Constitutional Review of Federal Tax Legislation
55 Pages Posted: 3 Feb 2021 Last revised: 29 Mar 2022
Date Written: January 22, 2021
What does the Constitution mean when it says that “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” (US Const. Article I, Section 8, Clause 1)?
The definition of “tax” for constitutional purposes has become important in light of the Supreme Court’s 2012 decision in NFIB v. Sebelius, in which Chief Justice Roberts for the Court upheld the constitutionality of the individual mandate of the Affordable Care Act under the taxing power. This has led to commentators questioning the utility of Roberts’ distinction between a “tax” (where Congress’ power is almost unlimited) and a “regulation” (where Congress’ power under the Commerce Cause is limited).
We should make a very clear note at the outset: Tax law is a too broad term. It includes both provisions intended at raising revenue and provisions intended to regulate behavior. Personal income tax (PIT), corporate income tax (CIT) and even value added tax (VAT) laws include both type of provisions. Using the distinction that Prof. Stanley Surrey has proposed about 60 years ago, tax legislation includes both types of provisions; those that aimed at raising revenue in accordance with the tax base, and regulatory provisions as well ("tax expenditures"). In other words, almost any tax legislation includes both aspects. Hence referring to PIT means its base, and not necessarily all its code provisions. The purpose of this article is to draw this distinction and to use it for basic guidelines for constitutional judicial review over tax legislation.
We would propose a different distinction. A “tax” for purposes of the Taxing Clause is a pure tax, namely a tax implemented “to pay the Debts and provide for the common Defence and general Welfare of the United States”, i.e., a tax intended primarily to raise revenues in order to finance the elected government’s policy and its implementation. In addition, a progressive “income tax” for purposes of the Sixteenth Amendment is a tax intended for redistribution of wealth from the rich to the poor. We do not address redistributive tax provisions (like the progressivity feature of PIT or a wealth tax) further, beyond noting that they are inherently political and therefore their distributive function (reducing inequality) should not be subject to judicial review.
Even a pure tax has constitutional limits, but they are relatively few. It should be emphasized though, that the traditional basses for constitutional judicial review - such as discrimination on the basis of gender, race, or sexual orientation, are applied to tax legislation in a very limited way. As noted already, one could detect the Supreme Court’s significant reluctance to review tax legislation in the US on constitutional grounds, although one could also argue that a tax provision that has disparate impact on racial or gender grounds (or other protected category) should be evaluated using struct scrutiny (as some provisions involving gender have in fact been evaluated by lower courts).
This should be distinguished from a regulatory tax legislation, i.e., tax legislation whose main purpose is not to raise revenue but to change taxpayer behavior. Regulatory taxes include Pigouvian taxes (e.g., tobacco taxes and carbon taxes) designed to reduce negative externalities and tax expenditures (deviations from a normative tax base, which we name negative Pigouvian taxes, since their purpose is to treat favorably taxpayers who create positive externalities). Regulatory Tax legislation should be subject to constitutional review under various clauses of the Constitution including the Due Process Clause, the Equal Protection Clause, the Establishment Clause, and the limits on the Commerce Clause.
The penalty imposed by the individual mandate of the ACA, which was repealed in 2017, was a regulatory tax (i.e., not a pure tax) and therefore (contrary to Chief Justice Roberts’ view) subject to the limits on Congressional power under the Commerce Clause (although in our opinion the individual mandate should have been upheld as consistent with these limits, per Justice Ginsburg’s dissenting opinion).
Any actual tax rule/legislation has more than one purpose. All tax rules influence behavior, and therefore come within our definition of regulatory taxes, and all taxes produce some revenue, and therefore come within our definition of pure taxes. But some taxes are primarily regulatory (e.g., Pigouvian taxes aimed to deal with negative externalities) and tax expenditures (deviation from a normative tax base which we name them Negative piguvian taxes since their purpose is to treat favorably taxpayers who create positive externalities) while others are primarily for revenue (e.g., VAT) . Other taxes have multiple purposes (e.g., corporate income tax, CIT, which has revenue and (as well as regulatory aims). Moreover, any given tax may have multiple provisions with different aims (e.g., the many tax expenditures embedded within PIT and CIT).
When evaluating the constitutionality of any given tax provision, a court should first classify it as either a pure tax provision or a regulatory tax provision. If it is the former, the court should generally hold that it is constitutional under the Taxing Clause. If it is the latter, the court should evaluate it against the limits imposed by the rest of the Constitution.
Keywords: tax, regulation, constitution
JEL Classification: H26
Suggested Citation: Suggested Citation