The Supreme Court just heard the Hobby Lobby case. The petitioners are required under the ACA (Obamacare) to either: (a) provide their employees health care with certain minimum requirements, which include contraceptive coverage or (b) not offer health care and pay a small fine. The other theoretic possibility is to offer health care and not meet the minimum requirements, but the penalty is exorbitant and therefore not a true option.
The petitioners argue their faith prohibits them from paying for contraceptive use. They think it unfair that to exercise their religious beliefs, the ACA essentially requires them to pay a tax. They are therefore bringing a First Amendment, as-applied challenge against the ACA.
During Oral Arguments, J. Sotomayor suggested the petitioners could merely pay the tax: “Those employers could choose not to give health insurance and pay not that high a penalty – not that high a tax.” J. Kagan chimed in: “[Petitioners] would pay $2,000 per employee, which is less [than they] probably pay to provide insurance to its employees … So there is a choice here.” I think both justices are seriously underestimating this compliance cost.
First, as a general rule taxes are not deductible. This is a tax and not a penalty, as C.J. Roberts wrote in NFIB v. Sebelius. So, the 2,000 dollars employers must shell out per employee is a non-capital, non-deductible expense. This makes the fine more costly for businesses.
Secondly, the very reason why employers offer employees healthcare is that this compensation is tax efficient. Employees need not include healthcare benefits in income, but an employer can still deduct payments for its employees’ healthcare. In comparison, wages are taxable by employees and deductible by businesses. This means employer provided health insurance is tax favored. For an example, pretend there is a single tax rate of 20%. Person X and Person Y both work for Corporation Z. Pre-tax, Person X receives 100 dollars + 90 dollars worth of health care and Person Y receives 200 dollars. Person X, after tax, takes home 80 dollars + 90 dollars of health care for a total of 170 dollars. Person Y takes home 160 dollars. So, even though Person Y received more money pre-tax, the exclusion of health-care compensation from taxable income means Person X took home more money after-tax. The corporation is indifferent between a dollar of compensation and a dollar of health care because they can deduct either. However, if corporations offer healthcare, then they will not need to spend as much money on employee’s wages, because healthcare compensation is more tax efficient.
How does this relate to Hobby Lobby? J. Kagan suggested that petitioners pay the tax and provide greater compensation that would allow petitioners’ employees to buy their own healthcare. However, as shown above, this would raise the total money petitioner spent on compensation because they would no longer being spending the money in a tax efficient manner.
So, what do my two points tell us about Hobby Lobby? Well, it would be more costly for petitioner to not offer health care and pay the tax than J. Kagan suggests. Whether that should alter the case’s outcome, I am unsure. However, I do think it illustrates two broader points.
(1) It is really a bad idea to have certain tax-favored forms of compensation and (2) maybe the Court should have treated the ACA tax as a penalty. If I am correct, then it will be very costly for firms to forgo offering the required healthcare. In a recent paper, Mr. Cooter and Mr. Siegel offer a heuristic for defining a fine as either a tax or a penalty. In short, taxes diminish behavior but not enough to destroy revenue, whereas penalties prohibit behavior and therefore do not raise significant revenue. Once more, if I am correct, then the fine will be costly enough that it likely prohibits behavior and does little to raise revenue. Therefore, under Cooter and Siegel’s analysis the ACA tax is a penalty. This reading of the fine would make the ACA unconstitutional under C.J. Roberts’ opinion.
*Isaiah Hunter is a J.D. candidate at New York University School of Law, class of 2014, and is the Senior Articles Editor of the Journal of Law & Liberty.