

The "individual mandate" is hugely misunderstood, even though it overshadows the entire debate about "Obamacare." Its provisions are modest, and about as easy to wriggle out of as federal income tax. On its face, it is actually an income tax, in the sense that it's a tax based on your income. And unless you're a tax extremist like Wesley Snipes, it's probably constitutional just like the regular income tax is. Whether the Supreme Court will see it this way is another matter, but it's worth knowing what hoops Chief Justice John Roberts and his conservative majority will have to jump through if they decide to strike down the law.

Conservatives, of course, regard the individual mandate as an unconstitutional extension of the federal government's power. While the government may impose taxes, it cannot force Americans to buy a product against their will, every year, from birth to death, they say. Such mandates are probably unconstitutional under the Commerce Clause of the Constitution, which gives Congress the right to regulate some but not all types of trade.

If the Supreme Court reads the law that way, then the individual mandate will almost certainly be struck from the reform act. (And why shouldn't it be? If Rick Perry becomes president, would you want him to force us to buy shares in Merck? Or if Mitt Romney gets elected, must we all assign our 401(k) portfolios to Bain Capital, his investment firm?)

The Obama Administration has argued that the law doesn't violate the Commerce Clause because all Americans participate in the healthcare market at some point in their lives. The problem is that a bunch of them either can't afford or can't be bothered to pay for their care. As the 11th Circuit appeals court ruling that struck down the law states, that increases the insurance premiums of families that do have coverage by $1,000 per year and up to $410 per year for individuals. It's a form of commerce that just happens to be universal, and therefore OK for Congress to regulate.

The "individual mandate" doesn't exist
But that's not what the law actually turns on. Here is the "individual mandate" section of the law itself, 26 U.S.C.A. 5000A. Note that the law doesn't actually contain the words "individual mandate" -- that term is a political invention that has been adopted by the federal appeals courts that have struck down the law. (Thanks for not being judicial activists, conservative federal judges!)

The title of the law is "Requirement to maintain minimum essential coverage," which certainly sounds like a mandate, but the title itself is misleading. After requiring that all Americans obtain some sort of coverage, it then says that those who choose not to must pay a tax. The tax is a modest one, and looks like this, per family:

$95 in 2014
$325 in 2015
$695 in 2016 up to a maximum of $2,085 per family or 2.5 percent of household income.

But then the act offers a third choice which doesn't get talked about much: Pay nothing at all. The act allows makes the following people exempt from the tax penalty:

Individuals who cannot afford coverage.
Taxpayers with income below the filing threshold.
People with spotty insurance that features only "small coverage gaps."
People for whom paying would be a "hardship" as defined by by the Department of Health and Human Services.
Members of Indian tribes.
People with a "religious exemption," such as those who live in sects.
Members of "health care sharing ministries," such as monks, who buy communal coverage.
Prisoners.
Expatriates.

It's really an income tax
In other words, the tax "penalty" is only a penalty in the same way that income tax generally is a penalty: If you're poor, you don't have to pay it. If you're earning money, you'll have to pay something. And even if you're earning money, you still don't have to pay it if you purchase enough stuff that counts as deductions or write-offs. In this case, health insurance is like a tax write off -- it gets you out of the income tax you'd otherwise pay.

The 16th Amendment to the Constitution is pretty clear on income taxes: they're constitutional. It's the part of the Constitution that conservatives hate most because it means that taxes can almost never be declared unconstitutional.

If the Supreme Court were to ignore this and overturn the law based on the Commerce Clause, it might, by extension, make unconstitutional any tax based on income levied in lieu of some other economic activity. I'm no tax expert, but wouldn't that unravel the entire tax code?

Just a thought.

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Photo by Flickr user Jon Person, CC 2.0