New Lawsuit Challenges IRS Authority to Enforce Obamacare

Published June 5, 2013

A new group of individuals and small businesses has filed suit to force the Internal Revenue Service to justify enforcement of President Obama’s health care law in states which declined to implement the law’s exchanges.

The suit, filed in the U.S. District Court for the District of Columbia, is joined by several parties represented by Jones Day lawfirm partner Michael Carvin, who co-argued the original U.S. Supreme Court cases against Obama’s law.

‘The IRS rule we are challenging is at war with the act’s plain language and completely rewrites the deal that Congress made with the states on running these insurance exchanges,” Carvin said.

Under Obama’s law, small businesses are exposed to the employer mandate tax only if any of their employees receive the subsidies. The law also exempts some lower-income individuals from its mandate to buy insurance, but  the value of the exchange subsidies pushes them out of the exempted range. That forces them to buy the expensive insurance compliant with the law.

These subsidies will only be available, according to the law, in states that set up their own individual and small business exchanges. Yet the IRS ruled in 2012 that whether a state creates an exchange or the federal government creates it, the subsidies apply, along with the mandates that arise from them.

IRS Rule

The Competitive Enterprise Institute (CEI), while not party to the suit, is helping coordinate the case. According to CEI General Counsel Sam Kazman, the IRS is effectively implementing the law where it is not allowed to under the literal interpretation of the law.

“There is a realization for a number of states that ‘if we can position our state as a place where companies will be free from the employer mandate, that might well give us a boost in economic growth,'” Kazman said. “But the IRS with its rule is undercutting all that.”

Congress designed the system of tax credits to create pressure for states to implement exchanges, Kazman says, but it hasn’t worked so far.

“They wanted to incentivize states to participate, so they gave the citizens tax credits if the state set up an exchange,” Kazman said.

Plaintiffs Resist Mandates

For the plaintiffs and others like them, the law’s combination of subsidies and mandates to purchase insurance will leave them worse off.

“Plaintiff Sarah Rumpf is a resident of the State of Texas, which has opted not to establish its own insurance Exchange,” the filing by Carvin states. “She derives her income as a public-relations consultant. Absent the IRS Rule, Rumpf would (based on any realistic estimate of her expected income) fall within the unaffordability exemption to the individual mandate penalty in 2014. But because the Subsidy Expansion Rule makes her eligible for a premium-assistance subsidy, she will be disqualified from that exemption and subject to the individual mandate penalty. As a result, Rumpf will be forced to either pay a penalty or purchase more insurance than she wants.”

Rumpf says she would prefer to buy simple catastrophic insurance

“This is going to put me in a different income range and end up costing me money,” Rumpf said. “I don’t believe it’s right for the IRS to ignore what the law says. I feel good about standing up for what’s right.”

Dueling Interpretations

A recent paper by Jonathan Adler, a Case Western Reserve University law professor, and Michael F. Cannon, director of health policy at the Cato Institute in Washington, DC, dealt with this issue. According to Adler, when the law says in section 1401 that premium support credits are available only “through an Exchange established by the State under section 1311,” it can’t possibly mean an exchange not established by the state.

Adler says the IRS’ central argument for the equivalency of the different types of exchanges is that the statute says all may be called “exchanges”.

“They’ve made a few other arguments,” Adler said, such as “that the application of reporting tax credit eligibility requirements to federal exchanges shows that credits must be available and that a reference to ‘such exchange’ means either a federal or state exchange.”

Ruling Could Be Significant

Edmund Haislmaier, senior research fellow in health policy at the Heritage Foundation, says a Supreme Court decision disallowing the tax credits through federal exchanges would be significant.

“We’re on track right now to have 35 federal exchanges and 15 state exchanges. What would you have if the Supreme Court held otherwise? Well, you would have a mass lobbying campaign in the 35 states to adopt their own exchange so everybody could get their hands on the federal money,” said Haislmaier.

Should the Court rule in the plaintiffs’ favor in this case, it would result in a massive push at the state level to change course, Haislmaier predicted.

“The federal government is creating one federal exchange with front ends for the states. Taking over the federal exchange would mean building all of that infrastructure at the state level, something health care freedom states have not done since the law’s enactment,” said Haislmaier. “If a year goes by in which people get a tax credit for buying insurance under the federal exchange and the state exclusivity is enforced, I think they’d be under tremendous pressure to reopen the federal spigot.”


Internet Resources:

Health Matrix: “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA,” Jonathan Adler and Michael Cannon, July 2012.