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The IRS Has Gone Rogue
Did Congress intend to offer tax credits through federal exchanges?


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Michael F. Cannon

A president who says “I haven’t raised taxes” has authorized his Internal Revenue Service issue a “final rule” that will illegally tax some 12 million individuals, plus large employers, in as many as 40 states beginning in 2014. Oklahoma’s attorney general has asked a federal court to block this rule. Members of Congress have introduced legislation in both the House and the Senate to quash it.

At first glance, it might not seem that the IRS is up to anything nefarious. The rule in question concerns the Patient Protection and Affordable Care Act’s tax credits, not the law’s tax increases. The tax credits are intended to offset the cost of insurance premiums for low- and middle-income workers.

For many Americans, however, those tax credits are like an anchor disguised as a life vest. The mere fact that a taxpayer is eligible for a tax credit can trigger tax liabilities against both the taxpayer (under the act’s “individual mandate”) and her employer (under the “employer mandate”). In 2016, these tax credits will trigger a tax of $2,085 on many families of four earning as little as $24,000. An employer with 100 workers could face a tax of $140,000 if even one of his workers is eligible for a tax credit.

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So it is significant that the PPACA explicitly and repeatedly restricts eligibility for tax credits to people who purchase health insurance “through an Exchange [i.e., government agency] established by the state” in which they live. That means that under the statute Congress enacted, a state can block those hefty taxes simply by declining to create an exchange. The PPACA directs the federal government to create an exchange in any state that declines to create one itself, and Health and Human Services secretary Kathleen Sebelius estimates she may have to do so in as many as 30 states. (Some experts put the number closer to 40.) However, because the statute withholds tax credits in federal exchanges, the creation of a federal exchange does not trigger tax liabilities. By our count, as many as 12 million low- and middle-income Americans would be exempt from those taxes, including 250,000 Oklahomans.

It is here that the IRS has gone rogue. The agency has announced that, despite the clear statutory language restricting tax credits to exchanges established by states, it will issue tax credits through federal exchanges. One can see why Oklahoma and the rest might be upset: By offering tax credits in states that opt not to create exchanges, the IRS is imposing taxes where Congress did not authorize them. This IRS rule will tax those 12 million low- and middle-income Americans, including 250,000 Oklahomans, contrary to the express language of the PPACA.

Defenders of the rule claim that Congress intended the tax credits to be available in all exchanges. But is that true?

It may come as a surprise to supporters of the PPACA, as it did to us, but all the evidence that has surfaced to date shows that Congress restricted and, yes, intended to restrict tax credits to state-created exchanges. What the IRS is doing is illegal.

We examine the evidence in our forthcoming Health Matrix article, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.” Here are a few highlights, including some material that is not included in our article.

1. The text of the PPACA is unambiguous.

The Supreme Court explained in Connecticut National Bank v. Germain that when a court is trying to divine congressional intent, the most important factor is the text of the statute:

In interpreting a statute a court should always turn first to one cardinal canon before all others. We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. . . .  When the words of a statute are unambiguous, then, this first canon is also the last: judicial inquiry is complete.

Using that canon as its guide, the Congressional Research Service writes this about the text of the PPACA’s tax-credit provisions:

A strictly textual analysis of the plain meaning of the provision would likely lead to the conclusion that the IRS’s authority to issue the premium tax credits is limited only to situations in which the taxpayer is enrolled in a state-established exchange.

Not convinced? You’re not alone. The CRS explained that courts might uphold the IRS rule if they were “willing to engage in a searching statutory interpretation involving text, context, legislative purpose, and legislative history.” So let’s look at context, legislative purpose, and legislative history.

2. Every health-care overhaul advanced by Senate Democrats denied premium assistance to residents of non-compliant states.

The PPACA’s language restricting tax credits to state-created exchanges came almost verbatim from a bill reported by the Senate Finance Committee.

Senate Democrats’ other leading health-care bill emerged from the Health, Education, Labor, and Pensions Committee. The HELP bill allowed premium assistance through federal exchanges (called “gateways”) in certain circumstances. But if a state refused to assist with implementation, the HELP bill denied premium-assistance subsidies to that state’s residents. And if a state fell out of compliance, the HELP bill explicitly revoked these subsidies from residents who were already receiving them.

Harsh? Perhaps. But this legislative history shows that denying premium assistance to residents of non-compliant states was not some beyond-the-pale idea that Congress could not possibly have intended, but was instead the dominant approach in the Senate; every bill Senate Democrats advanced contained this feature. The HELP bill also suggests a legislative purpose behind the language: to encourage states to implement the law.



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