U.S. District Senior Judge Paul Friedman found the IRS did not run afoul of the Affordable Care Act by adopting a rule granting tax credits to low- and middle-income residents of the 34 states that declined to set up a health insurance exchange.
The plaintiffs argued the language of the health care law only allowed the IRS to grant tax credits to residents of states that set up separate exchanges. Friedman found the text of the law, as well as Congress' goals in passing the law—making health insurance more affordable for all Americans—did not support the plaintiffs' limited interpretation.
Within minutes of the decision, Jones Day partner Michael Carvin, lead attorney for the challengers, filed an appeal.
Sam Kazman, general counsel for the Competitive Enterprise Institute, said in a statement that the ruling "delivers a major blow to the states that chose not to participate in the Obamacare insurance exchange program."
"In upholding this IRS regulation that is contrary to the law enacted by Congress, this decision guts the choice made by a majority of the states to stay out of the exchange program," Kazman said.
A spokeswoman for the U.S. Department of Justice could not immediately be reached for comment.
Congress authorized federal tax credits to make health insurance more affordable, but the plaintiffs said without the credits, they would be exempt from having to buy any insurance at all. The plaintiffs included individuals who did not want to buy health insurance and employers who faced a penalty if they did not provide health insurance and their employees received tax creditx.
The plaintiffs argued the health care law's reference to exchanges "established by the State" meant the IRS could only grant tax credits to residents of states that set up their own exchanges, separate from the federally-run program.
The U.S. Department of Justice said the federal exchange operated on behalf of states that did not set up their own system, and "stood in the shoes" of those states. Justice Department lawyers pointed to other evidence Congress intended the tax credits to be available nationwide.
The health care law at issue, read in isolation, might support the plaintiffs’ position, Friedman said. But, he wrote, "the cross-referenced sections, the surrounding provisions, and the ACA’s structure and purpose all evince Congress’s intent to make premium tax credits available on both state-run and federally-facilitated Exchanges."
Friedman found the employers lacked standing to sue. Unlike the individual plaintiffs, the judge wrote, the employers' injury stemmed from the collection of a tax—the penalty for not providing insurance to employees who received tax credits—and not the granting of tax credits. The federal Anti-Injunction Act barred lawsuits seeking to stop the assessment or collection of a tax, Friedman said.
The employers argued the penalty wasn't a tax, but Friedman said the assessment "acts like a tax and looks like a tax" (emphasis in original.)
"The Court therefore embraces a modified version of the “now-infamous ‘duck test’”: 'WHEREAS it looks like a duck, and WHEREAS it walks like a duck, and WHEREAS it quacks like a duck,' and WHEREAS it is called a duck by Congress on multiple occasions, '[THE COURT] THEREFORE HOLD[S] that it is a duck,' he wrote, citing previous rulings from the U.S. Court of Appeals for the D.C. Circuit.
National Law Journal photo by Diego M. Radzinschi.