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Lawsuit Challenges IRS Power Grab
By Loren Heal on May 10, 2013
The Obama administration has gone beyond the limits of Obamacare and has further raised taxes without approval from Congress. This move forces more low income Americans and struggling businesses to pay the mandate taxes. A lawsuit led by the Competitive Enterprise Institute seeks to force the IRS to obey the law as it is written.
CEI is not party to the suit, but is advising the plaintiffs. The action stems from the IRS deliberately misinterpreting the Obamacare law, humorously and ironically named the Patient Protection and Affordable Care Act, or ACA.
The action by the IRS will force more people to pay the individual mandate tax, and exposes businesses in health care freedom states to the employer mandate to provide insurance to their employees, which will cost jobs and force many out of business entirely.
According to section 1401 of the law, employers must provide insurance or face a fine of $2000 per employee only if all of the following are true:
- Any employee is not offered qualifying "affordable" insurance
- An employee buys a policy through the exchange, getting a tax credit
It only applies to policies "which were enrolled in through an Exchange established by the State under 1311" of the ACA.
This paper by Cato's Michael Cannon and Case Western Reserver Professor Jonathan Adler explains these details, and is a good introduction to the inner workings of the law.
The IRS in its rulemaking, however, in August 2011 said tax credits would be available for those buying insurance from exchanges created either under section 1311 or 1321, the federal exchange. That triggers a number of important effects, including exposing employers in healthcare freedom states to the steep IRS fines, fines they may have moved to a free state to avoid.
Twenty-four House conservatives sent a letter to the IRS Commissioner on November 4, 2011, demanding that the agency comply with the plain wording of the law.
The IRS Commissioner gave a carefully-worded reply, saying essentially that no one had noticed this before, so it doesn't matter:
Even as we consider your input, I must respectfullly disagree with the premise that our proposed regulations contradict the statute where they state that premium tax credits are available to those who obtain coverage through a Federally-facilitated exchange. The statute includes language that indicates that individuals are eligible for tax credits whether they are enrolled through a State-based Exchange or a Federally-facilitated Exchange. Additionally, neither the Congressional Budget Office nor the Joint Committee on Taxation technical explanation of the Affordable Care Act discusses excluding those enrolled through a Federally-facilitated exchange.
But there is no such unclear language in the law, and certainly the IRS has not stated what it is. Rather, the IRS final rule says that since the definition of "Exchange" is either a State-based exchange or a Federally-facilitated exchange, both allow for subsidies.
f. Federally-facilitated Exchange
Under the proposed regulations, the term Exchange has the same meaning as in 45 CFR 155.20, which provides that the term Exchangerefers to a State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.
Commentators disagreed on whether the language in section 36B(b)(2)(A) limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans on State Exchanges.
The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.
That is awful logic. It's like saying that both apples and oranges are fruit, therefore apples and oranges yield the same kind of juice.
According to CEI General Counsel Sam Kazman:
"We think it’s very clear. In addition to the language of the statute itself, I think one sort of interesting indicator is that before the IRS issue the regulation which came out in final form a year ago May, it put it out in proposed form inviting public comment. There were several comments indicating that the IRS just did not have authority to do what it was proposing to do, and when it came out with the final version -- agencies generally accompany that with an explanation of why they are doing what they are doing -- on this particular point, it gave an incredibly cursory response. If you think an agency’s jurisdiction is being questioned, it would get into quite a bit of detail, but its response there was really sparse. And to me that’s a tip-off that they just don’t have much in the way of justification."
"That’s a secondary point," said Kazman. "The language of the statute is clear. But on this particular issue, the agency was incredibly sparse, and it seems to me that was sort of a tip-off that the agency does not have very much in the way of justification for its interpretation."
The legislative history is equally clear. Senate Democrats, led by Max Baucus, knew they could not force states to do federal bidding. They wanted to incentivize states to participate, so they gave the citizens tax credits if the state set up an exchange.
"It turns out that those tax credits were sort of appetizers for something that wasn’t very appetizing,” Kazman said.
“Any agency is going to have trouble when its interpretation runs counter to a statute that is relatively clear. And in our view, Obamacare is clear on this point. So I just do not think they are entitled to very much deference.”
The effect on businesses is one thing, but the IRS power grab will move many people from being exempt to facing the mandate tax.
“In the case of individuals, it’s not so much that they’re facing a tax," Kazman said, "it’s that the credit is going to knock them out of what’s called the 'unaffordability exemption'. If you’re below a certain income as an individual, you’re not subject to the individual mandate under the unaffordability exemption, but these folks get a subsidy, and that in a sense disqualifies them. Now, you might think they’re getting a subsidy, so they’re not really injured, for these particular individuals, they are injured because the amount they will have to pay for a qualified insurance package is much higher than the subsidy they’re getting, and it’s much more than they want to pay."
This IRS attack on the poor is just one more reason why Obamacare must be fully repealed.