Human Services

IRS Permitted to Offer Subsidies in Federal Exchanges, Supreme Court Rules

In a split decision, the Supreme Court determined that the Internal Revenue Service’s decision to offer taxpayer subsidies through federally established exchanges is permissible.

The plaintiffs in King v. Burwell asked the Court to consider whether the Obama Administration, through the IRS, could offer taxpayer-funded subsidies through all exchanges, not just state established exchanges. The plaintiffs contended that the language of the Affordable Care Act was clear, only offering subsidies to people purchasing insurance through state exchanges.

The Supreme Court disagreed, noting that federally established exchanges could be considered “state established” for purposes of subsidies where the state deferred to the federal government. Instead of focusing on whether subsidies are available in a federally established, or state established, exchange, the Court analyzed who may receive the subsidies. Writing for the Court, Chief Justice Roberts stated,

The structure [of the ACA] itself also suggests that tax credits [the subsidies] are not limited to State Exchanges. …[The ACA]  initially provides that tax credits “shall be allowed” for any “applicable taxpayer.” …[The ACA] then defines an “applicable taxpayer” as someone who… has a household income between 100 percent and 400 percent of the federal poverty line. Together, these two provisions appear to make anyone in the specified income range eligible to receive a tax credit.

The case itself is not a determination of whether the ACA is constitutional—the Court previously determined the ACA was constitutional in NFIB v. Sebelius. Instead, this case focused on the language of the ACA compared to the language of the IRS Rule, which according to Michael Cannon, Director of Health Policy Studies at the Cato Institute, improperly taxed millions of Americans. “[T]he IRS is issuing premium subsidies and imposing those taxes in 34 states, including Virginia, that did not establish exchanges. The King challengers allege the IRS is subjecting them… and 57 million other Americans to illegal taxes in the form of Obamacare’s individual and employer mandates.”

While the decision unfortunately hinders a state’s ability to determine what is best for its citizens, it does not completely solve the problem. Because the subsidies are extended through an IRS rule, future administrations may change the rule, or even persuade Congress to fix the law through legislation.

In Depth: Human Services

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