IRS Regulations Threaten Continuing Existence of Obamacare

IRS Regulations Threaten Continuing Existence of Obamacare

Pay close attention when you sign-up for insurance during this year’s open enrollment period: you may lose the tax credit that makes your health plan actually affordable. And if you do lose that tax credit, and the Supreme Court ends up deciding the IRS has abused its authority in even offering the tax credit in the first place, you will also lose the associated penalty for not signing up for health care. That’s right – no tax credit AND no penalty.

Could this happen? It’s before the Supreme Court, and we’ll likely know by early next year. It would be a disaster for the continuing existence of Obamacare.

The United States Supreme Court recently granted certiorari (agreed to review) in a 4th Circuit case called King v. Burwell. This case is considered a companion case to Halbig v. Burwell, heard in the D.C. Circuit earlier this year, and two other pending cases in Indiana and Oklahoma. In July, the D.C. Circuit found for the plaintiffs in the Halbig case and the government requested en banc review by the full D.C. Circuit (which will be heard on December 17), thereby vacating the original panel’s published opinion. Thus, King v. Burwell is the first of these cases to be heard by the Supreme Court.

Unlike what you may think, these cases are NOT challenges to the Affordable Care Act (“ACA”). They are actually requests to uphold the ACA. The ACA was intended to persuade states to establish health insurance exchanges. The ACA provides for federal exchanges where states fail to establish their own. 36 states have refused to establish a state exchange, including Utah.

Section 1401 of the ACA provides for tax credits, i.e. subsidies, for the purchase of health insurance plans in “Exchange[s] established by the State.” These subsidies make the insurance purchased on an exchange actually affordable. Those five words are the entire issue in King v. Burwell and its companion cases.

The IRS is taxed (pun intended) with the responsibility to create rules and regulations to enforce federal statutes relating to taxes, including the ACA’s tax credit provisions. Early drafts of the IRS’s regulations relating to the ACA reflect the requirement that recipients of the tax credit must be enrolled in health insurance plans through an exchange “established by the State.” In early 2011, after significant Republican gains in state legislatures, the Acting Assistant Secretary for Tax Policy at the Department of Treasury, Emily McMahon, became aware that the ACA text only allows for tax credits through state exchanges. (It is telling that she did not realize this requirement existed before reading an article about it.) Shortly thereafter, the words “established by the State” disappeared from IRS draft regulations, and indeed stayed out throughout the promulgation and adoption of the final rule.

King v. Burwell, then, is a case challenging the IRS rule that arbitrarily, and conveniently, declares federal exchanges as in fact “established by the State.” These cases, therefore, are Chevron deference cases – and no, not the V-shaped pattern adorning every baby nursery decorated in the last 5 years. Chevron deference cases raise the question of how courts should treat agency interpretation of statutes – courts are supposed to give deference to an agency interpretation unless it is unreasonable.

Exterior of the Internal Revenue Service office in midtown New York. by Matthew BisanzCC
Exterior of the Internal Revenue Service office in midtown New York. by Matthew BisanzCC

In a Chevron analysis, the first question a court must answer is whether the statute is ambiguous. Two camps of thought exist – a “textualist” analysis where advocates say look only at the text, and a “statutory purpose” analysis where courts look to the intended purpose of the statute. In King, the IRS argued that because it “provide[d] an equally plausible understanding of the statute,” the ACA is ambiguous and the IRS’s interpretation, as allegedly reasonable, should be deferred to. In Halbig, however, the D.C. Circuit originally held there was no indication Congress understood the phrase “established by the State” to have any meaning other than the normal meaning of those words. It therefore held the tax credits illegal, including the penalties on employers and individuals those tax credits trigger. (Again, this case will be reheard by the entire D.C. Circuit Court in December.)

Parties disagree whether Congress really intended to limit the tax credits to only recipients in states that set up exchanges. The architect of the ACA, Jonathan Gruber, has both described plaintiffs’ positions in these cases as “screwy,” and admitted “[i]f you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits.”

In fact, Senate and House Democrats who now insist the availability of tax credits was intended for even those people in states who failed to set up exchanges have not been able to point to anything to substantiate these claims, and are disingenuous at best. Many bills considered in 2009-2010 specifically offered subsidies in all states, yet were not passed. Other bills granted subsidies only to states that cooperated with implementation. Sound familiar? In 2010, Democrat Representative, and former Texas Supreme Court Justice, Lloyd Doggett told his party’s leaders that states could block their residents from receiving any benefit under the ACA simply by not establishing an exchange. How else do you explain that?

In the end, though, the irony of a Chevron analysis case in our present-day Congress is that every statute is ambiguous – this is how Congress works now. If you want to understand a statute, you need to pass it first, then find out what’s inside. And what’s inside is whatever the unelected bureaucrats decide what is inside.

Which came first, the ambiguous statute or the nonsensical regulation defining it?

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