The Obamacare challengers still have some hurdles to clear.
It is a risky business reading tea leaves from the Supreme Court, because even when the Court does something in one case, it may not do the same in another, more politically charged case. That said, yesterday’s decision in CIC Services, LLC v. Internal Revenue Service would seem to be good news for the argument that the state plaintiffs in Texas v. California, who are challenging the Obamacare mandate, have standing to sue.
Recall what the states argued in Texas about why the Obamacare individual mandate injures them, even though the penalty on individuals has been repealed:
The lawsuit was brought against the federal government by two individuals and a group of states, led by Texas . . . The states argue that the individual mandate imposes costs on them, mainly in two ways. One, it causes more people to sign up for Medicaid, thus increasing state spending (an argument backed up by CBO reports in 2008 and 2017 finding that more people will buy insurance if the law tells them to, even without a tax penalty). Two, the individual mandate forces the states to spend money on IRS reporting requirements aimed at enforcing compliance. Those reporting requirements were not eliminated when the penalty was set to $0 in 2017; employers are still required to file Form 1095-C, and the IRS has thus far only temporarily suspended the use of Form 1095-B. A South Dakota human-resources official submitted testimony that the state spends $100,000 a year just on Forms 1095-C.
In short, the states argue that the reporting requirements constitute an independent injury that did not go away when Congress set the penalty under the mandate to zero. And failing to produce those forms carries stiff penalties, potentially over $500 per form.
That’s where CIC comes in. Under the Anti-Injunction Act, citizens and companies cannot sue in advance to stop the government from collecting taxes; they have to pay the tax, then sue for a refund. But are they also barred from suing to stop the imposition — in CIC, by the IRS itself — of regulatory reporting mandates that may lead to the collection of a tax? A unanimous Court, in an opinion by Justice Elena Kagan, said no, the reporting requirement is an injury independent of the tax. CIC involved “micro-captive insurance transactions” between related insurance companies. Such transactions are not taxable in every case — in fact, they are exempt from taxation if the transaction is legitimate — but the IRS requires detailed reporting on them because they may be shams for tax-evasion purposes. So, many insurers who are compelled to report these transactions do not actually ever pay any tax on them. Failing to comply with the reporting requirement, however, results in both tax penalties and non-tax criminal penalties.
An insurer sued under the Administrative Procedures Act, arguing that the reporting requirements violated the APA by being arbitrary and capricious and failing to comply with notice-and-comment requirements — the standard stuff of an APA lawsuit. The IRS claimed that the sued was blocked by the Anti-Injunction Act, because it challenged reporting rules for tax purposes. The Court did not buy it. First, the Court reiterated its rule from past cases: “A reporting requirement is not a tax; and a suit brought to set aside such a rule is not one to enjoin a tax’s assessment or collection. That is so even if the reporting rule will help the IRS bring in future tax revenue — here, by identifying sham insurance transactions.”
The IRS tried to save its case by arguing that its reporting mandates were “backed up by a statutory tax penalty” and the taxpayer was obviously trying to get out of paying taxes. But, the Court noted, the taxpayer’s motive is irrelevant; what matters is what its lawsuit asked for. Justice Kagan explained at some length that the suit was, in fact, seeking to end the taxpayer’s reporting obligations:
First, the Notice imposes affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty…Second and relatedly, the Notice’s reporting rule and the statutory tax penalty are several steps removed from each other…Third, violation of the Notice is punishable not only by a tax, but by separate criminal penalties…What sets this suit apart is that it no more targets a regulatory tax than a revenue-raising one…CIC’s action challenges, in both its substantive allegations and its request for an injunction, a regulatory mandate—a reporting requirement—separate from any tax. Or said otherwise, the suit targets not a regulatory tax, but instead a regulation that is not a tax.
So it is with Texas and South Dakota in the Obamacare case: They are non-payers of the mandate burdened by reporting requirements that derive from the mandate, and seek relief from that. Now, before we read too much into CIC, a few cautions are in order. One, as we saw in the original NFIB challenge to Obamacare in 2012, the pro-Obamacare Justices are perfectly capable of talking out of both sides of their mouths on this sort of thing. NFIB held that the mandate was not a tax for purposes of the Anti-Injunction Act (if it had been, the litigation would have been postponed until 2014), but was a tax for constitutional purposes. Voilà!
Two, the bigger problem that the Obamacare challengers have is still severability: If they win, what does the Court actually strike out of the statute? As I have explained at some length, not only are there reasons why the Court will, and should, limit its ruling to striking down a mandate that is already all but dead, but there are at least two Justices (Clarence Thomas and Neil Gorsuch) who are inclined to see severability as connected to standing. So, if the states can survive a standing challenge on CIC-like reasoning that they are really seeking relief from reporting requirements resulting from the mandate, then they may not have standing to challenge anything in Obamacare besides the mandate. As a result, any victory on standing and the merits would be a narrow one in terms of real-world impact on consumers of health insurance.