Cato Maintains Opposition to IRS Lawlessness in Obamacare-Subsidies Case

To encourage the purchase of health insurance, the Affordable Care Act added a number of deductions, exemptions, and penalties to the federal tax code. As might be expected from a 2,700-page law, these new tax laws have the potential to interact in unforeseen and counterintuitive ways.

As first discovered by Michael Cannon and Jonathan Adler, one of these new tax provisions, when combined with state decision-making and IRS rule-making, has given Obamacare yet another legal problem. The legislation’s Section 1311 provides a generous tax credit for anyone who buys insurance from an insurance exchange “established by the State”—as an incentive for states to create the exchanges—but only 16 states have opted to do so. In the other states, the federal government established its own exchanges, as another section of the ACA specifies. But where § 1311 only explicitly authorized a tax credit for people who buy insurance from a state exchange, the IRS issued a rule interpreting § 1311 as also applying to purchases from federal exchanges.

This creative interpretation most obviously hurts employers, who are fined for every employee who receives such a tax credit/subsidy to buy an exchange plan when their employer fails to comply with the mandate to provide health insurance. But it also hurts some individuals, such as David Klemencic, a lead plaintiff in one of the lawsuits challenging the IRS’s tax-credit rule. Klemencic lives in a state, West Virginia, that never established an exchange, and for various reasons he doesn’t want to buy any of the insurance options available to him. Because buying insurance would cost him more than 8% of his income, he should be immune from Obamacare’s tax on the decision not to buy insurance.  After the IRS expanded § 1311 to subsidize people in states with federal exchanges, however, Klemencic could’ve bought health insurance for an amount low enough to again subject him to the tax for not buying insurance. Klemencic and his fellow plaintiffs argue that they face these costs only because the IRS exceeded the scope of its powers by extending a tax credit not authorized by Congress.

The district court rejected that argument, ruling that, under the highly deferential test courts apply to actions by administrative agencies, the IRS only had to show that its interpretation of § 1311 was reasonable—which the court was satisfied it had. On appeal, a panel of the U.S. Court of Appeals for the D.C. Circuit held that the plain language of the ACA precluded the federal government from subsidizing the premiums of insurance policies obtained through federally established exchanges. Later that same day, the Fourth Circuit in King v. Burwell took the opposite position on the same question—from which ruling there is now a cert petition pending in the Supreme Court.

This circuit split did not last long, however, as the D.C. Circuit decided to vacate the panel opinion and rehear Halbig en banc (meaning all the court’s judges, not just a three-judge panel). Federal appellate rules say that such review “is not favored” and the D.C. Circuit has a particularly high bar, on average taking only one case per year en banc. Judge Harry Edwards, who dissented in the Halbig panel ruling, has taken great pains to reduce the number of en banc hearings. Even before he served as the D.C. Circuit’s chief judge, Edwards wrote in Bartlett v. Bowen (1987) that “the institutional cost of rehearing cases en banc is extraordinary” and that it “substantially delays the case being reheard, often with no clear principle emanating from the en banc court.” Nevertheless, the court took this step, vindicating President Obama’s strategy of packing the underworked D.C. Circuit after the Senate eliminated the filibuster for judicial nominees.

Cato and the Pacific Research Institute have filed a brief continuing our support for the plaintiffs on their appeal. While it is manifestly the province of the judiciary to say “what the law is,” where the law’s text leaves no question as to its meaning—as is the case here with the phrase “established by the State”—it’s neither right nor proper for a court to replace the laws passed by Congress with those of its own invention, or the invention of civil servants.

If Congress wants to extend the tax credit beyond the terms of the ACA, it can do so by passing new legislation. The only reason for executive-branch officials not to go back to Congress for clarification, and instead legislate by fiat, is to bypass the democratic process, thereby undermining constitutional separation of powers.

This case ultimately isn’t about money, the wisdom of individual health care decision-making, or even political opposition to Obamacare. It’s about who gets to create the laws we live by: the democratically elected members of Congress, or the bureaucrats charged with no more than executing the laws that Congress passes and the president signs.

The en banc D.C. Circuit will hear argument in Halbig v. Burwell on December 17.

