The Supreme Court decision certainly had everyone in D.C. talking – until Washington lost power and went through a massive heat wave.
Whether you are happy or sad with the court's decision here is a quick rundown to get you up to speed:
1. Tax or Penalty? It is official – the payment you make for failing to have health insurance is a — wait for it — a penalty for purposes of the Anti-Injunction Act and a tax for purposes of the taxing powers under the Constitution. Forgotten – good luck to the IRS trying to collect this penalty/tax. The penalty/tax has no criminal or civil penalties for failure to pay and interest doesn't accrue. Finally, the IRS is limited in its collection powers. Basically, taking it out of your refund is the biggest bat the IRS has. Look for this causing headaches for the IRS as some folks who traditionally got a refund now limit their withholding so that they owe the IRS money at the end of the year (and avoid the penalty/tax).
2. The Supreme Court's decision has not settled anything. It will be up to the elections to decide the ultimate fate of the health care bill. Obama wins – the bill stays basically intact. Romney wins (and the Senate probably goes Republican as well) – look for a good amount of the architecture of the bill to be struck down (especially the tax provisions). So the greatest desire of CPAs and business owners I talk to – that there be certainty – is still a long ways off.
3. Still – time for CPAs and businesses to get focused on the taxes – since some of them are already in play (tanning tax – see below) and some are coming down the road soon. For individuals, this means starting January 1, 2013 the 3.8 percent tax for 200k single/250k married on “investment income” and a 0.9 percent add-on tax on earned income – also for those above 200k single/250k married. On the positive side — for very small businesses there is a partial credit for providing health insurance. Looming large are the taxes on businesses that manufacture medical devices, pills and provide health insurance. The medical device tax is particularly fiendish and businesses need to be focused on the ways to reduce this tax. Finally, businesses (50 or more employees) need to start considering closely whether they will look to continue (or for the first-time) providing health insurance for employees or instead pay a penalty (roughly $2,000 per employee).
4. Congress can't make you eat broccoli under the Commerce Clause. The Chief Justice notes: ”The individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity. Such a law cannot be sustained under a clause authorizing Congress to ‘regulate Commerce.'”
5. Congress can tax you for not eating broccoli under the taxing powers of the Constitution. Parents take note.
6. Now that Congress can tax you for not doing something, what are the limits on that ability to tax? Happily, the Chief Justice guides us with the following quote: “We have nonetheless maintained that ‘'there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.' Kurth Ranch, 511 U.S., at 779 (quoting Drexel Furniture, supra,at 38).” I don't know if that's going to rock anyone to sleep.
7. If you don't have have case law that supports your position – cite a letter from Ben Franklin. There are many other examples of the courts finding constitutional a tax on somebody for not doing something (not including per capita/direct)–well actually, the Chief Justice doesn't cite any precedents but does helpfully create a new legal precedent, letters by Benjamin Franklin can be cited to justify an expansion of the taxing powers (see below).
“First, and most importantly, it is abundantly clear the Constitution does not guarantee that individuals may avoid taxation through inactivity. A capitation, after all, is a tax that everyone must pay simply for existing, and capitations are expressly contemplated by the Constitution. The Court today holds that our Constitution protects us from federal regulation under the Commerce Clause so long as we abstain from the regulated activity. But from its creation, the Constitution has made no such promise with respect to taxes. See Letter from Benjamin Franklin to M. Le Roy (Nov. 13, 1789) (“Our new Constitution is now established . . . but in this world nothing can be said to be certain, except death and taxes”).”
8. Coolest thing a CPA can say at a party now – “Of course the taxing power is bigger than the commerce clause.”
9. Who is the biggest loser? No question, the tanning tax people. Many tanning bed owners were already spending that refund they were going to get if the bill was found unconstitutional. But there is a bronze lining – the tax on tanning is bringing in about a third of the revenues that Congress expected when it passed the bill – seems there is a big increase in free tanning (and perhaps some places charging for towels – but not for tanning).
The two you missed – in the bipartisan deal on the highway bill and the student loan subsidies – part of the revenue raisers included:
1. Congress expanded the definition of a tobacco manufacturer to include those businesses who make “roll your own” machines available for consumers to use. $94 million dollar revenue raiser. Effective on date of enactment so no chance to stock up. (Background on the roll-you-own question is here.)
2. Pension Changes. The bill also lowers the payments that corporations have to make for their pensions – and in a nutshell raises money by increasing the amount of earnings subject to the corporate income tax.
And an update on tax cuts…
The White House today beat the drums for keeping in place the tax benefits for those making less than $200K single/$250K married. Good luck with that. No surprise, that won't happen any time soon. With key Democrats (including the former Speaker Nancy Pelosi) calling for the taxes to stay in place for those making less than $1 million and former President Clinton saying that all tax cuts should be extended, it seems that even getting Democrats to agree to extending the tax breaks for $200/$250K would be a tough sell.
I continue to believe that the likely scenario is that after the elections if President Obama is re-elected, the Republicans will propose capping deductions for those making over $500K single/$1 million a couple in exchange for keeping the rates in place (don't forget the health care increase); and, alternatively, if Romney is elected, that there will be a similar cap on deductions – but the revenues will be used to lower the rates further and pay for other changes in the tax laws.
Read Dean's related comments in Janet Novack's Forbes' post here. Dean thoughtfully comments about tax cuts: “Why would folks settle an issue that they want to campaign on?”