A rather obscure Supreme Court case decided in 1796 set the stage for Chief Justice John Roberts to declare the Obamacare penalty a tax. It also underscores the long-running debate about the constitutionality of various federal taxes.

On June 28, 2012, the Supreme Court held that the Affordable Care Act is constitutional. Roberts surprised legal and constitutional scholars opining that the ACA was constitutional, not based on the Commerce Clause, as some were suspecting, but on the taxing power delegated to Congress by the United States Constitution.

He wrote, “The same analysis here suggests that the shared responsibility payment may for constitutional purposes, be considered a tax, not a penalty. A tax on going without health insurance is not like a capitation or other direct tax under this Court’s precedents.”

Robert’s opinion was also interesting because of his holding that the Affordable Care Act did not impose a direct tax. Dissenting justices Scalia, Thomas Alito and Kennedy reacted strongly to Roberts’ opinion.

“We never have classified as a tax an exaction imposed or violation of the law. And so too, we never have classified as a tax and exaction described in the legislation itself as a penalty.”

They added.:

“Finally, we must observe that rewriting § 5000(a)  as a tax in order to sustain its constitutionality would force us to confront a difficult constitutional question, whether this is a direct tax that must be apportioned among the states, according to their population.”

The case exposed two radical differences in the opposing justices’ understanding of taxation. They not only disagreed on what a tax was but on the classification of federal taxation as well.

It may seem odd that the foremost jurists in the country could not agree on a subject that profoundly affects all Americans. However, just seven years after the ratification of the U.S. Constitution, a case came before the Supreme Court that also required the justices to rule on the nature of federal taxation. This was the 1796 Supreme Court case Hylton v. United States.

Like Sebelius, Hylton exposed two radically different theories regarding federal taxation. These theories stem from the wildly different views on government, formulated by the two major factions in the country, the federalists and the anti-federalists.

Hylton explores how Americans at the founding of our country viewed taxation, and how those views inform federal taxation in America today.

Despite anti-federalist objections on constitutional grounds, in 1794 Congress passed a carriage tax. Even some federalist supporters of the Constitution were opposed. In a letter to Thomas Jefferson, James Madison lamented, “The tax on carriages succeeded in spite of the Constitution.”

Controversy over the tax did not stop with its passage in August 1794.

The passage of the law by Congress continued to generate challenges in the form of civil disobedience. The record states Mr. Hylton owned 125 carriages for the conveyance of persons, but exclusively for his own separate use and not to be lent out to hire, or for the conveyance of persons for hire. Although history tells us that Mr. Hylton, a Virginia businessman, probably owned more carriages than existed in the whole state of Virginia, he nonetheless said they were for his own use, and not for hire. Mr. Hylton subsequently refused to pay the tax on carriages.

This disagreement eventually led to a tax revolt in Virginia in 1794.

Two years later, the Carriage tax and its Constitutionality would be challenged in the Supreme Court. The main argument was whether the Carriage tax is a direct or indirect tax. Hylton viewed the law as a direct tax in violation of the constitutional requirement that taxes passed by Congress must be apportioned according to the population and the number of representatives from each state.

The more fundamental question is at what point did a division take place between those who construe the federal government’s taxing powers as narrow and finite and those who construe a more liberal view on what the federal government could tax and for what ends?

Ironically, the revolt led to a Supreme Court case that many people at the time thought was poorly decided and many people today have never heard of. That, all the same, would eventually become one of the most important Supreme Court decisions for the way it enabled an ever-expanding federal taxation power.

Facts of the Case

In June 1794 the United States Congress passed a tax on the ownership of carriages. The tax called for a levy:

Upon all carriages for the conveyance of persons, which shall be kept by or for any person for his or her own use, or to be let out to hire or for the conveyance of passengers, the several duties and rates following.

Act of June 5. 1794, ch. 45. §1.1 Stat. 373, 374 (repealed 1802)

When the tax came due in September, Daniel Lawrence Hylton, a wealthy Virginia businessman, refused to pay it because in his opinion it was unconstitutional and void.

At the urging of Alexander Hamilton, the federal government rejected this argument and proceeded to sue Daniel Hylton in federal court over the tax. The case eventually made its way to the Supreme Court and became known as Hylton v. United States.

The case moved ahead without any justices questioning the court’s authority to hear the case or directly questioning the court’s power to nullify congressional acts on constitutional grounds. The court thus implicitly accepted its power to nullify an act of Congress seven years before the better-known decision in Marbury v. Madison (1803)

In a 4-0 decision, the Court ruled against Hylton. Justices Chase, Iredell, Paterson, and Wilson unanimously found that the federal government’s direct excise tax on the ownership of carriages was constitutional. The justices’ opinion was essentially based on two main arguments.

