Is the Federal Government Really a State, if the IRS Says It Is?

By July 4, the Supreme Court will have decided King v. Burwell. (Those of us who write about the most recent cases sometimes do not have a work-free July 4th weekend, but the Justices always do. The justices like a summer vacation longer than just a few weeks, so I can confidently predict we will know the answer before July 4, and most likely before the end of June.)

King v. Burwell involves the Patient Protection and Affordable Care Act [Pub. L. No. 111-148]—popularly called either the “ACA,” or “Obamacare” by both its opponents and its proponents. The litigation now before the Supreme Court is, on the surface, a simple issue of statutory interpretation. Only millimeters beneath the surface is a broader issue—how far will the courts go in allowing administrators to change the law by simply redefining terms that are not vague at all. This issue is peculiarly significant because the agency doing the redefining is the Internal Revenue Service. The first named defendant is Sylvia Burwell, the Secretary of Health and Human Services, but another defendant is the IRS, and it is the agency doing the redefining. No case has ever held that Congress could delegate to the IRS the power to raise or lower taxes.

The ACA, in Section 1311 [42 U.S.C. § 18031], provides that states shall create Health Benefit Exchange (“Health Exchanges”). If they meet certain criteria, they are “Qualified Health Exchanges.” The qualified Exchanges qualify for federal subsidies. Nonqualified exchanges do not.

The Court has consistently held that Congress does not have the constitutional power to order or commandeer states to enact particular laws. New York v. United States, 505 U.S. 144 (1992); Printz v. United States, 521 U.S. 898 (1997). While Congress cannot force a state to enact a qualified Health Exchange, it can use its taxing and spending power to “bribe” states by offering various incentives to states that enact and implement the kind of laws that Congress wants. That is what the ACA does.

It provides that if a state creates a qualified Health Exchange by January 1, 2014, then another section of the law—26 U.S.C. § 36B, in the Internal Revenue Code —offers generous subsidies. The subsidies are in the form of ‘‘premium assistance tax credits” and “refundable tax credits.” They not only reduce tax liability but also provide for federal money paid to private insurance companies.

Congress also created a fallback position: if a state refuses to set up a State Health Exchange, a different section of the ACA [42 U.S.C. § 18041(c)] authorizes the Secretary of Health and Human Services (HHS) to set up Federal Exchanges in those states that refuse to set up a State Exchange.

No provision of the ACA offers any tax subsidies or payments for federally created (as opposed to state created) Health Exchanges. That supports the carrot-and-stick approach to encourage states to create, implement, and maintain state Health Exchanges. In other words, if the state creates a Health Exchange, its citizens secure valuable tax benefits in addition to acquiring health insurance. If the state refuses to create, implement, and maintain a Health Exchange, that state’s citizens do not receive the financial benefits, but they will have to pay federal taxes that finance the subsidies that residents in other states (those with state-created Exchanges) will receive.

Besides to the financial incentives (carrots), the ACA has disincentives (sticks) to prod states to set up Health Exchanges. For example, the law penalizes states that do not create Exchanges by barring them from narrowing their state Medicaid programs until “an Exchange established by the State . . . is fully operational.” [42 U.S.C. § 1396a(gg)]

As one proponent of the law explained,

[I]f you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits—but your citizens still pay the taxes that support this bill. So, you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country.

Congress expected that all or most states would take this “bribe” because it gave an offer that was hard to refuse.

Nonetheless, some states—actually a lot of states34 of them — did not pick up the free federal subsidies (the carrots) and were willing to put up with the disincentives (the sticks). They simply refused to establish State Exchanges. It turned out that the ACA has not been as popular as its proponents believed it would be. Indeed, polls show that the more people learn about the law, the less favorably they view it. Moreover, many individuals have concluded that it is quite rational to not pay for health insurance until they get sick, because the fines are often not very much and the ACA does not allow insurance companies to refuse coverage because of preexisting medical conditions.

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