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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.) said.
“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 article).
IRS Commissioner Douglas Shulman testified that the regulation “does not rewrite the law . … Our legal experts believe this was a correct reading of the law.”
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 testified.
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 exchanges.
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 said.
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 said.
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.
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