Small Business Owners Sue Feds Over IRS Rules

Published July 5, 2013

A group of small business owners and individuals in six states are suing the federal government over an Internal Revenue Service regulation imposed under President Obama’s health care law which will force them to pay exorbitant fines, cut back employees’ hours, or severely burden their businesses.

The origins of the new challenge to President Obama’s law began last June when the Supreme Court upheld basic statutes of the federal health care reform law. Although the administration hoped all the states would voluntarily set up exchanges, 33 states decided not to participate, in part under the expectation that these mandates may no longer apply.

Since then, the IRS has issued a regulation expanding the employer mandate to apply even in states which choose not to set up a health insurance exchange, making it law in both participating and nonparticipating states. The lawsuit raises a challenge to this ruling, arguing Congress did not grant such authority under the health care law.

IRS Ignoring Legal Limits

Sam Kazman, general counsel for the Competitive Enterprise Institute, a free market advocacy organization, says the sole issue of the lawsuit is: “Did Congress authorize what the IRS is doing now?”

“I think the very clear answer is they did not,” said Kazman.

Jonathan Ingram, a senior fellow for health care policy and pension reform at the Illinois Policy Institute, also agrees the language of the law is very clear.

“What the IRS has essentially done is imply that it can impose this tax and that the small businesses are obligated to pay it. The IRS is ignoring what the statute says,” Ingram said.

“I’m hopeful about the outcome of this new case but think that it will ultimately have to be settled in the Supreme Court,” he said.

Subsidy ‘Quagmire’

Dr. Roger Stark, a health care policy analyst at the Washington Policy Center and a retired physician, points out an inconsistency regarding who gets federal subsidies for the exchanges.

“One of the big quagmires the feds will have to overcome in their lawsuit is that the statute specifically states that if the state sets up the exchanges, then subsidies would be available; however, if the feds set them up, there would be no subsidies. I anticipate that this could wind up in the Supreme Court, or the feds might just back off on the penalty to get the exchanges up and operational,” said Stark.

Devon Herrick, a senior fellow at the National Center for Policy Analysis, a pro-market public policy think tank located in Dallas, Texas, says the IRS regulation will have unintended consequences for the labor market, if the courts allow it.

“The mandate that employers offer health coverage amounts to little more than a tax on labor that will inhibit job creation. These perverse incentives will result in an inefficient restructuring of the labor market,” said Herrick.