Government by Coercion

Note: This article originally appeared at National Review Online on March 28, 2012.

George Will recently touted an elegant amicus brief by the Institute for Justice that assails the individual mandate on the novel ground of contract law: It requires individuals to enter into insurance contracts. Because voluntariness is a basic element of contract formation, IJ argues, the mandate runs counter to centuries of contract law. As Will puts it, “a compulsory contract is an oxymoron.”

In many areas of private law, including insurance, that proposition is correct. But by the same token, the rules have always been different for those who occupy a monopoly position. When one of the parties is a monopoly, the law has long required that the contract be reasonable and nondiscriminatory. The fear is that monopolies will exploit parties who have nowhere else to go.

That limitation on contractual freedom is thought to benefit the state as a whole. Yet the result is otherwise when the monopolist in question is the state itself. American constitutional law has dealt with that problem through the doctrine of unconstitutional conditions, which seeks to prohibit the use of the taxing power to accomplish things the government could not accomplish through direct imposition.

Alas, that principle has had a hit-and-miss history at the Supreme Court, which takes a far more permissive view of coercion (by the government) than of “compulsion.” Indeed, in some recent cases, the Court would have you believe that what the federal government cannot compel you to do, it has the power to “encourage” you to do, even if the encouragement is just the opportunity to avoid a penalty.

The philosophical difficulty here rests on the observation that the presence of choice does not imply the absence of coercion. On the contrary, coercion implies choice. “Your money or your life” is what the robber says. He leaves you a choice, but has engaged in coercion nonetheless.

Where recent Supreme Court cases have gone astray is to imply that some forms of coercion can be thought of as “encouragement” while other, more severe forms, can be regarded as “compulsion” where the law is concerned. If that is true, then no “law,” properly so called, is really compulsion, because every law is backed by a penalty – and you always have the freedom to choose between complying with the law and accepting the penalty. The great Positivist legal philosopher Hans Kelsen demonstrated at least that much in his Pure Theory of Law (1960).

If the Supreme Court’s doctrine of coercion is taken to its ultimate conclusion, all “laws” are merely “encouragements.” From that standpoint, the Constitution’s limits on government power, including even the right of due process, appear to depend entirely on the arbitrary application of a distinction without a difference.

The individual mandate, for example, does not really “compel” individuals to purchase health insurance. It is, rather, a choice between purchasing health insurance or paying a tax. But precisely the same may be said of Obamacare’s Medicaid provisions, which require states to expand their Medicaid programs as a condition of continuing to receive federal Medicaid matching funds. That statutory command is at bottom a choice between complying with the federal dictate or losing money the state’s residents are paying in taxes – in other words, a tax penalty.

Recent Supreme Court decisions nevertheless see a profound difference between these two kinds of law. Hence, if the mandate cannot be justified as an exercise of the commerce power, it will be struck down, because the mandate is considered a “requirement” and is therefore subject to the Constitution’s limits on federal power. But the Medicaid expansion will almost certainly be upheld, because it is not classified as a “requirement,” just a form of “encouragement,” and is therefore not subject to the Constitution’s limits.

This false distinction lies at the root of the most fatally flawed of its modern precedents: South Dakota v. Dole (1987), the case that will receive the most attention during today’s oral argument on the Medicaid expansion provision in Obamacare.

Dole held that the federal government could dock states up to 5 percent of federal highways funds if they did not raise their drinking age to 21. The Court has long paid lip service to the danger that, by withholding public moneys, the federal government might accomplish things that it cannot not compel directly under its affirmative powers.

The Court in Dole sidestepped this concern, however, because it deemed that the penalty involved was so small that it was merely an “encouragement.” Still, warned Chief Justice William Rehnquist, “Our decisions have recognized that in some circumstances the financial inducement offered by Congress might be so coercive as to pass the point at which pressure turns into compulsion.”

In that seeming concession to moderation lies a logical fallacy of huge institutional importance. Coercion is coercion, whether the “financial inducement” is one dollar or 20 billion. When the federal government first taxes money away from the states and then offers to give it back to them only on condition that they comply with certain conditions, there is coercion, regardless of how much money is put on the table. The practice is either permissible, or it is impermissible. There is in fact no “point at which pressure turns into compulsion.” A requirement backed by a tax penalty is either compulsion in all cases, or it is compulsion in no case.

To prove the point, in the 25 years since Dole was handed down, virtually every federal court that has ruled on a Dole coercion challenge was decided on summary judgment, before a trial on the facts. Summary judgment is appropriate when, of the facts as admitted by the parties before the full trial, one of them is entitled to judgment in its favor as a matter of law. And sure enough, in the case now before the Supreme Court, the trial court below ruled that the federal government was entitled to summary judgment because it didn’t matter how onerous the penalty was: The government can impose any and all conditions it wants on the funds it gives to the states. The doctrine of unconstitutional conditions seems a dead letter.

But it need not be. In dealing with this issue IJ relies on the Court’s historic decision in New York v. United States (1992), which struck down a law that required states either to take title to low-level radioactive waste within their borders, or regulate its disposal according to Congress’s instructions. In that case, the Supreme Court ruled that Congress could not impose upon the states a choice between two options, neither of which it could impose as a free-standing requirement.

New York on its own can’t sustain IJ’s argument because New York explicitly embraces Dole’s distinction between “encouragement” and “compulsion.” Demolishing that distinction should have been IJ’s first task, and it is a task to which the Supreme Court must turn sooner or later.

Yesterday the Supreme Court gave the solicitor general a rough time when he sought to justify the individual mandate as a use of the taxing power. Our hope is that in today’s argument, the Court will show a similar skepticism toward the use of the federal taxing in the Medicaid context. The Court should not let the federal government use its taxing power to coerce states into spending vast sums of money for programs that are directed from Washington.

The current program calls for the federal government to pick up most of the tab for the new programs, but that will not be true in the out years. If Dole remains controlling law, the federal government could scale down its own contributions to levels that threaten to push states, already in financial distress, over the brink. The states would likely buckle to the federal will as they always have before the taxing power, and that would spell the end of federalism.

In reaching the right decision, the Court can rely on earlier cases that understood the potential for abuse in the tax and spend power. That much was settled in the Child Labor Tax cases, which have not been overruled, and which show the power of the doctrine of unconstitutional conditions as a way to keep the federal government operating within its intended constitutional limits.

The time has come to revive this long-established constitutional tradition. The Court should recognize what has always been the case, namely, that “encouraging” compliance with some government scheme by threatening the loss of your tax dollars is every bit as much “compulsion” as when the government seeks to enforce some law through a penalty it can impose as a free-standing tax.

It should resolve the profound confusion that guided its decisions in Dole and New York, both of which embraced the foolish notion that the difference between an “encouraging” penalty and a “compelling” one is merely a matter of degree. The five conservative justices showed yesterday a renewed intellectual toughness. If they believe in the principles of limited federal power, they should ask the federal government to explain what limiting principle on the taxing power can save the Medicaid expansion from its well-deserved invalidation.

-Mario Loyola is director of the Center for Tenth Amendment Studies at the Texas Public Policy Foundation. Richard Epstein is the Laurence A. Tisch Professor of Law at the New York School of Law.