California v. Texas: ACA Supreme Court challenge, take 3

The U.S. Supreme Court rendered its third decision on the merits of the Affordable Care Act (ACA), the second on the constitutionality of the 2010 law. The court ruled the plaintiffs had no legal right to sue, otherwise known as “standing.” As a result, the justices did not opine on the constitutionality of the ACA with or without the individual mandate. It is possible another lawsuit will come along in the future to again challenge the validity of the ACA. In the meantime, the law remains, along with all of its taxes and required information reporting.

Background

In 2012, the court held, in National Federation of Independent Business v. Sebelius (NFIB), that Congress, through the ACA penalty structure, imposed a tax on individuals that do not obtain health insurance. The Tax Cuts and Jobs Act (TCJA), passed in 2017, reduced this tax, or penalty, to zero effective for months beginning after Dec. 31, 2018. With the penalty for failure to obtain health insurance at zero under the TCJA, the individual mandate no longer raised revenue under Congress’ authority to tax. In California v. Texas, Texas and other Republican-led states plus two individuals challenged the constitutionality of the ACA and argued the mandate had become an unlawful command by the federal government requiring taxpayers to purchase health insurance. Prior to the November 2020 oral arguments in front of the Supreme Court, the 5th Circuit Court of Appeals agreed with Texas and said the individual mandate must produce revenue in order to meet Congress’ taxing authority. Furthermore, since the 2012 case also stipulated the individual mandate to purchase health insurance could not be severed from the rest of the ACA, the plaintiffs in California v. Texas argued the rest of the ACA became unconstitutional because it could not be severed from the individual mandate. California, the U.S. House of Representatives and other Democrat-led states defended the ACA and asked the court to uphold the law.

Reminders

The ACA brought into existence several tax-related provisions summarized below.

The 3.8% net investment income tax. The most significant provision is the additional 3.8% net investment income tax that began in 2013. The tax applies to net investment income or the excess of a taxpayer’s adjusted gross income (AGI) above certain thresholds ($200,000 for individuals and $250,000 for joint filers), whichever is less. For this purpose, net investment income includes interest, dividends, royalties, rents, capital gains, and passive income from trade or business activities. The Biden administration is currently proposing to amend this definition to also include gross income and gain from any trades or businesses not otherwise subject to employment taxes for taxpayers with AGI over $400,000.