Junk Polling: Democrats for Public Education Edition

Yesterday, Democrats for Public Education (DFPE) released the results of a poll that supposedly shows a high degree of public support for their agenda:

All of the progressive reforms elicit solid majority endorsement (ranging from 60% to 80% buy-in), while none of the conservative reforms come remotely close to a majority (ranging from 40% to 10% buy-in). Note the steep drop-off from the last progressive reform (increase teacher pay) to the top conservative reform (test scores for teacher evaluations). [Emphasis in the original.]

What an amazing coincidence! The public favors exactly what DFPE proposes!

But let’s look at how they phrased the “proposed reforms”:

Democrats for Public Ed poll question

Notice how all the so-called “progressive reforms” sound positive (“engaging curriculum” “overcome challenges”) and sometimes even explicitly connect the reform to some positive outcome (“help disadvantaged students”). Are teachers’ “due process rights” (read: tenure) really about their ability to “advocate for the things that students need” or more about protecting incompetent teachers from being fired

Bulgaria’s October 5th Elections: A Flashback at the Economic Records

Bulgarians will go to the polls on October 5th to elect new members of its parliament and thus a new government. Before casting their votes, voters should reflect on the economic records of Bulgaria’s governments since 1995.

Every country aims to lower inflation, unemployment, and lending rates, while increasing gross domestic product (GDP) per capita. Through a simple sum of the former three rates, minus year-on-year per capita GDP growth, I constructed a misery index for each of Bulgaria’s six governments since 1995 (see the accompanying table).

The Pension Burden on State Budgets

Cato’s “Fiscal Policy Report Card on America’s Governors” focuses on short-term tax and spending decisions made by governors. But governors and legislatures also make important decisions that will affect state budgets over the longer term.

As Chris Edwards and I discuss in the Report Card, one area of particular concern is compensation for state workers, particularly retirement benefits.

Total wages and benefits for state and local workers was $1.3 trillion in 2013, which accounted for 53 percent of all state and local spending. That is a huge cost that could rise substantially in coming years, particularly in those states that have large funding gaps in their retirement plans. Governments have promised their workers generous pension and retirement health benefits, but most states have not put enough money aside to fund them.

In recent years, many states have modestly trimmed benefits and increased worker contributions for retirement plans. However, more reforms are needed, as recent studies have shown. A study by the Center for Retirement Research (CRR) at Boston College found that the average funding level—the ratio of assets to liabilities—for public employee pensions was just 72 percent in 2013 after declining substantially over the past decade. Based on the usual accounting for these plans, the unfunded liabilities in state and local pensions total $1.1 trillion, according to CRR.

Those numbers understate the size of the problem. Most financial economists think that the discount rate used in official valuations of government pension liabilities is too high, or too optimistic. When CRR used a lower discount rate of 4 percent instead of the average official rate of 7.7 percent, the value of unfunded state and local pension liabilities skyrocketed to $3.8 trillion. Our Cato colleague, Jagadeesh Gokhale, argues even that is too conservative as it only includes currently accrued pension costs. He estimates that the funding gap for accrued benefits plus future accruals under today’s generous pension rules is about $10 trillion.

Many states have made modest reforms to pensions in recent years, but larger reforms are needed. Without reforms, state budgets will be put under increasing stress and part of the burden of pension benefits will land on future taxpayers.

Should Intellectual Property Be in Trade Agreements?

After I complained recently that arguments for including intellectual property (IP) in trade agreements needed to specify what level of protection is desirable, Tom Giovanetti responded by asking for my view on a more basic question: Should IP—regardless of the level of protection—be in trade agreements at all? My colleague Bill Watson has previously set out a political argument for removing it, which is that achieving free trade is becoming very difficult when IP issues get inserted into trade negotiations. Let me add to his argument the following: If IP is in, then there is really no boundary to what can be in, and the result is trade agreements that look like “global governance” agreements.

Returning to Tom’s question, I should say at the outset that Tom doesn’t really say explicitly why IP should be in trade agreements. He doesn’t explain how IP rules fit within the general concept of trade liberalization, or what scope he sees for trade agreements. What are his limits for what should be covered in trade agreements? I’m really not sure. Instead, the main focus of Tom’s argument for including IP in trade agreements seems to be that the United States exports lots of IP-related goods, and therefore it is in the nation’s interest to have IP rules in there.

With this argument, it seems to me that Tom is trying to portray strong IP protection as something that helps U.S. industry at the expense of its foreign competition. This doesn’t have a very trade-liberalizing feel. Moreover, looking at the bigger picture, what stronger IP protection does is help U.S. industry at the expense of consumers (U.S. and foreign). In terms of appropriate IP policy, it seems to me, the focus should be on giving incentives to innovate, but not to the detriment of consumers. Some argue that stronger IP protection promotes innovation, but others contest this.

