Constitutional Review of Federal Fiscal Legislation

Abstract

What does the Constitution mean when it says that “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States” (US Const. Article I, Section 8, Clause 1)? The definition of “tax” for constitutional purposes has become important in light of the Supreme Court’s 2012 decision in NFIB v. Sebelius, in which Chief Justice Roberts for the Court upheld the constitutionality of the individual mandate of the Affordable Care Act under the taxing power. This has led to commentators questioning the utility of Roberts’ distinction between a “tax” (where Congress’ power is almost unlimited) and a “regulation” (where Congress’ power under the Commerce Cause is limited). We would propose a different distinction. A “tax” for purposes of the Taxing Clause is a pure tax, namely a tax implemented for raising revenue for the government “to pay the Debts and provide for the common Defence and general Welfare of the United States”. In addition, pure taxes can legitimately be used for distributive purposes, i.e., to reduce inequality. Even a pure tax has constitutional limits, but they are relatively few. This should be distinguished from a regulatory tax, i.e., a tax whose main purpose is not to raise revenue but to change taxpayer behavior. Regulatory taxes include Pigouvian taxes (e.g., tobacco taxes and carbon taxes) designed to reduce negative externalities and tax expenditures (deviations from a normative tax base). Regulatory taxes should be subject to constitutional review under various clauses of the Constitution including the Due Process Clause, the Equal Protection Clause, and the limits on the Commerce Clause. The penalty imposed by the individual mandate of the ACA, which was repealed in 2017, was a regulatory tax and therefore (contrary to Chief Justice Roberts’ view) subject to the limits on Congressional power under the Commerce Clause. Any actual tax has more than one purpose. All taxes influence behavior, and therefore come within our definition of regulatory taxes, and all taxes produce some revenue and effect some redistribution, and therefore come within our definition of pure taxes. But some taxes are primarily regulatory (e.g., Pigouvian taxes) while others are primarily for revenue (e.g., Value Added Tax, VAT) or redistribution (e.g., the personal income tax, PIT). Other taxes have multiple purposes (e.g., corporate income tax, CIT, which has revenue and redistribution as well as regulatory aims). Moreover, any given tax may have multiple provisions with different aims (e.g., the many tax expenditures embedded within PIT and CIT). When evaluating the constitutionality of any given tax provision, a court should first classify it as either a pure tax provision or a regulatory tax provision. If it is the former, the court should generally hold that it is constitutional under the Taxing Clause. If it is the latter, the court should evaluate it against the limits imposed by the rest of the Constitution.