Taxation without representation: the illegal IRS rule to expand tax credits under the PPACA.

Author:Adler, Jonathan H.
Position:Patient Protection and Affordable Care Act - Introduction through IV. Text, Legislative History, and Congressional Intent, p. 119-166


The Patient Protection and Affordable Care Act (PPACA) provides tax credits and subsidies for the purchase of qualifying health insurance plans on state-run insurance exchanges. Contrary to expectations, many states are refusing or otherwise failing to create such exchanges. An Internal Revenue Service (IRS) rule purports to extend these tax credits and subsidies to the purchase of health insurance in federal exchanges created in states without exchanges of their own. This rule lacks statutory authority. The text, structure, and history of the Act show that tax credits and subsidies are not available in federally run exchanges. The IRS rule is contrary to congressional intent and cannot be justified on other legal grounds. Because tax credit eligibility can trigger penalties on employers and individuals, affected parties are likely to have standing to challenge the IRS rule in court.

CONTENTS INTRODUCTION I. THE PPACA II. THE PPACA's REGULATORY STRUCTURE A. A Three-Legged Stool B. Exchanges, Tax Credits & the Employer Mandate C. Tax Credits & the Individual Mandate D. Tax Credits & State-Run Exchanges III. THE IRS RULE IV. TEXT, LEGISLATIVE HISTORY, AND CONGRESSIONAL INTENT A. Plain Text B. Preference for State-Run Exchanges C. Financial Incentives D. Antecedent Bills E. Authorial Intent F. Non-Equivalence G. Revealed Intent H. An Error of Miscalculation V. ASSESSING OTHER POTENTIAL LEGAL RATIONALES FOR THE IRS RULE A. Scrivener's Error B. Absurd Results C. Chevron Deference D. "Such Exchange" E. The "CBO Canon" VI. STANDING TO CHALLENGE THE IRS RULE CONCLUSION INTRODUCTION

On March 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (PPACA or "the Act") into law. (1) The PPACA creates a complex scheme of new government regulations, mandates, subsidies, and agencies in an effort to achieve near-universal health insurance coverage. Immediately after passage, a majority of state attorneys general and numerous business and public interest groups filed suit challenging various portions of the new law--most notably the so-called "individual mandate" and Medicaid expansion. This litigation wound its way to the US Supreme Court, which produced a divided ruling upholding the constitutionality of the mandate but limiting the Medicaid expansion. (2) Yet this decision did not end the controversy surrounding the PPACA. (3) Additional litigation has already ensued and is likely to continue in the years to come. (4)

The PPACA's congressional sponsors created incentives for states to implement much of the law and reasonably expected that states would do so. (5) States help implement many complex federal programs like Medicaid and the Clean Air Act. Among other things, the PPACA encourages states to create new agencies called health insurance "Exchanges" to execute many of the law's key features. If a state fails to create an Exchange that meets federal standards, the Act authorizes the federal government to create a "fallback" Exchange for that state. As an inducement to state officials, the Act authorizes tax credits and subsidies for certain households that purchase health insurance through an Exchange, but restricts those entitlements to Exchanges created by states. Apparently this was not inducement enough.

Contrary to initial expectations, a large number of states will not create Exchanges before the PPACA's key provisions take effect in 2014. As Health and Human Services (HHS) Secretary Kathleen Sebelius commented in February 2012, the federal government could be responsible for running Exchanges in fifteen to thirty states. (6) Yet dozens of states are either dragging their heels or flatly refusing to cooperate with implementation. (7) As of February 15, 2013, only seventeen states and the District of Columbia have signaled intent to create a PPACA-compliant Exchange, leaving the federal government responsible for creating them in thirty-four states. (8)

This apparent miscalculation creates a number of problems for implementation of the PPACA. The tax credits and subsidies for the purchase of qualifying health insurance plans in state-run Exchanges serve as more than just an inducement to states. These entitlements also operate as the trigger for enforcement of the Act's "employer mandate." As a consequence, that mandate is effectively unenforceable in states that decline to create an Exchange. The tax credits further play a role in the enforcement of the Act's "individual mandate," such that a state's decision not to create an Exchange would exempt a substantial portion of its residents from that mandate. (9) Because such a large number of states have declined to create Exchanges of their own, it may be difficult to implement the law as supporters had hoped.

