The Illegal IRS Rule to Expand Tax Credits under the PPACA: A Response to Timothy Jost

August 1, 2012 • Commentary
By Michael F. Cannon and Jonathan H. Adler
This article appeared on Health Affairs on August 1, 2012.

Last week, we posted a draft of our forthcoming Health Matrix article, “Taxation without Representation: the Illegal IRS Rule to Expand Tax Credits under the PPACA,” at the Social Sciences Research Network web site. Here’s the abstract:

The Patient Protection and Affordable Care Act (PPACA) provides tax credits and subsidies for the purchase of qualifying health insurance plans on state‐​run insurance exchanges. Contrary to expectations, many states are refusing or otherwise failing to create such exchanges. An Internal Revenue Service (IRS) rule purports to extend these tax credits and subsidies to the purchase of health insurance in federal exchanges created in states without exchanges of their own. This rule lacks statutory authority. The text, structure, and history of the Act show that tax credits and subsidies are not available in federally run exchanges. The IRS rule is contrary to congressional intent and cannot be justified on other legal grounds. Because the granting of tax credits can trigger the imposition of fines on employers, the IRS rule is likely to be challenged in court.

Our research has been featured in several major media outlets, and has generated heated responses. Below, we respond to a recent Health Affairs blog post by our most tenacious critic, Washington & Lee University law professor Timothy Jost. But first, a little background.

What’s at Issue?

To advance the PPACA’s goal of expanding access to health insurance, Section 1311 directs states to establish health insurance “exchanges” where residents may purchase qualifying insurance plans. Section 1321 authorizes the federal government to create Exchanges where states do not.

Due in large part to the PPACA’s insurance regulations, qualifying health plans offered through the Exchanges will be rather expensive. Thus the Act authorizes tax credits that shift much of the cost of those plans to the federal government. Those tax credits trigger additional “cost‐​sharing” subsidies (which further shift costs to taxpayers) as well as penalties against employers under the law’s employer mandate.

The dispute is over whether the 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.

An Evolving Defense of the IRS Rule

Timothy Jost has mounted a spirited and evolving defense of the IRS rule. Jost begins and ends his most recent blog post by questioning our motives: “what is it about extending the benefits of our health care system to millions of uninsured Americans that so troubles opponents of the ACA?” We will stick to addressing Jost’s analysis in that post and in his prior commentary.

When we first began drawing attention to the rule last year, Jost admitted the relevant provisions of the statute “clearly say” that “tax credit eligibility… depends on the applicant being enrolled in a qualified health plan ‘through an Exchange established by the State under section 1311.’ ” He maintained, however, that “Congress clearly did not mean” what it clearly said, even though the meaning of that text would have been plain to anyone who had bothered to read it. He has since backtracked — not on whether the language of the statute is clear, but on the supposed clarity of Congress’ manifest desire to offer tax credits in federal Exchanges. He concedes that both “the PPACA” and the reconciliation bill “could have been clearer” on that point.

Jost originally claimed this supposed discrepancy between the clear language of the statute and congressional intent was the sort of drafting error that could be ignored — i.e. a “scrivener’s error.” He now concedes this was no scrivener’s error.

Jost further claimed it “is obvious to anyone who understands the ACA” that the clear statutory language was a “drafting error” because there could be “no coherent policy reason” for withholding subsidies in federal Exchanges. He now concedes there is a coherent policy reason for the plain meaning of the statute: “It is clear that the federal government favored state exchanges,” he writes, and created incentives for states to establish them. Those incentives, he continues, included “generous grants to the states” and imposing a Medicaid maintenance‐​of‐​effort requirement that only lifts once a state creates an Exchange. Jost even concedes that another leading Senate bill conditionally withheld subsidies in federal Exchanges as a way of motivating states to implement that bill.

