According to the explicit language in the Affordable Care Act, tax credits for purchasing federally-regulated health insurance on the “Obamacare” exchanges are only supposed to be available "through an Exchange established by the State." Since 34 states have not set up an Obamacare exchange (leaving their residents to use the federal Obamacare exchange instead), it seems obvious that the credits are legally not available in those states.
But the IRS decided to dole out the tax credits in those states anyway, allowing 87 percent of Healthcare.gov customers to receive taxpayer subsidies to purchase health insurance, by arguing the federally-created exchange can somehow be “an Exchange established by the State.” Don’t laugh; two liberal trial court judges bought the argument in cases like Halbig v. Sebelius, which is now on appeal to the U.S. Court of Appeals for the D.C. Circuit, and King v. Sebelius, which is on appeal to the Fourth Circuit. Decisions by those appeals courts are expected any day now.
These tax credits are expected to trigger billions of dollars in penalties on employers in those states. As the Cato Institute’s Michael Cannon notes: “The mere availability of those subsidies triggers penalties against individuals under the law’s individual mandate, while the issuance of such subsidies triggers penalties against employers under its employer mandate. In a final rule purporting to implement the law’s tax-credit rules, the IRS announced it would issue subsidies in all states, even the 34 states that do not have ‘an Exchange established by the State.’”
Through such tax credits, taxpayers are expected to pay insurers an average of $246 a month, according to a report released in June by the federal Department of Health and Human Services, which means higher-than-expected costs for taxpayers over the next decade.
There are also massive marriage penalties and work disincentives embedded in these tax credits. The Congressional Budget Office estimated those work disincentives may shrink the number of people employed in America by two million people. That is one reason why financial analysts expect Obamacare to increase the budget deficit.
As CEI General Counsel Sam Kazman (who helped coordinate the Halbig litigation) noted, the trial court’s ruling in Halbig v. Sebelius upholding this illegal extension of tax credits was:
“a blow to the small businesses, employees and individuals who live in those states as well. 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. It imposes Obamacare penalties on employers and on many individuals in those states, penalties that Congress never authorized, putting their livelihoods and the jobs of their employees at risk. . .
“The court does all this despite its own finding that our arguments were supported by, in its words, “the plain language” of the law’s key provision regarding state-established exchanges. And by erasing the distinction between functions carried out by states and functions carried out by the federal government on behalf of states, the ruling undercuts some basic aspects of federalism.”
As Michael Carvin, the lead attorney for the Halbig case, also noted, the position of the IRS and HHS ignores the teachings of the Supreme Court’s June 2014 decision in Utility Air Regulatory Group v. EPA, No. 12-1146, which emphasized that:
“agencies cannot make “decisions of vast ‘economic and political significance’” absent a clear statement from Congress. . .Yet here the Government argues that the IRS, despite a clear congressional statement to the contrary, was empowered to trigger $150 billion per year in spending and deprive states of the ability to shield their residents from federal regulation.”
Even putting aside the fact that the credits trigger costly employer penalties, small businesses can be injured by Obamacare and its tax credits in a number of ways. For example, small businesses that are sole proprietorships can be injured because the Obamacare individual mandate directly applies to the proprietor, and the availability of the tax credit results in them no longer being able to take advantage of the hardship exemption to Obamacare’s individual mandate to buy health insurance, an exemption that would otherwise save them from having to pay for unneeded coverage that is overpriced even with the taxpayer subsidy embodied in the tax credit. You can only claim a hardship if insurance for just you as an individual – not your spouse or family members – would cost more than 9.5% of your income.
A classic example is plaintiff David Klemencic, a West Virginia resident and plaintiff in Halbig v. Sebelius, who would be forced by the availability of credits to buy health insurance beyond his actual needs. Even with a hefty, costly taxpayer subsidy, the policies purchased on the exchanges can be a bad bargain, especially for young, healthy people. That’s because Obamacare requires insurers to charge prices for insurance that have little or nothing to do with a user’s actual costs or usage of the healthcare system, regardless of whether their actual cost to an insurer is radically lower than another user’s. For example, it forces insurers to charge people the same amount regardless of whether a person has a pre-existing condition (which is like an auto insurer charging the same amount regardless of your driving record or even whether you will soon have, or recently had, an accident), and limits consideration of age-based differences in healthcare costs, even though young people consume vastly less health care.
For healthy young people, especially those who have savings or relatives who help them financially in case of an emergency, buying Obamacare health insurance – even with tax credit subsidies – is often a huge rip-off, since the likelihood of such an emergency is extremely low. But the credits destroy their ability to avoid such coverage through the hardship exemption.
Obamacare also requires that people have coverage for things they will never need. A 56-year-old Arkansas resident wrote that "Obamacare canceled my health plan, and increased my premiums by 50 percent, but at least I'll have maternity care" due the healthcare law's mandate that anyone regardless of age or gender have maternity care coverage. And although she doesn't drink or do drugs, "Obamacare forces me to pay for substance abuse treatment."
Costly Obamacare mandates have led some employers to stop hiring or lay off employees, and others are getting rid of full-time employees and replacing them with part-timers to avoid Obamacare mandates that apply to full-time employees.
NOTE: Due to the replacement of HHS Secretary Kathleen Sebelius by Sylvia Burwell, the cases noted above challenging the federal government’s interpretation of the Affordable Care Act will likely be renamed Halbig v. Burwell and King v. Burwell, respectively.