Oops! No ObamaCare Tax Credit Via Federal Exchanges?

From: Investors.com

Because of a quirk in ObamaCare, people who buy health insurance through a federally run exchange may not be eligible for premium subsidies.

Government-created exchanges are places for individuals to shop and purchase health insurance. ObamaCare will require individuals and families to buy insurance, starting in 2014.

Those with incomes at 100% to 400% of the federal poverty level will be eligible for taxpayer funded subsidies — a tax credit to help pay for the premium.

It turns out that the legislation isn't so clear, the latest example of what analysts predicted would be a stream of surprises from the mammoth health law.

Section 1311 of ObamaCare instructs state governments to set up an exchange. If a state refuses, Section 1321 lets the federal government establish an exchange in the state.

Yet ObamaCare states that the tax credit is available to people who are enrolled in an "an exchange established by the state under (Section) 1311." It makes no mention of people enrolled in federal exchanges being eligible for the tax credit.

"There is this technical problem in the law," said James Blumstein, a professor at Vanderbilt Law School. "I don't see how you get around that."

This could be a big problem, as some states probably won't set up and run exchanges. Governors in Alaska, Florida, Louisiana and Texas have said they won't. Kansas and Oklahoma have also signaled they won't by returning federal funds meant to be used to establish an exchange. Other states seem to be dragging their feet.

States could be left with disgruntled residents who can't tap tax credits to help pay for insurance they're forced to buy.

"The whole structure of the law collapses without a state-run exchange," said Michael Cannon, director of health policy studies at the libertarian Cato Institute. "That forces Congress to either repeal ObamaCare or significantly alter it."

The Tax View

The Internal Revenue Service appears to be overlooking the problem. In a proposed regulation, the IRS states that a taxpayer is eligible for the tax credit if he or a member of his family "is enrolled in one or more qualified health plans through an exchange established under Section 1311 or 1321."

"Congress did not delegate this discretion to the IRS," Cannon said. "Congress created a tax credit for A, and the IRS is saying it applies to A and B. If the IRS offers this tax credit to federally run exchanges, the IRS will be assuming powers the Constitution vests only in Congress to alter the tax code and spend money."

It is not clear who would have legal standing to challenge the IRS. Generally, one has to show some type of harm under the law to contest it. An individual getting a tax credit via a federally run exchange wouldn't since he would be receiving a benefit.

A state government might have standing to challenge the IRS.

"States could oppose it because giving tax credits to a federally run exchange could undermine their autonomy," said Blumstein. "If only states can confer the benefit via state exchanges, then they have more leverage when negotiating with the federal government over the exchanges under the Affordable Care Act.

That might be enough to give them standing to sue."

That could put a state in a difficult position politically.

"Would states want to challenge this by forestalling the tax credit going to their residents?" Blumstein asked.

It's not clear exactly how federal exchanges were left out of the tax credits. Blumstein suggests that Section 1311 was unconstitutional because it forced states to set up an exchange. He surmises that someone in Congress realized this and added Section 1321 as a fallback. But in the haste to pass ObamaCare, no one in Congress updated the section dealing with the tax credit.