The first went like this:

The only direct taxes are land and capitation taxes. The carriage tax is neither a land nor a capitation tax, therefore, the carriage tax is an indirect tax and thus constitutional

The second argument was as follows:

Direct taxes must be apportioned among the states. The carriage tax cannot be apportioned among the states, therefore, the carriage tax is an indirect tax and thus constitutional

How Hylton Supported Sebelius

Though many at the time considered the justices’ premises to be faulty and believed that the decision was based purely on politics, the case nonetheless became a landmark decision. While Hylton was decided over two centuries ago, it has played an important role in numerous Supreme Court decisions that have justified the expansion of federal taxation. And it has played a pivotal role in the development of current federal tax policy. Most notably, its precedent was crucial to NFIB v Sebelius (2012)

This includes Roberts’ insistence of the fact that the payment was a tax and not a penalty. Why did he feel the necessity to do that?

Probably because of how Congress worded the law. This is what it states,

(a) Requirement to maintain minimum essential coverage

An applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.

26 U.S. Code § 5000A – Requirement to maintain minimum essential coverage

(b) Shared responsibility payment

If a taxpayer who is an applicable individual… fails to meet the requirement of subsection (a) for 1 or more months, then, except as provided in subsection (e), there is hereby imposed on the taxpayer a penalty with respect to such failures in the amount determined under subsection (c).

26 U.S. Code § 5000A – Requirement to maintain minimum essential coverage

A cursory reading of the provision would make seem that the payment was indeed a penalty.

Nonetheless, Roberts continues,

…The mandate is not a legal command to buy insurance. Rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income. And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress’s constitutional power to tax.

Roberts believed that the shared responsibility payment provision was simply just another way for the government to impose a tax. However, the key here was that this tax is imposed on not buying or not owning something.

In his dissenting opinion, Justice Scalia reacted strongly to Roberts’ opinion.

Justice Scalia pointed out that Roberts’ opinion was unique as no previous Supreme Court had ever classified a penalty as a tax and found it constitutional. Interestingly, the original congressional legislation never used the words tax to describe the penalty. Justice Roberts actually classified the penalty as a tax.

Scalia also observed that if the Affordable Care Act were rewritten as a tax, it may fall under the Constitution’s definition of a direct tax.

Scalia here noted that if Congress had called the act a tax, there could be restrictive constitutional direct tax guidelines imposed that would make the tax almost impossible to collect.

Justice Roberts, however, anticipating Scalia’s direct tax argument, twice appealed to Supreme Court precedent established in Hylton v. United States to show why in his opinion the ACA was not a direct tax.

First Roberts writes:

See Hylton v. United States,  (1796) … The Court was unanimous, and those Justices who wrote opinions either directly asserted or strongly suggested that only two forms of taxation were direct: capitations and land taxes. See… the  (opinion of Paterson, J.) and…the (opinion of Iredell, J.)

By citing Hylton, Roberts shows that the Supreme Court has already established a precedent that the only direct taxes are capitations and land taxes.

Next, he cites the opinion of Justice Samuel Chase from Hylton,

A tax on going without health insurance does not fall within any recognized category of direct tax. It is not a capitation. Capitations are taxes paid by every person, “without regard to property, profession, or any other circumstance.

Daniel Lawrence Hylton…owned, possessed, and kept one hundred and twenty-five chariots for the conveyance of persons, but exclusively for his own separate use, and not to let out to hire, or for the conveyance of persons for hire.

Hylton v. United States, 3 U.S. (3 Dall.) 171, 176 (1796)

The court also stated that Hylton had prior knowledge of the Carriage tax but that he:

… Refused to…pay the duties thereupon as in and by the said recited law is required, alleging that the said law was unconstitutional and void.

Hylton v. United States, 3 U.S. (3 Dall.) 171, 176 (1796)

Here Roberts cites an opinion, also called dicta, from Hylton by Supreme Court Chief Justice Samuel Chase on the nature of a capitation tax. Since the Affordable Care Act did not meet Chase’s definition of a capitation, it was not in Roberts’ opinion a capitation tax. Therefore, since the shared responsibility payment was neither a land tax nor a capitation, it was not in Roberts’ opinion a direct tax.

Roberts, by using Hylton to support his opinion that the ACA was not a direct tax, became one of many Supreme Court justices who had used the case to justify expanded federal taxation.

The Hylton case also informs of fundamental disagreements of taxation between the Federalists & Anti-Federalists that we will explore in a later article.

Bob Fiedler
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