The statute makes no provision for subsidies in federally established exchanges.
The mere availability of exchange subsidies triggers penalties under the ACA’s employer and individual mandates. Under the statute, then, if a state does not establish an exchange: (1) those subsidies are not available; (2) a state’s employers are exempt from the employer mandate; and (3) the lion’s share of its residents are exempt from the individual mandate.
This appears to have been the IRS’s initial interpretation of the statute, at least until something went terribly wrong.
Early drafts of the IRS’s implementing regulations reflected the statutory requirement that exchange subsidies are available only through “an Exchange established by the State.” Following sweeping Republican gains in state governments in 2010 and discussions with the White House and Treasury Department, however, the IRS changed its draft regulations in March 2011.
In August 2011, the IRS issued a proposed rule announcing it would provide tax credits (and implement the resulting penalties) in states with federal exchanges too. Treasury and IRS officials later admitted to congressional investigators they knew the statute did not authorize them to issue tax credits through federal exchanges, and that they have no records of researching the statute or its legislative history before deciding to jettison this requirement.
The proposed rule provoked immediate and sustained criticism from the public, academics, and members of Congress. The IRS nonetheless finalized its “tax‐credit rule” in May 2012. The final rulecited no statutory authority for the agency’s reversal. It contained only a cursory, one‐paragraph explanation claiming this rewrite was consistent with the statute’s goals. Not until October 2012, under sustained pressure from members of Congress and after the rule had been challenged in federal court, did the agency cite any supposed statutory authority.
Confounding expectations, thirty‐six states refused or otherwise failed to establish exchanges. When that happened, criticism of the IRS rule turned into legal action:
- In September 2012, the state of Oklahoma challenged the final rule in Pruitt v. Burwell. The state argues the availability of subsidies in Oklahoma, a non‐establishing state, would, among other injuries, trigger penalties against the state under the employer mandate. In September 2014, a federal district court agreed, ruling that the ACA clearly and unambiguously authorizes those measures only in establishing states.
- In May 2013, several employers and individual taxpayers from federal‐exchange states filed Halbig v. Burwell. These plaintiffs likewise argued that the availability of unauthorized subsidies in their states subjects them to penalties no Congress ever authorized. On July 22, 2014, a split panel of the D.C. Circuit ruled the statute clearly and unambiguously supported the plaintiffs. The government appealed the Halbigruling to the full D.C. Circuit, which agreed to reconsider the case en banc on December 17.
- In September 2013, several individual taxpayers from Virginia (a federal‐exchange state) filed King v. Burwell. Mere hours after the Halbig ruling, the Fourth Circuit issued a ruling in King that found the case to be a close call (see below), yet sided with the government on the grounds that the ACA is ambiguous and the IRS should be afforded Chevron deference.
- In October 2013, the state of Indiana filed Indiana v. IRS, making claims similar to those in Pruitt. A federal district court heard arguments in early October 2014. A ruling is imminent.
Formally speaking, King and its companion cases are Administrative Procedure Act challenges to an Internal Revenue Service regulation implementing the ACA’s tax credit provisions.
More plainly, these cases would alter no part of the ACA. They seek to block an attempt to expand the ACA’s major taxing and spending provisions outside of the legislative process.
The truth is far more troubling than if these cases were simply challenges to the ACA. The posture of these cases implies that if the plaintiffs’ interpretation is correct, the ACA is unworkable without state cooperation – which two‐thirds of the states have withheld – and the only reason the law has survived intact as long as it has is that the IRS is issuing billions of dollars in illegal subsidies to keep it afloat.
Myth #2: These cases are “absurd.”
Many critics of these cases agree with ACA architect Jonathan Gruber, who once described the plaintiffs’ interpretation of the statute as “screwy,” “nutty,” and “stupid.” The courts disagree.
The most recent opinions in two of the three cases (Halbig and Pruitt) found the ACA clearly and unambiguously supports the plaintiffs’ position and contradicts the government’s position. The third (King) found the issue was a close call: “a literal reading of the statute undoubtedly accords more closely with [the plaintiffs’] position,” and “the [government has] the stronger position, although only slightly.”
Moreover, only after Gruber made those comments was it revealed that in 2012, Gruber himself told multiple audiences, “If you’re a state and you don’t set up an Exchange, that means your citizens don’t get their tax credits.”
