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Professors Provide Roadmap for Supreme Court Healthcare Ruling

Robert Cooter
Professor Robert Cooter

By Andrew Cohen

The Supreme Court’s tax-power analysis in NFIB v. Sebelius, which recently upheld President Obama’s healthcare law, closely resembles a constitutional theory developed by Berkeley Law professor Robert Cooter and his former student, Duke Law professor Neil Siegel ’01.

The Court ruled that the Patient Protection and Affordable Care Act’s (ACA) mandate—that most Americans purchase health insurance or pay a penalty—was constitutional under Congress’s power to levy taxes.

In his majority opinion, Chief Justice John Roberts applied some of the same arguments in Cooter and Siegel’s forthcoming Virginia Law Review article, “Not the Power to Destroy: An Effects Theory of the Tax Power.” It’s an argument Cooter and Siegel have been presenting at legal conferences over the past two years. They posted the law review piece online this past January.

The article develops the authors’ “effects theory”—which holds that the distinction between a tax and a penalty depends upon its effect—not its name. In other words, even though the fine for not purchasing the ACA minimum coverage is named a “penalty” by Congress, it is in fact a tax because of its effects. Roberts reached the same conclusion.

In doing so, Roberts applied two of the three traits Cooter and Siegel used to distinguish a tax from a penalty: its punitive level and whether there is evidence of scienter (an intent to deceive, manipulate, or defraud). Roberts followed their argument that a moderate exaction without scienter is a tax.

He also noted—as did Cooter and Siegel—that a tax can be deemed a penalty if the burden becomes excessive and thus coercive, but that the minimum coverage provision falls below this threshold. Roberts further echoed the authors by noting that a penalty’s effect is to prevent conduct, which raises little revenue, whereas a tax’s effect is to “dampen” conduct without preventing it, which can raise significant revenue.

The Chief Justice emphasized other key points in the scholars’ article, cited some of the same sources in the same sequence, and concluded his opinion by using the same Oliver Wendell Holmes quote that leads the law review article.

The similarities in logic, citations, and rhetoric are striking. But the effects theory, when first proposed by Cooter and Siegel, was dismissed by legal scholars. “We faced tremendous hostility after first presenting this paper,” said Cooter, who co-directs the law school’s Law and Economics Program, and is the author of The Strategic Constitution (Princeton University Press 2002). “Critics said no one would accept the theory, that it was ‘not important.’ But the Supreme Court opinion follows much of our arguments, and I think we may be on to something relevant to the future interpretation of the Constitution.”

Linking the theories

The effects theory ties into the authors’ “collective-action federalism” theory, which provides a new way of understanding the Constitution’s Commerce Clause. While the clause’s 18 provisions enumerating congressional powers are widely viewed as separate and unrelated, Cooter and Siegel see them as a coherent set designed to deal with multi-state problems that affect the general welfare.

Before the Court’s ruling, they argued that the Supreme Court had no justifiable basis for striking down the ACA minimum coverage requirement because Congress had acted within its constitutional powers—in an effort to solve economic problems that spill over state boundaries.

“Congress may step in when the actions of two or more states produce undesirable results for the nation as a whole,” Cooter said. “History shows that the Constitutional Convention was conceived mostly to overcome multi-state, collective-action problems that the Articles of Confederation could not handle. We’re not describing what we think a good Constitution would be; we’re describing what we think the Constitution we have is, and that belief must be historically rooted.”

Cooter and Siegel relate the constitutionality of the ACA mandate to buy health insurance to a collective-action problem arising when people benefit from something regardless of whether they contribute to it. When the effects of that problem cross state borders, Congress is constitutionally authorized to require various types of private action.

Economics as a marvelous predictor

In 1984, Cooter’s Columbia Law Review paper “Prices and Sanctions” distinguished between a price and a sanction in the law. Nearly three decades later, “I could see that the same idea that I’d applied to private law—that a penalty tries to prevent your conduct, while a tax merely increases the cost of doing it—might work here. Fortunately, my friend and former student, Neil Siegel, had become a distinguished constitutional lawyer, and together we perfected the theory.”

In applying the effects theory to the healthcare bill, Cooter and Siegel point to a Congressional Budget Office projection that the fine for not buying health insurance will dampen uninsured behavior but not prevent it, thus raising several billion dollars in revenue each year. As a result, Cooter and Siegel concluded that the penalty is a tax—and may have helped persuade Chief Justice Roberts to reach the same conclusion.

“The law is practical like engineering, not like astronomy,” Cooter said. “You can’t affect the stars, but you can affect bridges. The Constitution was conceived as a practical document, and you can’t figure out everything about it by simply looking at the ordinary meaning of words. Sometimes you have to work out what the effects are, and economics is a marvelous predictor of consequences based upon incentives.”

7/18/2012