The chairman of the House Oversight and Government Reform Committee said Aug.
2 that the Internal Revenue Service acted illegally in issuing a rule allowing
subsidies for low- and moderate-income people who obtain insurance through
federally established exchanges under the health reform law.
It was “very clear” from the wording of the Patient Protection and Affordable
Care Act, as well as from discussion on the House floor during deliberations
over the law when it was passed in 2010, that if states did not create their own
exchanges, the federal exchanges that would be created in their place would not
issue subsidies to help people pay for health insurance policies they are
required to buy under the law, committee Chairman Darrell E. Issa (R-Calif.)
“It was considered to be an incentive” for states to create their own
exchanges, Issa said. “The intent was clear,” he said at a hearing titled, “IRS:
Enforcing ObamaCare's New Rules and Taxes.” He accused the Obama administration
of improperly interpreting the law to allow the premium advance tax credit
subsidies to be issued through the federal exchanges.
In May, the IRS issued a final rule allowing the federal exchanges to issue
the premium tax credit subsidies and cost-sharing subsidies to people earning
between 100 percent and 400 percent of the poverty level (see previous
IRS Commissioner Douglas Shulman testified that the regulation “does not
rewrite the law . … Our legal experts believe this was a correct reading of the
However, PPACA states that people are eligible for tax credits if they buy
insurance only through exchanges established by states, Michael Cannon, director
of health studies at the Cato Institute, testified. Cannon, who opposes PPACA,
said: “There is no parallel language anywhere in the statute authorizing the IRS
to offer tax credits through federal fallback exchanges.”
In addition, Cannon said, Senate Finance Committee Chairman Max Baucus
(D-Mont.) said during consideration of the law that the tax credit subsidies
were conditioned on the states creating exchanges. “This rule exceeds the IRS's
statutory authority under the PPACA and is an illegal tax increase,” Cannon
Cannon also said the IRS's rules will result in an “illegal tax on employers”
under the health law. He was referring to PPACA's requirement that employers
with at least 50 employees provide health insurance plans that meet the law's
coverage requirements and that do not cost employees more than 9.5 percent of
their income. Employers not meeting these requirements must pay penalties if any
employees receive subsidies through the exchanges.
Washington and Lee University law school Professor Timothy Jost, a consumer
representative to the National Association of Insurance Commissioners who favors
the law, testified that PPACA does allow federal exchanges to issue subsidies.
Under the law, the federal government will set up exchanges in states that do
not create their own by 2014, and premium tax credits can only be issued through
Without subsidies from federal exchanges, people in the 30 to 40 states that
are unlikely to operate their own exchanges initially would lose access to the
tax credits, which are intended to make health insurance affordable, Jost said.
The IRS has authority to interpret the law to allow for subsidies to be issued
through federal exchanges, he said.
“Premium tax credits will be available to middle-income uninsured citizens”
of all states, not just those in states that are establishing their own
exchanges, he said. A total of $1 trillion in tax credits will be provided over
10 years under the law, he said.
Rep. Carolyn Maloney (D-N.Y.) released a July 23 Congressional Research
Service legal analysis
that she said indicated the IRS's interpretation was proper. The analysis said
it is possible that courts could read PPACA to mean that federal exchanges could
not issue subsidies, but also said, “The IRS rule appears to be an exercise of
the authority delegated to the agency” to implement the law.
Nina Olson, national taxpayer advocate with the IRS, said that while the
Service has made “significant progress” in implementing PPACA, the agency needs
to “step up” its public information campaign. “The IRS should educate taxpayers
who receive the advance premium tax credit about the importance of updating
information if their information or other relevant circumstances change,” she
Taxpayers who continue to receive subsidies but become ineligible for them
will end up with an unexpected tax bill, or they will not receive expected
refunds, Olson said. Most taxpayers are not otherwise required to provide
periodic updates to the IRS, she noted. “It's going to be a very great learning
curve” for many taxpayers, “with a lot of pitfalls.”
Implementing PPACA will result in an “unprecedented expansion of IRS work,”
and it is “critical” that the agency receive adequate funding to meet taxpayer
needs, Olson said. The agency expects to hire about 800 additional employees to
implement the law, some of whom will work in information technology but most of
whom will be involved in customer service, she said.
Rep. Danny Davis (D-Ill.) said many people believe the IRS “will be
subjecting individuals to liens or levies or even jail time if they fail to
purchase insurance.” Olson said the IRS “is prevented from issuing liens or
levies or its other enforcement action” regarding the individual mandate
requiring that people who do not buy health insurance pay a penalty.
Under PPACA, the IRS can collect the penalty through a “refund offset,” under
which refunds that are due to taxpayers would be offset by the amount of penalty
owed, she said.
In addition, there are provisions in the law allowing exemptions for
hardship, and the mandate only applies to taxpayers starting at a certain level
of income, she said.
Former IRS Commissioner Mark Everson, vice chairman of alliantgroup LP, which
provides tax services for small and medium-sized businesses, said it is not
clear that the IRS will be able to implement the law well. “This is a step
backward for tax administration,” he said, adding that the law introduces “the
most complexity in over 20 years to the tax code.”
There is a risk that confidential taxpayer data could be divulged because
under the law, the IRS must share information with many state agencies and other
entities, which will also be having difficulties implementing the law, Everson
In addition, there will be a major burden on certified public accountants who
advise small and midsize businesses, Everson said. “Even if the Service is
successful in executing the long list of tasks assigned the IRS under the
Affordable Care Act, there's still an unquantifiable, real risk that health care
reform will falter or … perhaps even fail because of the sheer number of moving
parts and complexity of the new system,” he said.
By Sara Hansard
More about the House hearing is at http://oversight.house.gov/hearing/irs-enforcing-obamacares-new-rules-and-taxes/.
The July 23 Congressional Research Service legal analysis of premium tax credits
in federal exchanges is at http://op.bna.com/hl.nsf/r?Open=shad-8wsp4k.