According to the opinion of Chief Justice Roberts, the government had two theories supporting the Constitutionality of the individual mandate. First, it asserted the Commerce Clause. The government argued that it could require individuals to purchase health insurance as their failure to do so would affect interstate commerce and "undercut the Affordable Health Care Act's other reforms." Second, in case the first argument didn't work, it relied on the Congressional Taxing Powers. The government argued that even if Congress lacks the power to require individuals to purchase health insurance, it does have the power to tax those who do not. "The only effect of the individual mandate is to raise taxes on those who do not do so, and thus the law may be upheld as a tax."
President Obama's spokesperson Jay Carney denies that the mandate is a tax. He says, "It's a penalty, because you have a choice. You don't have a choice to pay your taxes, right?"
Boston College Professor Brian Galle dispels this in an excellent essay in the Yale Law Journal asking the question, "Is the Individual Responsibility Requirement (IRR) really a tax?" Below in it's entirety is the excerpt of his article. You may refer to the link underlined above to view the original posting and links within it.
"First, let me make clear that the IRR is an exercise of Congress’s power “[t]o lay and collect taxes.” The federal district courts in Virginia and Florida, as well as some commentators, argue that the IRR is not a tax at all, apparently because it is not clearly labeled as a “tax.” Ordinarily, Congress does not have to invoke specifically the source of authority for its enactments. But Randy Barnett and Erik Jensen both argue that courts give special deference to exercises of the taxing power and that the source of this deference is really just a refusal to look behind Congress’s choice of the “tax” label. So, on these accounts, if there is no label, there is no special deference. It takes a particularly obstinate—even hostile—reading of the IRR provision to find that it is not labeled a “tax.” True, the result of a failure to obtain insurance is in some places called a “penalty.” But the letter t is followed by the letters a and x, in that order, forty-five times in the section of the Tax Code setting out the insurance requirement alone. Those who are subject to the requirement to provide insurance for themselves and their dependents are called “taxpayers.” The period for which they are required to carry insurance is called a “taxable year.” The amount payable for those who do not acquire qualifying insurance is in part determined according to a “percentage of . . . the taxpayer’s household income for the taxable year.” “Household income,” in turn, is defined as a slight modification of “adjusted gross income,” which is not defined in the statute, but which cross-references an important component of the federal income tax.
In any event, the claim that only a statute expressly labeled as a “tax” can be justified under the taxing power is false. In fact, since its earliest cases interpreting the taxing power, the Supreme Court has held that it is the effect of a statute as a tax, not its mere label, that controls. For example, confronted with the question of whether a federal requirement to obtain a license to engage in certain “immoral” activities was within Congress’s power, the Court in 1866 easily upheld the statute in question as an exercise of the taxing power. Although the statute made no mention of a “tax,” the Court held that “[t]he granting of a license must be regarded as nothing more than a mere form of imposing a tax.” Later, the Court would explain that the “scope and effect” of a statute determined whether it could be upheld as “within a granted power,” although in that particular case it noted the inquiry was unnecessary because the levy was called a tax on its face.
The Florida district court’s claim to the contrary is based on a logical fallacy. It states correctly that under Supreme Court precedent, if Congress uses the word “tax,” then the enactment is constitutionally a tax. To put that in logical terms, if A (“tax”), then B (tax). But the court then asserts that if Congress does not use the word “tax,” it follows that the enactment is not a tax: in logical terms, if not-A, then not-B. That is a formal logical fallacy, known as denying the antecedent.
The case law also deeply undercuts the suggestion by two courts that Congress’s decision to replace the word “tax” with “penalty” during the drafting of the statute demonstrates Congress’s “intent” to treat the IRR as something other than a tax for constitutional purposes. Since Congress does not have to use magic words to rely on its taxing power, the fact that it chose not to use those words sheds no light on its intent. Suppose, for example, that by default tenants in my state can obtain attorneys’ fees if they prevail in suits against their landlords. I have on my word processor a form lease that also provides for fees in that instance. I delete the fee-shifting clause, then print the lease and sign it. Have I waived my right to sue my landlord? If I know about the default rule, the answer is clearly not; all I have done is saved some printer toner by omitting a redundant clause. And the default rule here, since 1866, is that Congress does not need to use the word “tax” to rely on its constitutional power to tax. We have no reason to believe Congress was unaware of well-settled precedent. All of this presumes, as well, that Congress even has the power to prevent courts from sustaining a statute on some constitutional ground, a difficult proposition some of the district courts have simply assumed to be true with no explanation.
Nor is there any persuasive normative case for conditioning constitutionality on Congress’s definitively labeling an excise as a “tax.” Barnett and Jensen appear to suggest that the tax label will create some additional political constraint, perhaps on the theory that the label will increase the salience of the burden on the public. As I have argued, though, there is no evidence that decreasing the salience of a tax eases its passage. Public choice theory in fact implies the opposite. Few voters oppose obvious taxes because each free rides on the others. When taxes are partly hidden, though, those who are aware both of the tax and others’ ignorance of it increase their opposition because they know they cannot free ride.
Courts have sometimes also used “clear statement rules” of the sort Barnett and Jensen suggest to defend federalism values. The IRR, though, is an example of exactly the kind of legislation that, in a normatively sensible federalist structure, should be within federal authority. The structure of health care produces a race to the bottom that diminishes state autonomy. The fact that some states provide care for the uninsured creates a cross-border moral hazard, allowing neighboring states to offer fewer free services but permitting citizens of the low-service states to cross the border when they fall ill. Offering fewer free services means that paid services are cheaper or taxes are lower. So the pressure on each state is to free ride on the efforts of its neighbors; states that offer better services attract migrants that drive up prices, taxes, or both. As a result, states cannot set the policy that their citizens might prefer. Whether this collective action problem is solved through direct federal legislation, conditional spending, or, as here, conditional taxation, the answer should be the same: federal action enhances state autonomy and so should face few judicial barriers.
In addition to his clear-statement argument, Barnett also appears to argue that the IRR is not a tax because the “mandate cannot have been imposed to raise revenue.” His point seems to be that it is only the penalty for failing to follow the IRR that raises money and so the IRR itself cannot be justified under the taxing power. But the IRR, like any tax on a particular transaction, simply defines the transaction that is subject to taxation. If Barnett’s view were correct, then nearly all of the taxing power cases decided by the Supreme Court have been wrongly decided. When Congress properly imposed a tax on margarine colored to look like butter, the coloring of butter itself brought in no funds for the Treasury. Transferring marijuana to someone who has not obtained a license raises no money for the Treasury, but taxes on such transfers are part of the taxing power.
Finally, two federal district courts have mistakenly concluded that the IRR could be recharacterized as imposing a “penalty” and therefore falls outside of Congress’s power to impose a tax. The courts rely for this proposition on cases interpreting the rights of individuals subject to government punishment. It is true that Congress cannot escape the heightened due process standards to which criminal defendants are entitled, such as protection against double jeopardy, by the expedient of attempting to label a punishment as something else. But that fact does not in any way undermine other clear holdings of the Supreme Court that any tax that raises revenue, no matter how little, is within the grant of authority contained in Article I, Section 8."
Brian Galle, The Taxing Power, the Affordable Care Act, and the Limits of Constitutional Compromise, 120 Yale L.J. Online 407 (2011), http://yalelawjournal.org/2011/4/5/galle.html.