Weekly SSRN Tax Article Review And Roundup: Holderness Reviews Pareja's The Role Of Congressional Procedure In Severability Doctrine

This week, Hayes Holderness (Richmond) reviews Mary Leto Pareja (New Mexico), California v. Texas: The Role of Congressional Procedure in Severability Doctrine, 46 Seton Hall Leg. J. (2021).

The Affordable Care Act and its controversial individual mandate are back in the headlines again as the Supreme Court considers the effect of reducing the tax for not maintaining health insurance to a zero rate. Surely, no reader of this blog will have forgotten Chief Justice Roberts’ weaving opinion in the 2012 NFIB case. Applying a “functional” approach, the opinion explained that the ACA’s “penalty” for not having health insurance was properly characterized as a “tax” for constitutional purposes. This interpretation ensured the constitutionality of the provision under Congress’ tax power, as it would not have been constitutional under Congress’ authority to regulate interstate commerce.

In 2017, after various other efforts to disrupt the operation of the ACA, Congress reduced the rate of the tax for not having health insurance to zero through a provision in the Tax Cuts and Jobs Act. Importantly, the TCJA was passed through the budget reconciliation process, bypassing opportunities for filibustering but limiting the potential scope of the legislation under the Byrd Rule. In her forthcoming Article, Mary Leto Pareja argues that this process cannot be ignored.

The current challenge to the ACA, California v. Texas, concerns two questions: first, whether reducing the tax to a zero rate removes the individual mandate from the protection of Congress’ taxing power; and second, if the answer to the first question is yes, whether the individual mandate provisions are severable from the rest of the ACA. If the individual mandate is not severable, then the entire ACA would be unconstitutional, as the District Court for the Northern District of Texas initially found in this instance. The District Court reached this conclusion after considering congressional intent, specifically, whether Congress would have passed the ACA without the individual mandate. Or in other words, the court asked “what Congress would have intended had it known that part of its statute was unconstitutional.”

The Fifth Circuit Court of Appeals agreed with the District Court on the first question but remanded on the second with instructions to more carefully consider congressional intent. Before the District Court could do so, the Supreme Court interceded and took up the case. In order to focus on the severability question, Pareja assumes that the lower courts correctly determined that lowering the tax rate to zero rendered the individual mandate unconstitutional.

Pareja makes her opinions known regarding the unsatisfactory nature of the District Court’s initial analysis of the severability question. She highlights research demonstrating that the individual mandate, and particularly the accompanying tax, were not as important to the overall mission of the ACA as often assumed. Rather, the “carrots” of the Premium Tax Credit and Medicaid expansion proved capable of carrying the mission of the ACA forward, even without the “stick” of the individual mandate (which had been underenforced for years). Though this research may not have informed the intention behind the original act, it is reasonable to claim that it did inform the intention behind the provisions in the TCJA that revised the ACA.

The heart of Pareja’s contribution though is her argument for process as intent. In her view, the District Court ignored a major indicator of Congressional intent, one that may be more reliable than member statements or committee reports. That indicator is the process that Congress used to pass the TCJA. Under the budget reconciliation process, the Senate’s hands are tied in ways relevant to the question of whether the individual mandate provisions are severable from the larger ACA. Perhaps most importantly, due to the limits of the Byrd Rule, the Senate would not have been able to make substantive changes to much of the ACA, as provisions outside of the tax penalty are certainly extraneous. Because the Senate could not have repealed the ACA through the process that it used, the intention of the chamber cannot have been to have repealed the ACA in reducing the individual mandate to zero. And given courts’ conservative approach to severability issues in order to avoid legislating from the bench, the District Court should have recognized this procedural glitch in its analysis and effectively abide by it in the court’s severability analysis.

Procedure as intent is a fascinating notion; though, as with any inquiry into intent, the evidence can be murky. One could argue that the clear—albeit slim—majority of congresspeople wanted to repeal the ACA in its entirety but were blocked by a minority through the (increasingly) controversial filibuster rules. Rather than framing the budget reconciliation process as limiting the results (and thus the intent) of legislators, perhaps one might frame it as the only avenue to bypass gridlock and achieve the intention of a majority of legislators. The TCJA passed, so why limit the intention of the law to the minority of legislators who would not have passed it? Surely, if the TCJA had gone through more orthodox procedure, courts would not be overly concerned with the views of those voting “no.” It is not entirely clear that the twists and turns of budget reconciliation should change that, though the argument is appealing. Pareja could strengthen her position by providing more explanation of how to divine intent from unorthodox congressional procedures.

