When the Supreme Court narrowly upheld the health insurance mandate part of Obamacare, John Roberts suggested that the penalty for not buying health insurance could be viewed as a tax.

I’m not qualified to offer an opinion as to whether that decision was correct from a legal perspective, but economists don’t see much difference between regulations and taxes. A fine for speeding, or for double parking your car, looks pretty similar to a $4/pack tax on cigarettes, which might be viewed as a “fine” for smoking.

Suppose the Supreme Court had said that a health insurance mandate was unconstitutional. The government could achieve the same effect with a combination of taxes and subsidies. If the penalty for not buying health insurance had been $2500 per household, then the government could impose a lump sum tax of $2500 on all households in America. Then they could offer a $2500 subsidy to all households that purchased health insurance. For those with health insurance, the tax and subsidy would exactly offset–the government could inform those households to not even bother paying the tax and collecting the subsidy. Those without health insurance would be paying a $2500 tax to the government–exactly equivalent to the health insurance penalty under the mandate.

Today, many states are contemplating using a similar subterfuge to undo one of the most important parts of the recent tax bill, the $10,000 limit on the deductibility of state and local taxes. One idea is to have higher income people donate $X to various state health and education programs, and then receive an equivalent tax credit. The donation would effectively serve as a tax payment, and yet it could be deducted from federal income taxes (unlike with SALT payments). And these “donations” wouldn’t really be charity in any meaningful sense. People donating the money are no worse off than if they did not donate the money. The alternative was paying the same amount in taxes.

Because legal definitions often don’t coincide with economic definitions, there is plenty of room for gaming the system. If states find a way around the $10,000 cap in SALT deductions, it would be a major setback for tax reform, and also further balloon an already excessive budget deficit. This is an issue to watch.

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