In Obamacare Case, the Law’s Tax is Again Fatal to the Challengers’ Interpretation

When the Supreme Court heard oral arguments in King v. Burwell last month, much was the same as in the first Obamacare case. Now, as then, the government and the challengers disagree on the interpretation of a few key words in the law. Now, as then, there is a straightforward interpretation of the words and an alternative interpretation. Now, as then, the challengers are asking the court to adopt the most straightforward interpretation. Now, as then, the challengers’ interpretation raises constitutional questions. And now, as then, the law’s tax is fatal to the challengers’ interpretation.

In the case three years ago, the court was asked to decide between two readings of the so-called “individual mandate” provision of the law. The “most straightforward” reading of the law was that it commanded individuals to purchase health insurance. The “alternative” reading of the law was that the “penalty,” which the law referred to as a “shared responsibility payment,” was effectively a tax on individuals who did not purchase insurance.

In the Opinion of the Court, Chief Justice John Roberts wrote that the most straightforward reading of the law was not constitutional because the Commerce Clause does not give Congress the power to command individuals to purchase insurance. But “[t]hat is not the end of the matter,” he wrote. “As we have explained, ‘every reasonable[***19] construction must be resorted to, in order to save a statute from unconstitutionality.'” He continued, “Under our precedent, it is therefore necessary to ask whether the Government’s alternative reading of the statute—that it only imposes a tax on those without insurance—is a reasonable one.” And finally: “The question is not whether that is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.”

When addressing the question of whether the law’s “penalty,” could be considered a tax, the Chief Justice wrote:

(“[M]agic words or labels” should not “disable an otherwise constitutional levy” (internal quotation marks omitted)); Nelson v. Sears, Roebuck & Co.312 U. S. 359363 (1941) (“In passing on the constitutionality of a tax law, we are concerned only with its practical operation, not its definition or the precise form of descriptive words which may be applied to it” (internal quotation marks omitted)); United States v. Sotelo436 U. S. 268275 (1978) (“That the funds due are referred to as a `penalty’ . . . does not alter their essential character as taxes”)

The Chief Justice concluded that “[t]he Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

Fast forward three years. Now the challengers and the government disagree over the interpretation of the words “Exchange established by the State.” The challengers argue that an “Exchange established by the State” is an exchange that was constructed by the state and is run by the state. The government argues that an “Exchange established by the State” is an exchange that was created under the state’s authority and operates within the state. The challengers interpretation excludes the federally operated exchange; the government’s interpretation includes it. The challengers argue that their interpretation is the most straightforward; the government argues that its interpretation is the only interpretation that makes sense within the context of the law.

One difference in the latest case is the petitioners are not challenging the constitutionality of the law. Normally this would mean that there would be no need for the court to consider alternative readings of the statue in order to preserve its constitutionality. In this case, however, the challengers’ reading of the law results in questions about the law’s constitutionality.  Given these questions, the court may again need to consider alternative readings of the law as it did in the first case.

One constitutional question raised by the challengers’ interpretation is similar to a question the court considered in the first case. In that case, the court found that the way in which the law’s Medicare expansion was enforced violated the Constitution “by threatening States with the loss of their existing Medicaid funding if they decline to comply with the expansion.” Chief Justice Roberts wrote that “the financial ‘inducement’ Congress has chosen is much more than ‘relatively mild encouragement’—it is a gun to the head.”

In this latest case, a brief filed for 22 states and the District of Columbia argues that a similar situation would exist under the challengers’ interpretation of the law. Under the challengers’ interpretation, no one in the 34 states that use the exchange would be eligible to receive premium assistance tax credits. In addition, the brief quotes an article by Larry Levitt and Gary Claxton published by the Kaiser Family Foundation that estimates “8.1 million (or 83%) of those formerly subsidy-eligible uninsured people would end up being exempt from the individual mandate.”

Under the challengers’ interpretation, the words “Exchange established by the State” are “magic words” that disable both the law’s tax credits, and its constitutional tax for millions of taxpayers. The words cut off one entire leg of the three legged stool to which the ACA is often compared, and a large percentage of a second leg. Only the requirement that insurance companies insure everyone would remain untouched. Levitt and Claxton write in another article that “[t]his would trigger a classic adverse selection “death spiral,” where insurers would seek very large premium increases, which in turn would cause the healthier of the remaining enrollees to drop coverage.”

The brief for the 22 states and the District of Columbia notes that “it is a novel kind of pressure to threaten to injure a State’s citizens and to destroy its insurance markets in order to force State-government officials to implement a federal program.” It concludes: “And because Petitioners’ interpretation of the ACA would raise a serious Tenth Amendment question, it must be rejected in favor of the Government’s more plausible reading, which avoids that infirmity.”

Another potential constitutional question arises from the fact that uninsured residents of states with state-run exchanges would be subject to a federal tax to which uninsured residents (in the same income range) of states that use the exchange would be exempt. Specifically, uninsured taxpayers whose income is greater than 100% of the poverty line and less than 12.5 times the cost of the lowest cost bronze plan available on the exchange within their state would generally have to pay the law’s tax if they live in a state with a state-run exchange, but would be exempt from the tax if they live in a state that uses the exchange. This creates a potential constitutional problem under one, and possibly both, of the Constitution’s Due Process Clauses.

