The Great and Mighty Tax Law: How the Roberts Court Has Reduced Constitutional Scrutiny of Taxes and Tax Expenditures

Abstract:     
Taxation is the Supreme Court’s new darling. In its last two terms, the Court has endowed the tax law with legal superpowers, giving it the astonishing ability to elude constitutional limits. The justices have sent Congress and state legislatures a strong signal that they may use their tax laws as a means to aggressively enact public objectives unrelated to the traditional revenue-raising function of taxation. They have made clear that the Court will uphold policies administered through the tax law even where those same policies would be unconstitutional if administered as either direct regulation or appropriated spending.

In National Federation of Independent Business v. Sebelius, the newly muscular tax law saved Obamacare from near death at the hands of the Commerce Clause. The case confirmed the broad reach of the taxing power under the Constitution, and showed the current high Court’s willingness to treat regulatory legislation as taxation, even where Congress declined to call the legislation a “tax.” The cliffhanger ending to the Obamacare challenge may have been made possible by a much-less publicized -- but more legally radical -- case from the previous term; in Arizona Christian Schools v. Winn, which involved tax benefits for religious schools, the Court adopted a novel judicial approach to targeted tax benefits. In that case, the Court rejected the widely accepted treatment of tax expenditures as government spending administered through the tax law, and instead treated them as simple tax cuts. It thereby allowed tax benefits that are functionally equivalent to direct government spending to bypass the constitutional scrutiny that both taxes and direct spending would receive. Tax benefits are now beyond the reach of the Bill of Rights, which prohibits government action from treading on individual rights.

The consequences of this new judicial strategy are profound, raising the troubling question: Is there any justiciable limit to the great and mighty tax law? Both these cases aggravate a growing tension between economic and legal analysis of taxation, widening the gap between these two central approaches to tax law. The Court transformed tax expenditures from state action subject to constitutional limits into nonreviewable private spending by individuals. This development reduces the protection that the Constitution provides to individuals, undermines tax reform efforts and fiscal responsibility, jeopardizes established legal doctrine, and encourages less transparent and less equitable government.

Number of Pages in PDF File: 46

Keywords: taxation, constitutional law, tax expenditures, tax cuts

JEL Classification: K34

working papers series