Article I, Section 8, Clause 1 gives Congress 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." It was one of the main reasons for the Constitution: under the Articles of Confederation, Congress could only ask the states for money. In NFIB you saw a law fail under the commerce power and survive as a tax. This lesson explains how courts decide what counts as a tax.
Why it works
Key idea
| Feature | Bailey's "tax" (1922) | NFIB's payment (2012) |
|---|---|---|
| Size | A tenth of all net profits, for any violation | Usually far less than the price of insurance; capped |
| Knowledge required? | Yes: only for "knowingly" employing children | No scienter requirement |
| Who enforces | Treasury tax officers, with factory inspections also by the Secretary of Labor | IRS, through the normal tax process |
| Revenue | Aimed at stopping the conduct | Expected to raise billions of dollars a year |
| Result | A penalty: invalid | A tax: valid |
Worked example: NFIB: a "penalty" that is a tax
- The label does not control: courts look at how the exaction works.
- The payment was not so high that people had no real choice; for most it was less than the cost of insurance.
- It had no scienter requirement, was collected by the IRS through ordinary means and could not lead to criminal prosecution.
- It would raise revenue (about 4 billion dollars a year was projected).
Answer: It functioned as a tax, so it was within the taxing power, upheld 5 to 4. The four joint dissenters argued Congress had chosen the word "penalty" and meant it.
Worked example: Applying the factors
- Size: a large fixed amount, likely leaving no real choice.
- Scienter: only knowing violations, a mark of punishment.
- Collection: by a law enforcement agency, not the IRS.
- Purpose: to stop the conduct, not to raise revenue.
Answer: Under Bailey and NFIB, it looks like a penalty. Whether it is valid would then depend on whether some other power supports the underlying rule.
Common mistake
There is a separate question, beyond this course, of whether a tax is a "direct" tax that must be apportioned among the states by population (Article I, Section 9). NFIB held the mandate payment was not a direct tax. The Sixteenth Amendment (1913) removed apportionment for income taxes.