Jost further claimed it is “highly unlikely that the House… would have approved a bill that only provided tax credits through state exchanges but not through the federal exchange.” And yet, by his own admission, House Democrats did exactly that. Given the choice between a Senate bill with many provisions they did not like, or no bill at all, they opted to accept the former — a choice Jost advocated at the time.

Finally, Jost originally claimed “there will be no judicial review” of the IRS rule because “[i]t is not possible to conceive of a person” who would have standing to challenge the rule. Jost now concedes that the rule would inflict concrete harm on employers in states that do not create Exchanges. That is, the rule’s illegal tax credits will trigger illegal penalties against employers, who could therefore establish standing.

To summarize, Jost has conceded the following: the text of the PPACA “clearly” withholds tax credits in states that fail to create Exchanges; House Democrats approved that language; this was not a scrivener’s error; Congress wanted to encourage states to create Exchanges; withholding tax credits in federal Exchanges is consistent with that goal; Congress used other financial incentives to motivate states to establish Exchanges; the other leading Senate bill conditioned tax credits on state cooperation; such evidence as Jost marshals to his side “could be clearer”; and employers could demonstrate standing to challenge the rule.

Congressional Intent

Yet Jost still maintains Congress clearly did not mean what it clearly said. Before we address his primary argument, which is based on congressional intent, note what Jost does not offer in support of the IRS rule. He cites no statutory language authorizing tax credits in federal Exchanges — because there isn’t any. He likewise cites no statutory language that conflicts with the language restricting tax credits to state‐​established Exchanges — again because there isn’t any.

Instead, he begins his defense of the IRS rule with this claim:

The legislative history of the ACA establishes that Congress understood that premium tax credits would be available through both federal and state exchanges.

A claim this strong should be supported by evidence — evidence that is not merely consistent with, but that “establishes” the claim. Yet Jost cites no contemporaneous statement — by any member of Congress or anyone else — that supports his claim about what “Congress understood.” All that Jost can show is that most PPACA supporters assumed that tax credits would be available in every state because all states would establish their own Exchanges. Every bit of evidence Jost cites is entirely consistent with the clear language restricting tax credits to state‐​created Exchanges. Nothing he cites contradicts our claim that the IRS rule is illegal.

Jost places substantial weight on the amendments made to the PPACA through reconciliation, but here again he lacks any clear evidence for his position. Jost readily concedes that these amendments “could have been clearer.” In other words, the reconciliation bill, like the legislative history, does not “establish” what Jost claims Congress “understood.” Indeed, so far as we are aware, no defender of the IRS rule has identified even a single statement by a member of Congress prior to or contemporaneous with passage of the bill expressing an understanding that the PPACA authorizes tax credits in federal Exchanges. Our extensive search of the Congressional Record found none. If Congress’ intent was so clear, where is the evidence?

The only statement anyone has found in the legislative history that addresses this point comes from the Act’s lead author, who affirmed that Congress did intend to withhold tax credits in federal Exchanges. During a September 23, 2009, mark‐​up of his bill, which ultimately became the PPACA, Senate Finance Committee chairman Max Baucus (D-MT) refused to consider a Republican amendment regarding medical malpractice on the grounds it fell outside the Committee’s jurisdiction. Sen. John Ensign (R-NV) protested, asking how Baucus’ bill could do other things that lie outside the Committee’s jurisdiction, like direct states to create Exchanges. Baucus responded the bill creates tax credits, which are within its jurisdiction, and makes eligibility for those tax credits conditional on states creating Exchanges. Conditional necessarily means that Baucus intended to withhold tax credits in states that did not create their own Exchanges.

We describe the Baucus‐​Ensign colloquy, excerpt the relevant portions, and provide links to the full transcript and video on pages 34–36 and footnote 113 of our working paper. Jost claims the colloquy had “nothing to do” with Exchanges, yet Senator Baucus refers to Exchanges three times. Further, as Jost concedes, the PPACA retains the Baucus language, even after being amended by the reconciliation bill.

