United States Constitution

PREAMBLE : We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution



The Taxing and Spending Clause

Introduction Important Cases
Though parts of the federal government’s power to tax (and use the money made from taxes) can be found in different provisions throughout the Constitution, it is this provision, in Article I, Section 8, that is at the heart of this ability: “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; but all Duties, Imposts and Excises shall be uniform throughout the United States.”

In the early part of the 20th century, this clause was used by the Court to narrow Congress’ ability to tax and spend. In efforts to affect changes in state policy and state law, the federal government attempted to use the stick of taxes and the carrot of spending to incentivize states to comply with some federal program. For example, Congress wanted to regulate child labor laws. But, as far as the Constitution is concerned, no provision authorizes Congress to regulate in this area. As a governmental body of limited, enumerated powers, Congress could theoretically not make laws to affect such change. It is the states’ prerogative whether or not to regulate in an area where Congress does not have authority. However, in 1919, Congress passed a law attempting to use its taxing and spending power to incentivize changes in state child labor laws. This law imposed a tax on profits of a company that employed children. But in Bailey v. Drexel Furniture Co. (1922), the Supreme Court held this law to be unconstitutional. Congress was prohibited from using its taxing and spending power to essentially work around a limitation on its authority.

 Bailey v. Drexel Furniture Co. (1922)

United States v. Butler (1936)
Modern Conditional Spending Important Cases
Still, despite the period during which the Supreme Court tended to limit Congress power on economic matters (see the Lochner Era), the modern Court generally views Congress’ authority under the Taxing and Spending Clause as fairly broad. Not only have the limits on Congress’ powers to use the negative reinforcement of taxes to shape behavior been relaxes, but so has the so-called “Conditional Spending” power of Congress. Meaning, in certain circumstances, Congress may use targeted spending to incentivize states to act in a certain way. After all, Congress may use money to “provide for the…general welfare of the United States,” a grant of power that is now seen as fairly broad.

However, there are still contours to the Conditional Spending Power, understood to have generally been established in South Dakota v. Dole (1987). In South Dakota, the Court examined a law passed by Congress that withheld a portion of federal highway money from states whose legal drinking age was below 21. Holding this law to be constitutional, the Court delineated the following: (1) that the exercise of the spending power be able to be defined as for the “general welfare,” (2) that the Court substantially defer to the judgment of Congress as to whether something is for the general welfare, (3) that the conditional receipt of federal funds be “unambiguous,” (4) that there be some nexus between the condition and the project for which the money is being given, and (5) that other constitutional provisions not independently bar the conditional grant of the funds.

For example, in Rumsfeld v. Forum for Academic and Institutional Rights, Inc. (2006), the Court held the Solomon Amendment to be constitutional. The Solomon Amendment was a law that denied federal funding to any school which did not allow military recruiters the same access to students as other private employers. Law schools sought to not comply with the law because, at the time, the military abided by the ‘Don’t Ask, Don’t Tell’ policy, which the schools labeled discriminatory. However, finding that the conditional spending complied with the South Dakota framework, the Court upheld the law.

 Hampton & Co. v. United States (1928)

Magnano Co. v. Hamilton (1934)

South Dakota v. Dole (1987)

Rumsfeld v. Forum for Academic and Institutional Rights, Inc. (2006)
The Affordable Care Act: The Constitutionality of the Individual Mandate Important Cases
Recently, in National Federation of Independent Business v. Sebelius (2012), the Supreme Court relied heavily on the Taxing and Spending Clause to uphold most of the Affordable Care Act (also refereed to as Obamacare), as well as to declare part of it unconstitutional.

Though this healthcare law is vast and complex, the two major provisions dealt with in this case concerned what is called the ‘individual iandate’ (held constitutional under the Taxing and Spending Clause) and an expansion of Medicaid (held partially unconstitutional under the Taxing and Spending Clause). The individual mandate requires every American to have health insurance. Those who cannot afford insurance will be given subsidies to purchase it. Those who can afford insurance, but choose not to do so, will be subject to a fine. The underlying reasoning of this fine is as follows: someone who has the ability to purchase health insurance but doesn’t is burdening the cost of insurance for those who do purchase it. When the uninsured does get sick or injured, he or she has nowhere to turn but the emergency room, where the cost of healthcare is high. Then, this person may be suddenly stuck with a bill that he or she is unable to pay for. But because the hospital is obligated to provide care for all, it still expends the money to care for this patient – but then doesn’t get paid. Therefore, the hospital has no choice but to raise the cost of care for everyone, even those with insurance.

The most popular argument among legal scholars and media pundits, in the days leading up to the Court’s decision on this case, was that the Justices would either strike down the mandate or uphold it under the Commerce Clause. The side arguing that it was unconstitutional said that the federal government did not have the ability to require people to purchase a product (the insurance). The side arguing that it was constitutional said that those with the ability to purchase insurance, but who chose to do so, were impacting interstate commerce detrimentally – the consequences of the decision to forgo health insurance reached beyond themselves.

In the end, the Court did hold that, under the Commerce Clause, the individual mandate was unconstitutional. Congress could not force people to purchase insurance under its power to regulate interstate commerce. However, the Court did find the mandate constitutional under the Taxing and Spending Clause. The aforementioned fine – called a penalty by some – was, in actuality, nothing more than a tax, said the majority of the Court. In fact, it is the Internal Revenue Service that is charged with managing this aspect of the law. This means that, according to the Court. people weren’t being forced, per se, to buy insurance. Rather, those that didn’t were being subject to a tax – it was a simple case of Congress using its Taxing and Spending power to incentivize behavior, which is constitutional.

 National Federation of Independent Business v. Sebelius (2012)
The Affordable Care Act: The Unconstitutionality of the Medicaid Expansion Important Cases
However, the Court did not uphold the entire healthcare law. There was a portion of the law that required states to expand Medicaid coverage. Medicaid is an existing entitlement program that provides healthcare for the poor, much like Medicare provides healthcare for the elderly. Both states and the federal government provide for the funding of Medicaid. Under the Affordable Care Act, Congress requires states to enlarge their pool of Medicaid recipients. Under the law, before the Supreme Court decision, if states complied, they would get some additional federal money – but, over time, states would be increasingly responsible for the financial burden of the Medicaid expansion. If states refused, the federal government would withhold existing funding for state Medicaid programs.

The Court held that this provision left the realm of conditional spending and incentivizing, and entered the realm of coercion. Under the framework established by the 10th Amendment, as well as the requirements of conditional spending as laid out in South Dakota (see above) and subsequent cases, such usage of the Taxing and Spending Clause is actually unconstitutional. When states have no choice but to comply (as was practically the situation in the face of losing existing Medicaid funding), it is as if Congress is directly regulating in an area in which it has no authority.

 National Federation of Independent Business v. Sebelius (2012)