Supreme Court nominee Brett Kavanaugh’s Senate confirmation hearing is likely to be a parade of controversial issues such as abortion, capital punishment, and immigration.
But underneath the hot-button issues, tax policy churns along, and Kavanaugh—who has served on the U.S. Court of Appeals for the D.C. Circuit for 12 years—has been at the center of at least two major tax-related cases in the last decade. And he could find himself following in the footsteps of his predecessor, retiring Justice Anthony Kennedy, on another.
In Seven-Sky v. Holder, a legal challenge to the Affordable Care Act’s individual mandate, the plaintiffs argued that the mandate's penalty for not having coverage was unconstitutional. Kavanaugh's dissent, in this case, is of particular interest to those looking for insight on his views on taxes.
Kavanaugh came in as the circuit court decided whether it even had the jurisdiction to hear the case. A section of the tax code called the Anti-Injunction Act states that an individual can’t challenge a tax before it is enforced. In his dissenting opinion, Kavanaugh found that the penalty was indeed a tax because it was “assessed and collected” in the same manner as taxes, via the IRS, and thus subject to the AIA.
Kavanaugh lost out in the circuit decision, but Supreme Court Chief Justice Roberts used similar logic to arrive at his decision when the health care law made its way there. Roberts said that while the penalty wasn’t a tax for the purposes of the Anti-Injunction Act, it was still constitutionally valid because of the taxing power granted in Article I of the Constitution—for the same reasons Kavanaugh stated.
The decision saved the individual mandate, to the ire of many conservatives.
Alan Viard, resident scholar at the American Enterprise Institute, said some of the blame conservatives may put on Kavanaugh for preserving the ACA are misplaced.
“When you have Judge Kavanaugh saying that’s a tax for the purposes of the Anti-Injunction Act, there may be some hostility towards that, even though that’s not really what they would be upset about,” Viard said. “They’re really upset about Chief Justice Roberts saying it’s a tax for the purpose of the constitutional power to tax.”
Kavanaugh has also weighed in on whether the IRS can regulate tax-return preparers. In Loving v. IRS, the plaintiff sued the agency for its requirement that preparers submit to registration and competency testing. In 2014, Kavanaugh and the D.C. Circuit ruled that the IRS didn’t have the authority to impose those regulations. The IRS ultimately dropped the mandatory program and adopted a voluntary training system.
Similar regulatory issues could come up again if lawmakers fail to pass a technical-corrections bill for last year’s tax-code overhaul and the IRS and Treasury are forced to address some of the more pressing issues administratively.
“I think that Kavanaugh will be more inclined to invalidate regulations than, say, Kennedy would have been,” said Steven Rosenthal, senior fellow at the Tax Policy Center.
Justice Kennedy’s final majority opinion was a significant tax case, South Dakota v. Wayfair, which gave states the green light to levy a sales tax on online retailers, even if they didn’t have a physical presence in the state.
Kennedy laid out guideposts in his ruling by which other states could craft their own online-sales-tax laws likely to pass congressional muster, but many questions remain. For example, the ruling didn’t explicitly disallow states retroactively collecting sales tax on previous transactions, and it didn’t specify the level of business activity a seller must have within a state to have a “substantial nexus” and thus fall under a sales-tax regime.
Different states will try different things, and if Congress doesn’t codify Kennedy’s guideposts into law, more litigation may arise in the coming years as states craft their own regimes.
But the Supreme Court may not be terribly interested in revisiting the issue. Roberts’s dissenting opinion, in which Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan joined, agreed with the majority that past court decisions requiring a physical presence for state sales taxes were wrong—but implored Congress to fix the issue, not the courts.
“Now that the Supreme Court has reversed itself, the dissenters are going to want to fall in line and protect and defend the current decision; they are not going to try and reverse the reversal,” Rosenthal said.
While Kavanaugh did not rule on the Wayfair case, he helped decide a similar case, Gordon v. Holder, which involved whether a New York cigarette seller could ship its products tax-free across state lines.
Ultimately, the D.C. Circuit barred the federal government from enforcing parts of a law designed to require the reporting of interstate cigarette sales to tax authorities. Kavanaugh, writing separately, upheld federal authority over the internet sellers, saying that federal law requires them to pay state cigarette taxes.
“I could see Justice Kavanaugh not differing much from Justice Kennedy on this issue,” said Joseph Bishop-Henchman, executive vice president of the conservative-leaning Tax Foundation. “In the Gordon v. Holder case, he signed onto an opinion evaluating the relevant doctrine, the Dormant Commerce Clause, and did not join in a dissent rejecting its application in the case. That would put him similar to Kennedy and [Samuel] Alito, and unlike [Clarence] Thomas and [Neil] Gorsuch, who reject the doctrine.”