What is in this article?:
- Legal issues continue to shape the present and future of American agriculture.
- The involvement of the legal system in agriculture likely will continue to grow.
- Top 10 agricultural law developments of 2012 based on their impact (or potential impact) on U.S. agriculture.
Health care law impacts agriculture
2. The U.S. Supreme Court upholds the individual mandate provision of the 2010 health care law. On June 28, 2012, the U.S. Supreme Court upheld as constitutional the Patient Protection and Affordable Care Act (more commonly known as “Obamacare”). In its ruling, the Court upheld the provision in the Act that mandates that each person obtain health coverage or pay a tax. Likewise, the Court found constitutional the “employer responsibility mandate” which imposes cost-sharing, reporting, and other obligations on employers.*1 There were two separate majority opinions in the case. Under the first opinion, the majority determined that the Commerce Clause did not support the individual mandate, nor did the Necessary and Proper Clause. In the second majority opinion, however, the Court chose “to read the mandate not as ordering individuals to buy insurance, but rather as imposing a tax on those who do not buy that product.” The majority went on to state: “If a tax is properly paid, the Government has no power to compel or punish individuals subject to it” and “[i]f it were read as a command, it would be unconstitutional because the Federal Government does not have the power to order people to buy health insurance.” So, the Court determined that there is no legal obligation to purchase health insurance, and upheld only the mandate provision under the Constitution’s taxing power. National Federation of Independent Businesses v. Sebelius, 132 S. Ct. 2566 (2012).
Why is the Act of importance to agriculture? It is important because it is primarily tax legislation with numerous provisions that will apply to everyone, ag and non-ag, and some provisions will cause agricultural producers to re-evaluate leases and business organizational structures. Here’s a rundown of the tax provisions that have already taken effect: small business health insurance tax credit; economic substance doctrine (codified); group health insurance plans and insurers required to offer coverage for unmarried adult children until age 26; 10 percent surtax on indoor tanning services; employer W-2 reporting of the value of health benefits (for employers filing 250 or more W-2s); doubling of the penalty on non-qualified HSA withdrawals; increased limits on qualifying expenses for HSAs, HRAs and Flex Accounts; an additional 0.9 percent increase in the Medicare tax on wages and self-employment income over $250,000 (MFJ); an additional 3.8 percent Medicare tax on “investment” income; a lower ceiling ($2,500) on flex accounts; an increase in the itemized deduction floor for medical expenses; an additional 2.3 percent non-deductible excise tax on the gross sales of companies that manufacture or import medical devices.
For agricultural producers, perhaps the most significant tax provision is the additional 3.8 percent Medicare tax (effective Jan. 1, 2013) on passive sources of income. It applies to taxpayers with modified adjusted gross income over $250,000 on a joint return, and includes capital gains, dividends, rents, royalties, and passive K-1 income. For farmers and ranchers, several things need to be kept in mind. Sales of farm business assets (land and equipment, etc.) will not be subject to the tax if the taxpayer had materially participated in the business for five years in the eight-year period before receipt of Social Security benefits. Cash lease income is passive and is potentially subject to the tax, as is non-material participation crop share or livestock share lease income. Simply running investment income through a pass-through entity that otherwise has trade or business income does not avoid the tax. Also, self-rental income is subject to the tax, as is royalty income.
Additional constitutional challenges to Obamacare are presently in process. On Nov. 26, 2012, the U.S. Supreme Court ordered the U.S. Circuit Court of Appeals for the Fourth Circuit to again take up a case that the Fourth Circuit had earlier dismissed.*2 The case involves a constitutional challenge to the employer mandate provision of the Act. A second case is also challenging the constitutionality of the Act on the basis that the Supreme Court’s construction of the individual mandate as a tax created an additional constitutional problem with the Act. Specifically, the argument is that when the Senate enacted the Act that included a “tax” for not purchasing health insurance, the Congress violated the Origination Clause which requires all revenue bills to originate in the U.S. House. In September of 2012, the Federal District Court for the District of Columbia refused to grant the government’s motion to dismiss the case.*3