The fact that the challengers’ interpretation creates two classifications of taxpayers does not, by itself, create a question of constitutionality. But if the classification of taxpayers and the apportionment of the tax do not serve a legitimate government purpose, then a constitutionality question exists.

The challengers purport that the reason Congress only provides tax credits to people who purchase insurance through state-run exchanges (under their interpretation) is to incentivize the states to establish state-run exchanges. But under the challengers’ interpretation, uninsured residents of states with state-run exchanges are subject to the tax, and residents of states that use the exchange are exempt. Therefore, under the challengers’ interpretation, the tax is a disincentive for states to establish a state-run exchange. As such, the apportionment of the tax does not serve the challengers’ purported purpose; it undermines it.

Under the challengers interpretation, Congress was at odds with itself. On the one hand, Congress limited tax credits to residents of states that have state-run exchanges in order to encourage states to establish state-run exchanges. And then, on the other hand, Congress undercut this incentive by exempting residents of states that use the exchange from having to pay the law’s tax.

If the court decides in favor of the challengers, each state that is currently using the exchange will have two options for its residents whose household incomes are between 100% and 400% of the poverty line: a) deny the residents access to the tax credits but exempt an estimated 83% of them from the tax, or b) provide the residents with access to the tax credits but subject over 97% them to the tax. Given these options, it is unclear whether access to the tax credits or exemption from the tax would be more attractive to a state.

Ironically, the petitioners themselves chose exemption from the tax over eligibility for the tax credits. Under the IRS’s interpretation of the law, the petitioners are eligible for the tax credits even though they live in states that use the exchange. But eligibility for the tax credits also makes the petitioners subject to the law’s tax. The petitioners claim that they have suffered a financial injury as a result of this, and they have brought this case seeking relief from this injury. In doing so, the petitioners demonstrated that exemption from the tax is more valuable to them than eligibility for the tax credits.

Here we see that the challengers’ own argument is at odds with itself. On the one hand, the challengers claim that granting individuals access to the tax credits is an incentive for a state to establish a state-run exchange. And then, on the other hand, the challengers undercut this claim and argue that granting individuals access to the tax credits causes financial injury to the individuals.

Perhaps the challengers imagine that their situation is unique. It is not. In most cases, granting an individual access to the tax credits also subjects the individual to the law’s tax. Therefore, under the challengers’ argument, making an individual eligible for tax credits causes a financial injury to the individual most of the time.

Under the challengers’ interpretation, the only compelling inducement for a state to establish a state-run exchange is the aforementioned risk that choosing to use the exchange would cause a “death spiral” in a states’ insurance markets. But causing serious harm to a states’ insurance markets is not a legitimate government purpose. Nor is it an allowable means to a legitimate end because it would effectively force states to implement a federal program. Some states might resist for a time, but if insurance premiums skyrocket in a state, the state would be compelled to establish a state-run exchange even if the state is strongly opposed to the law.

Assuming, arguendo, that the challengers’ interpretation would not produce a death spiral in a states’ insurance markets, the challengers’ interpretation produces no clear incentive for a state to establish a state-run exchange. Therefore, the challengers’ interpretation does not serve its purported purpose. And since the challengers have proposed no other purpose for their interpretation, the challengers have failed to show that the inequitable apportionment of the law’s tax that arises under their interpretation serves a legitimate government purpose. Therefore, the challengers’ interpretation raises a serious constitutionality question under the Due Process Clause of the Fifth Amendment. And given that the inequitable apportionment of the tax would result from a decision of the state, a constitutionality question may also exist under the Fourteenth Amendment.

But irrespective of the constitutionality questions, the fact that the challengers’ interpretation produces so many conflicting inducements is, by itself, fatal to the challengers’ interpretation.

Under the challengers’ interpretation, the tax and the tax credits serve a common purpose in states that have state-run exchanges; in these states, both the tax and the tax credits incentivize individuals to purchase insurance. In states that use the exchange, however, the challengers’ interpretation disables both the tax and the tax credits for millions of taxpayers. It removes the incentives for these individuals to purchase insurance and effectively allows millions to opt out of the law. The challengers claim that Congress did this to incentivize states to establish state-run exchanges, but the apportionment of the tax and and tax credits serve opposing purposes in this case. The apportionment of the tax incentivizes states to use the exchange, and the apportionment of the tax credits incentivizes states to establish state-run exchanges. This conflict is manifest in the challengers’ own argument where, on the one hand, the challengers claim that granting individuals access to the tax credits is an incentive for a states to establish a state-run exchanges, and on the other hand, claim that granting individuals access to the tax credits causes financial injury to the individuals.

In contrast, there are no conflicting inducements under the government’s interpretation of the law. Under the government’s interpretation, both the law’s tax and its tax credits serve the same purpose in all states: they incentivize individuals to purchase insurance.

Since the government’s interpretation of the law produces consistent and non-conflicting inducements, and the challengers’ interpretation produces a myriad of conflicting inducements that undermine one another, the government’s reading is the only reasonable reading when viewed within the broader context of the law. Therefore, irrespective of the constitutionality questions that are raised by the challengers’ interpretation, the court should adopt the government’s reading of the law.



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