from Energy, Security, and Climate and Energy Security and Climate Change Program

John Roberts, Environmental Economist

June 29, 2012

Blog Post
Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

More on:

Health Policy and Initiatives

Commentary in the aftermath of Thursday’s Supreme Court decision to uphold the Affordable Care Act has focused on its immediate political and policy consequences and on the limits it articulates to the authority of Congress to regulate commerce. But there’s something else worth paying attention to: in upholding the ACA on the grounds that it is an exercise of congressional taxing authority, it appears to affirm the broader legal foundation for taxing private behavior that has damaging social consequences. That, of course, is a fundamental piece of environmental economics.

I’m no legal scholar, but it seems easy to me to frame the tax penalty in the ACA in environmental economics terms. Failing to carry insurance doesn’t just harm the uninsured – it harms those others who may end up footing the bill when the uninsured requires care. Taxing those who choose not to carry insurance helps internalize that externality. The net result, assuming the tax is set properly, should be more efficient economic behavior.

Most of the public wrangling over the constitutionality of the ACA focused on whether it was a legitimate effort to regulate interstate commerce. But the various arguments presented, both at the Supreme Court and in lower federal courts, also wrestled with taxation power. (See this Yale Law Journal essay for a nice summary.) Many of the arguments made against holding the ACA constitutional by construing its penalties as taxes didn’t claim that they weren’t, in fact, taxes. Instead, they claimed that if they were taxes, such taxes, constituting an overreach of federal power, should not be allowed. Had the Supreme Court endorsed that line of argument, it might have called into question a range of environmental taxes, particularly those whose main goal is not to raise revenue but to influence behavior.

But the majority, led by the Chief Justice, declined to go down that road. Instead it upheld the broad authority of Congress to impose taxes – and, quite explicitly, reaffirmed that those taxes need not primarily be about collecting revenues. Here’s part of the decision:

“Although the payment will raise considerable revenue, it is plainly designed to expand health insurance coverage. But taxes that seek to influence conduct are nothing new…. That §5000A seeks to shape decisions about whether to buy health insurance does not mean that it cannot be a valid exercise of the taxing power.”

This would seem to affirm the solid legal foundation of federal efforts to tax externalities, a tool at the heart of environmental economics. Some might argue that that foundation was never in doubt. Many of those same people, though, would surely have said the same thing about the constitutionality of the Affordable Care Act, before it became apparent over the last year, at least as a matter of Supreme Court decision-making, that nothing was for certain. If and when future environmental incentives are challenged on constitutional grounds, the health care case could become surprisingly relevant.

More on:

Health Policy and Initiatives