Last week, we posted a draft of our forthcoming Health Matrix article, “Taxation without Representation: the Illegal IRS Rule to Expand Tax Credits under the PPACA,” at the Social Sciences Research Network web site. Here’s the abstract:
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 the granting of tax credits can trigger the imposition of fines on employers, the IRS rule is likely to be challenged in court.
Our research has been featured in several major media outlets, and has generated heated responses. Below, we respond to a recent Health Affairsblog post by our most tenacious critic, Washington & Lee University law professor Timothy Jost. But first, a little background.
What’s at Issue?
To advance the PPACA’s goal of expanding access to health insurance, Section 1311 directs states to establish health insurance “exchanges” where residents may purchase qualifying insurance plans. Section 1321 authorizes the federal government to create Exchanges where states do not.
Due in large part to the PPACA’s insurance regulations, qualifying health plans offered through the Exchanges will be rather expensive. Thus the Act authorizes tax credits that shift much of the cost of those plans to the federal government. Those tax credits trigger additional “cost-sharing” subsidies (which further shift costs to taxpayers) as well as penalties against employers under the law’s employer mandate.
The dispute is over whether the Act authorizes the IRS to provide tax credits only in Exchanges established by states (under Section 1311) or also in Exchanges established by the federal government (under Section 1321). Three facts are key to this dispute.
First, both sides acknowledge that the statutory language governing eligibility for tax credits is clear and unambiguous. The Act provides that taxpayers are eligible for tax credits if they purchase a health plan through “an Exchange established by the State under section 1311.” That language clearly authorizes tax credits only in state-established Exchanges, and the Act employs or refers to that language no less than six times when authorizing tax credits. There is no parallel language anywhere in the statute authorizing the IRS to offer tax credits through federal Exchanges established under Section 1321.
Second, there is nothing in the statute that conflicts with the plain meaning of that language. Indeed, the rest of the statute supports that plain meaning. Nor has anyone identified anything in the law’s legislative history that conflicts with that language. The only statement anyone has found on this point shows the statutory language was intentional. During congressional debate, the bill’s lead author, Senate Finance Committee chairman Max Baucus (D-MT), explained that the bill conditions tax credits on the establishment of a state-run Exchange.
Third, even though some members of Congress and the President might have preferred a law that authorized tax credits in federal Exchanges, they nevertheless enacted a law that did not. Many advocates of health care reform urged passage of the Senate bill even though there were parts of the bill they did not like, and knowing full well that not all defects could or would be fixed through the reconciliation process. Congress amended the sections of the Senate bill that authorize tax credits and cost-sharing subsidies a total of 12 times through the reconciliation process, but left the language limiting tax credits to state-established Exchanges undisturbed. Again, many of those amendments support the clear meaning of that language, and none of them conflict with it.
And yet, in late May the IRS finalized a rule that will issue tax credits — and therefore will trigger cost-sharing subsidies and employer-mandate penalties — through federal Exchanges, contrary to the plain language of the statute. It is our contention that this rule is illegal.
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