However, the second summation of Pareja’s argument is the stronger one. Understandably, courts have expressed reluctance to use the severability doctrine to achieve results that Congress itself could not. As Pareja notes, Chief Justice Roberts summarized the concern well during oral arguments in this case: “I think it’s hard for you to argue that Congress intended the entire Act to fall if the mandate were struck down when the same Congress that lowered the penalty to zero did not even try to repeal the rest of the Act. I think, frankly, that they wanted the Court to do that. But that’s not our job.” Taking this approach to severability protects against lawmaking from the bench, which would shift political tasks—and the accountability or lack thereof that accompany them—to unelected actors. In the tax realm in particular, this shift is problematic, as taxation is often framed as a fundamental power which allows for the burdens of government do be distributed in whatever fashion the government decides is most appropriate. This is a political determination that should be made by the representatives of the people bearing the burdens; thus courts are especially reluctant to disrupt tax laws.

In order to keep their hands off the lawmaking process—particularly in tax, where the budget reconciliation process looms large—courts might adopt a canon of interpretation that instructs them not to bring about a result that Congress itself could not have under the congressional process used. This approach would be less about process as intent than process as a limiting principle of statutory interpretation designed to preserve the separation of powers and to keep political decisions—and accountability for them—with the legislature. Pareja could expand on this line of argument by discussing processes other than the budget reconciliation process that would limit interpretation of the statutes that arise; with tax tunnel vision, other examples do not immediately come to mind.

The fight over the ACA has been a long one, and it has had interesting effects in the tax arena. NFIB may have invigorated Congress’ tax power, albeit through an awkward path. California v. Texas is likely to answer whether a zero rate tax is an exercise of Congress’ tax power, but as Pareja highlights, it may also address the effect of congressional procedure on judicial decision making. Perhaps the Byrd Rule is even more impactful than we have realized.

Here’s the rest of this week's SSRN Tax Roundup:

• Khaled Abdel-Kader (IMF) & Ruud A. De Mooij (IMF), Tax Policy and Inclusive Growth
• Danial Ali Akbari (Lund) & Thomas Fischer (Lund), Shaping Inequality: Progressive Taxation under Human Capital Accumulation
• Simon Berset (Fribourg) & Mark Schelker (Fribourg), Decentralization and Progressive Taxation
• Paul Brezina (Vienna), Eva Eberhartinger (Vienna), & Maximilian Zieser (Vienna), The Future of Tax Audits? The Acceptance of Online-Based, Automated Tax Audits and their Effects on Trust and Power
• Sydnee Caldwell (Berkeley), Scott Nelson (Chicago), & Daniel C. Waldinger (NYU), Tax Refund Uncertainty: Evidence and Welfare Implications
• Ruud A. De Mooij (IMF), Dinar Prihardini (IMF, Antje Pflugbeil (IMF), & Emil Stavrev (IMF), International Taxation and Luxembourg's Economy
• Bart Dierynck (Tilburg), Martin Jacob (WHU), Maximilian A. Müller (ESMT Berlin), Christian P. H. Peters (Tilburg), & Victor van Pelt (WHU), Public Tax Disclosures and Investor Perceptions
• Domenico Ferraro (Arizona State) & Giuseppe Fiori (Federal Reserve), Non-Linear Employment Effects of Tax Policy
• Ryan Groff (New England Law), Keeping America: Wealth Concentration and the Need for Repaired Revenues and Basic Income
• David A. Guenther (Oregon) & Richard C. Sansing (Dartmouth), Corporate Implicit Taxes and Tax Incidence: Causes and Measurement
• Chibueze Muobuikwu (Kevin Martin Ogwemoh Legal), A Review of the Tax Regime Under the Nigerian Pension Reform Act, 2014
• Leopoldo Parada (Leeds), Vodafone Magyarország: Special Hungarian Tax on Turnover of Telecommunications Operators is Compatible with EU Law, 10 Highlights & Insights on European Taxation (2020)
• Natasha Sarin (Penn), Lawrence H. Summers (Harvard), Owen Zidar (Princeton), & Eric Zwick (Chicago), Rethinking How We Score Capital Gains Tax Reform
• Dario Serrano-Puente (Banco de Espana), Optimal Progressivity of Personal Income Tax: A General Equilibrium Evaluation for Spain
• David I. Walker (Boston University), Executive Pay Clawbacks and Their Taxation, 24 Fla. L. Rev. __ (forthcoming 2021)