The Illegal IRS Rule to Increase Taxes & Spending under ObamaCare: Our Response to Timothy Jost

Jonathan Adler and I have a post at the at the Health Affairs blog where we respond to Timothy Jost’s critique of our working paper, “Taxation without Representation: the Illegal IRS Rule to Expand Tax Credits under the PPACA.” Jost has been our most tenacious (if not most consistent) critic.

Here’s an excerpt. Keep in mind that although we say “tax credits,” government spending accounts for about 80 percent of the money involved. Which is a lot: the cost of this illegal IRS rule could be in the hundreds of billions of dollars.

The dispute is over whether the [Patient Protection and Affordable Care] 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.

We invite everyone to read our working paper alongside Jost’s post, and our reply, and to decide for themselves whether the IRS is breaking the law.

You can also watch Jost and me testify before Congress on the IRS rule tomorrow at 9am ET in room 2154 of the Rayburn House Office Building.