A final Internal Revenue Service (IRS) rule issued on May 18, 2012, attempts to fix this problem by extending eligibility for tax credits and cost-sharing subsidies to those who purchase qualifying insurance plans in federally run Exchanges. (10) The PPACA, however, precludes the IRS from issuing tax credits in federal Exchanges. The plain text of the Act only authorizes premium-assistance tax credits and cost-sharing subsidies for those who purchase plans on state-run Exchanges, and the IRS rule's attempt to offer them to other individuals cannot be legally justified on other grounds. In other words, the IRS is attempting to create two entitlements not authorized by Congress and, in the process, to tax employers and individuals whom Congress did not authorize the agency to tax.

It may be somewhat surprising that the PPACA contains such a gaping hole in its regulatory scheme. We were both surprised to discover this feature of the law and initially characterized it as a "glitch." (11) Yet our further research demonstrates that this feature was intentional and purposeful and that the IRS's rule has no basis in law. This supposed fix is actually an effort to rewrite the law and to provide for something Congress never enacted--indeed, something that the PPACA's authors chose not to include in the law.

This Article explains the importance of the law's limitation on the availability of tax credits for health insurance for implementation of the PPACA and details the case for and against the IRS rule. Part II provides a brief overview of the PPACA's legislative history and explains the regulatory structure that the Act creates to govern private health insurance markets--paying particular attention to the instability the law introduces into those markets, the role of tax credits and subsidies in mitigating that instability, and the central role of health insurance "Exchanges." Part III describes the IRS rule and the agency's justification for it. Part IV shows how the IRS rule is contrary to the text, structure, purpose, and history of the PPACA. Part V identifies and evaluates other potential legal rationales for the IRS rule and finds them wanting. Part VI explains that while an IRS rulemaking expanding the eligibility of tax credits or subsidies beyond that authorized by Congress would normally escape judicial review, the interactions of the tax credit provisions with the law's employer and individual mandates provides a basis for Article III standing to challenge the IRS rule. States may have standing to sue as well. (12) In other words, this question is likely to be resolved in federal court.


    What we now call the PPACA is the product of three different bills, two of which originated in the Senate and a third that made limited amendments to the final Senate bill at the behest of the House of Representatives. In 2009, two Senate committees reported major health care legislation. On September 17, the Health, Education, Labor, and Pensions (HELP) Committee approved the "Affordable Health Choices Act" (S. 1679). (13) On October 19, the Senate Committee on Finance approved the "America's Healthy Future Act of 2009" (S. 1796). (14) The two Senate bills shared many features. Before either bill reached the Senate floor, Senate Majority Leader Harry Reid (D-NV) assembled the chairmen of those committees and congressional and White House staff in his office in the US Capitol, where they merged the two committee-reported bills into the Patient Protection and Affordable Care Act. (15)

    Although Senate Democrats held a sixty-seat majority--the minimum necessary to break a Republican filibuster--Senator Reid had difficulty collecting yea votes from every member of his caucus. (16) Once he had corralled all sixty votes, Senate Democrats broke the Republican filibuster. The new Patient Protection and Affordable Care Act cleared the US Senate before sunrise on December 24, 2009, without a vote to spare. (17)

    Congressional Democrats had intended to have a conference committee merge the PPACA with the "Affordable Health Care for America Act" (H.R. 3962) that had passed the House of Representatives in November. (18) Had this occurred, the PPACA might look quite different than it does today. But in January 2010, Republican Scott Brown won a special election to fill the seat vacated by the death of Sen. Edward Kennedy (D-MA). Brown's victory shifted the political terrain. It gave Senate Republicans the forty-first vote necessary to filibuster a conference report on the House and Senate bills.

    As a result, House and Senate Democrats abandoned a conference committee in favor of a novel strategy. House Democrats agreed to pass the PPACA exactly as it had passed in the Senate, but only upon receiving assurances that after the House amended the PPACA through the "budget reconciliation" process, the Senate would immediately approve those amendments. Because Senate rules protect reconciliation bills from a filibuster, the PPACA's supporters needed only fifty-one votes to pass the House's "reconciliation" amendments. The downside of this strategy was that the rules governing budget reconciliation limited the amendments House...

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