Myth #3: King is based on “a drafting error.”
The requirement that tax‐credit recipients enroll in coverage “through an Exchange added by the State” appears twice explicitly in the tax‐credit eligibility rules, and a further seven times by cross‐reference. It was added to the text at multiple stages of the legislative process, including under the supervision of Senate leaders and White House staff.
That’s not a drafting error. Not even the Obama administration argues it was.
Myth #4: The statute is ambiguous.
Even Washington & Lee University law professor Timothy Jost, a prominent critic of these cases, acknowledges the tax‐credit eligibility rules “clearly say” exchange subsidies are available only through state‐established exchanges. Nor do any other provisions of the statute cast any doubt on that requirement.
The government has attempted to manufacture ambiguity by applying odd and strained interpretations to other statutory provisions. Those alternative interpretations cannot be reconciled with the statute. The Fourth Circuit’s basis for concluding the statute is ambiguous is a prime example.
The plain‐meaning interpretation of that requirement is the only statutory construction that considers both text and context, creates no surplusage or anomalies, and is consistent with the structure of the relevant sections.
Myth #5: Congress intended to offer tax credits in federal exchanges.
The most significant myth to gain currency in these cases, the one that underlies and animates all opposition to thereto, is a theory of congressional intent without any evidentiary basis.
All available contemporaneous evidence points to the conclusion that Congress intended to withhold exchange subsidies in federal exchanges.
Many bills Congress considered in 2009–2010 offered exchange subsidies in all states. Other bills offered exchange subsidies only in states that cooperated on implementation. Some members undoubtedly preferred the former type. The one that passed Congress, however was the latter type. The fact that that was the only bill that could pass Congress means that members voting for the ACA intended to enact this restriction, even if they ideally would have preferred another bill.
The only contemporaneous statement that speaks directly to this question supports the plain meaning of the text. In 2010, former Texas Supreme Court Justice Lloyd Doggett, a Democratic member of the House of Representatives, warned his party’s leaders that even though the ACA provided for federal fallback exchanges, states could still categorically block their residents from receiving “any benefit” under the ACA’s exchange provisions simply by refusing to establish an exchange. The other ten Texas Democrats in the House of Representatives joined Doggett’s warning. All eleven would later vote to enact the ACA without modification to that feature.
Meanwhile, despite three years of searching for contemporaneous evidence that any member of Congress intended for the ACA to offer tax credits in federal exchanges, the government has come up empty.
It is not material that ACA authors Max Baucus, Tom Harkin, and Harry Reid now claim they intended for the law to offer subsidies through federal exchanges. These claims came only post‐enactment, after the contrary statutory language proved to be a political liability. Nor is it material that Sander Levin, George Miller, Nancy Pelosi, and Henry Waxman say the same, because they played no role in the ACA’s drafting. What’s more, each of these members of Congress also claimed that if you like your health plan, the ACA lets you keep it – thus demonstrating either (A) they do not understand the law, or (B) they are willing to lie to protect it.
In the face of contemporaneous evidence to the contrary and the absence of any contemporaneous support, the theory that Congress intended the ACA to offer tax credits in federal exchanges appears to be a post hoc fabrication.
Myth #6: King would deny health‐insurance subsidies to four million Americans.
If the Supreme Court vacates the IRS rule, it would be recognition that the ACA itself denies subsidies to those four million federal‐exchange enrollees – just as the statute denies exchange subsidies to millions of Americans for other reasons, and denies Medicaid coverage to the poor in states that fail to cooperate.
Indeed, the IRS is already requiring potentially hundreds of thousands of ineligible recipients, across all fifty states, to repay some or all of the exchange subsidies they erroneously received. Vacating the IRS rule would only affect how often that happens.
Myth #7: King would cause massive disruption.
These cases would not cause disruption. They seek to end the political and economic disruption caused by the IRS’s decision to expand the ACA’s major taxing and spending provisions outside the legislative process.
How much disruption the IRS rule ultimately causes depends on how Congress responds to its being struck down. Congress could simply ratify the IRS’s revision of the statute by authorizing subsidies in federal exchanges. Or it could move in the opposite direction, and make private insurance more affordable for millions, particularly low‐income Americans, by actually reducing its cost.