Turning back to trade agreements, Tom’s argument misses a fundamental point: What is the purpose of trade agreements? For decades, this purpose was fairly clear: to provide a framework of mutual restraints on protectonist trade barriers, such as tariffs, quotas, and discriminatory laws and regulations.

Public Oversight of Congress, One Click at a Time

In mid-August, using Cato Deepbills data, the Legal Information Institute at Cornell University started alerting visitors to its U.S. Code pages that the laws these visitors care about may be amended by Congress.

The most visited bills are an interesting smattering of issues.

Getting top clicks is H.R. 570, the American Heroes COLA Act. Would it surprise you to learn that beneficiaries of Social Security’s Old Age, Survivors and Disability Insurance program are looking to see if veterans’ disability compensation will get the same cost-of-living increases? The relevant section of the Social Security Act on the Cornell site points to the bill that would grow veterans’ benefits in tandem with Social Security recipients’.

S. 1859, the Tax Extenders Act of 2013, is the second bill with the most referrals from Cornell. People looking into federal regulation of health insurance—or myriad other statutes—are finding their way to this complex piece of legislation. We know visitors to the Cornell site are legally sophisticated. They just might be able to follow what S. 1859 does.

Immigration is a hot-button issue, and Deepbills links at Cornell such as the code section dealing with reimbursement for detaining aliens are sending people to S. 744, the Border Security, Economic Opportunity, and Immigration Modernization Act.

Another hot-button issue and top source of clicks from Cornell’s site: federal gun control. People looking at gun control law are following links to Senator Dianne Feinstein’s (D-CA) bill to ban assault weapons.

As of Thursday morning, 674 people had clicked 855 times on links to the bills in Congress that affect the laws they’re interested in. Those numbers aren’t going to instantaneously revive public oversight of the government. But usage of these links is rising, and Tom Bruce at Cornell says he plans changes that may increase clicks by 3 to 5 times. He guesses that people see Cato’s sponsorship of the data they can access 20,000 times a day. (“I should have asked you for a penny per impression ;),” he says. Funny guy.)

A lot more people are aware of work Cato is doing to increase government transparency, but, more importantly, a small but growing cadre of people are being made aware of what Congress is doing. This positions them to do something about it. Public oversight of Congress is increasing one click at a time.

At a Minimum, Transatlantic Trade Negotiations Should Ditch Investor-State Provisions

Some exaggeration notwithstanding, Harold Meyerson, with whom the occasion to agree is rare, does a reasonably good job describing some of the pitfalls of the so-called Investor-State Dispute Settlement mechanism in his Washington Post column yesterday.  ISDS has become a source of growing controversy, which threatens to derail the Transatlantic Trade and Investment Partnership negotiations, which are reported to be floundering during the seventh “round” of talks taking place this week in Chevy Chase, Maryland.

“Under ISDS,” Meyerson writes, “foreign investors can sue a nation with which their own country has such treaty arrangements over any rules, regulations or changes in policy that they say harm their financial interests.”  That is more or less correct, but the implication that the threshold for bringing a suit is simple harm to a foreign investor’s financial interests is misleading.  What is being disciplined under ISDS is not harm to financial interests of foreign investors, but harm that comes from discriminatory treatment of foreign investors.  Thus, ISDS avails foreign investors (i.e., U.S. companies invested abroad, foreign companies invested in the U.S.) of access to third-party arbitration tribunals as venues for determining whether and to what extent the plaintiff suffered economic damages on account of host-government actions or policies that fail to meet certain minimum standards of treatment.

Meyerson suggests that ISDS provisions be purged from the TTIP negotiations because they subordinate U.S. courts to unaccountable tribunals, which “invites a massive end-run around national regulations.” Though I firmly believe the U.S. economy is racked with superfluous and otherwise unnecessary regulations, I do believe that a successful foreign challenge of U.S. laws, regulations, or actions in a third-party arbitration tribunal (none has occurred, yet) would subvert accountability, democracy, and the rule of law.  For those and several other reasons, I’m on board with Meyerson’s suggestion to purge ISDS from TTIP, and would extend the purge to all trade agreements.  In fact, I developed eight reasons for purging ISDS from the trade negotiations in this paper earlier this year.