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Food Fight in 36B--The Looming Challenge to the Affordable Care Act's Premium Tax Credit Rules

By Alden J. Bianchi

In a recent blog-post, which you can read here, I described a claim by opponents of the Affordable Care Act to the effect that low-income individuals living in states that fail to establish health insurance exchanges will be barred from receiving subsidized health insurance coverage commencing in 2014.  The Act encourages, but does not require, states to establish insurance exchanges.  In states that fail to do so, the Federal government will step in and operate a Federally-facilitated exchange.  But, say the opponents, low-income subsidies are available only to residents of states that establish their own insurance exchange. 

The rules governing premium tax credits are set out in newly added Internal Revenue Code Section 36B.  In final regulations under Code 36B, the Treasury Department and the IRS read the rules broadly, such that subsidized coverage (in the form of advanceable, refundable tax credits) are available irrespective of whether an exchange is state-based or Federally-facilitated.  The operative rule, however, refers to an exchange “established by a state.”  Does this mean that the regulators have gone too far?  Two recent publications have now provided us with a stark picture of the battle lines. 

The brief for the opponents is a lengthy work entitled, Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits under the PPACA, published by Case Western University School of Law and authored by Jonathan H. Adler and Michael F. Cannon.  The article explains the arguments that would form the basis for lawsuit challenging the final Code 36B regulation.  The main claim, as one might expect, is that that meaning of the statute is plain on its face.  Therefore, the Treasury Department and IRS expansion of the rule lacks any basis in the statute and should be rejected.  The authors separately endeavor, less convincingly, to ground the result in the Act’s legislative history. 

The other side of the argument is detailed in an article entitled, Health Reform Law Makes Clear That Subsidies Will Be Available in States with Federally Operated Exchanges, written by Judith Solomon, and published by Center on Budget and Policy Priorities.  Ms. Solomon’s position is straightforward—i.e., that a Federally-facilitated exchange is, for all purposes of the Act, indistinguishable from one that is established by a state.  She goes on to flesh out the arguments about the deference owed by the courts to the Federal rulemaking process. 

Who’s right?  If the Supreme Court’s recent decision upholding the constitutionality of the Act taught us anything, it’s the futility of anticipating what courts will do with these issues.  The stakes for both sides could not be higher, however: if the Act’s supporters lose, the result will be a gaping hole in the Act’s goal of making coverage affordable; if the opponents lose, they will be 0 for 2.

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Martha Zackin