A Desperate Search for Conflicting Text

Unable to furnish any evidence supporting his theory of congressional intent, Jost turns to other provisions of the statute that he claims will show that Congress “clearly did not mean” to do what it clearly did.

First, he cites language providing that in cases where states fail to create Exchanges, “the Secretary shall… establish and operate such Exchange within the State.” Jost writes, “By ‘such Exchange’ Congress meant the ‘required exchange’ mandated by section 1311.” This is absurd. Jost himself quotes the statute as authorizing tax credits through “an Exchange established by the State under section 1311.” In case that wasn’t clear enough, Section 1311 requires that for purposes of that section, “An Exchange shall be a governmental agency or nonprofit entity that is established by a State.” (Emphasis added.) And just for good measure, the original Baucus bill contained similar language: “the Secretary shall… establish and operate the exchanges within the State.” Baucus thus affirmed that this language does not do what Jost claims it does.

Second, Jost cites a reporting requirement added by the reconciliation bill. That requirement directs both state‐​created and federal Exchanges to report, to the Treasury Secretary and each taxpayer who obtains coverage through an Exchange, information regarding tax credit amounts and eligibility. Jost claims we “simply say [this requirement] is meaningless” and thereby “violat[e] another canon of statutory construction, that every provision of a congressional enactment should be given effect.” We refer readers to pages 37–40 of our working paper, where we explain: that this requirement “is clear and straightforward”; that it “it plainly requires federal Exchanges to report zero advance payments” of tax credits; that this result does not conflict with the language restricting tax credits to state‐​created Exchanges; and, on the contrary, it actually supports what Jost concedes was Congress’ goal of encouraging states to create Exchanges. This reporting requirement simply does not constitute the conflicting language Jost seeks.

Jost hopes to find such conflicting language because under the “Chevron doctrine,” courts defer to reasonable agency interpretations of ambiguous statutory text. That’s why the third provision Jost cites is one granting the Treasury Secretary the authority to “prescribe such regulations as may be necessary to carry out the provisions of this section.” In order to have a federal court uphold the IRS rule, the agency must show it is using its interpretive authority to resolve a textual ambiguity in a manner that is consistent with the statute.

Unfortunately for Jost and the IRS, the relevant text is not ambiguous, and courts do not defer to administrative agencies on whether a textual ambiguity exists. No one has identified any statutory text that conflicts with the language that “clearly” restricts tax credits to state‐​established Exchanges, and whether Congress granted an agency the authority to issue tax credits, appropriate funds, and tax employers is not something to be lightly inferred. As a consequence, the IRS’s decision to offer tax credits in federal Exchanges is manifestly contrary to the clear language of the statute.

It is ironic that Jost has become the leading spokesman for the revisionist theory that Congress did not mean to withhold tax credits in federal Exchanges. In January 2010, Jost was one of two academics who organized a letter signed by 51 health policy experts that conceded the Senate bill was “imperfect” but pleaded with House Democrats to pass it anyway. The language restricting tax credits to state‐​run Exchanges was right there for all to see. It would have been obvious to anyone who actually read it, as Jost no doubt did. It would have been easy to amend through reconciliation, had that been Congress’ intention. That same reconciliation bill extended tax credits and cost‐​sharing subsidies to Exchanges created by U.S. territories, but let federal exchanges alone. This is further evidence that Congress intended for that language to be there. Indeed, we have been unable to find any objections to that language until around the time it became clear that the costs and unpopularity of the PPACA were making states skittish about establishing Exchanges.

Thus the most illuminating passage from Jost’s defense of the IRS rule is this: “the entire structure of the ACA depends on premium tax credits being available in all states.” We have no doubt that Jost, Baucus, and others now regret their miscalculation that states would be eager to create Exchanges. But the fact that they misjudged the popularity of their bill and how states would respond does not give the IRS license to rewrite a statute. That’s not how the rule of law works.

Loose Ends

For those who just can’t get enough of this issue, we now turn to some specific errors in Jost’s most recent blog post.

  • He writes that “[h]aving lost” before the Supreme Court, PPACA opponents “have come up with a new theory” for challenging the law. He knows we began criticizing this illegal IRS rule long before the NFIB decision. Indeed, he criticized our claim before the Supreme Court heard, let alone decided that case.
  • Jost claims that by opposing the IRS rule, we are “fighting for increased taxes on the middle class.” Hardly. Stopping this rule would not increase anyone’s tax liability from what it is now or under the PPACA. It would, however, prevent the federal government from shifting the costs of the law’s regulations from insurance carriers to taxpayers and prevent the imposition of substantial — and illegal — penalties on many employers.
  • Jost claims we “concede” that employers would be “the only persons with standing” to challenge the IRS rule and they could not establish standing until 2015. Wrong on both counts. We have not ruled out the possibility of states establishing standing, and we write that the timing issue “is not clear” as the Anti‐​Injunction Act “may” bar suit prior to assessment of employer penalties being assessed. Under NFIB v. Sebelius, we believe employers may be able to obtain earlier judicial review, the AIA notwithstanding, but this claim is beyond the scope of our paper.
  • Jost writes, “nowhere does [the PPACA] provide… that premium tax credits would not be available in… exchanges created by the federal government.” Nowhere does the statute provide that refundable tax credits would not be available to the Taliban, either. But that doesn’t mean the IRS can start sending checks to Kandahar. Administrative agencies like the IRS have no inherent powers, only delegated ones. If Congress did not authorize tax credits in federal Exchanges, the IRS has no authority to issue them.
  • Jost writes that the reconciliation bill “merely clarifies the most plausible reading of the PPACA — that premium tax credits are available through federally facilitated and non‐​federally facilitated state exchanges.” Except that it does no such thing. The reconciliation bill made numerous changes to the relevant sections of the PPACA, and even clarified that tax credits would be available in U.S. territories, but did nothing to alter the language that “clearly” restricts tax credits to Exchanges established by states.
  • Jost writes, “Congress did not try to ‘coerce’ states to create state exchanges by threatening their citizens with loss of billions of dollars of premium tax credits. Indeed, under the Supreme Court’s recent Medicaid decision, such coercion might have been suspect.” Jost appears to be confused about the sequencing of PPACA’s enactment and the Supreme Court decision striking down the statute’s Medicaid mandate. Nonetheless, he helpfully makes our case for us. The Supreme Court’s recent Medicaid decision came about because Congress did try to coerce states with the loss of billions of dollars of federal Medicaid grants. It stands to reason that the same Congress would do the same thing with regard to tax credits and Exchanges.
  • Given Jost’s reliance on the NFIB holding it is worth noting that when state attorneys general first filed suit against the PPACA, Jost dismissed their legal claims as so frivolous that the plaintiffs’ attorneys should be sanctioned under Rule 11 of the Federal Rules of Civil Procedure and held personally liable for the government’s defense costs. As late as this year, Jost described the states’ complaint against the Medicaid mandate as “devoid of legal authority.” Needless to say, that frivolous lawsuit reached the highest court in the land, which invalidated the Medicaid mandate 7–2 and adopted some, though certainly not all, of the states’ arguments regarding the individual mandate.
  • Jost writes “if [tax credits] are not available in many states, the nature of insurance markets will change dramatically, increasing the risk for insurers and decreasing availability to middle‐​income Americans. If this was the intent of Congress, it surely would have made it far more evident.” Because Congress always makes it clear when it adopts legislation that could have negative effects? Really? Which Congress is that?


We cover each of these areas more thoroughly in our working paper. We invite Health Affairs readers to read it alongside Jost’s response and decide for themselves whether the IRS is breaking the law.

About the Authors
Jonathan H. Adler

Professor of Law, Case Western Reserve University