RPC Reg Spotlight September 20, 2012

 

Regulatory Action in the Spotlight:

 

IRS rule regarding health insurance premium tax credit enacted by the Patient Protection and Affordable Care Act

 

 

Adverse Effects:

 

  • Lack of legal foundation for rule
  • Will contribute to already high cost of Affordable Care Act
  • Effectively creates a new entitlement program through tax credits

 

 

Response of the Obama Administration:

 

On June 11, 2012, the Internal Revenue Service (IRS) unveiled a final rule (T.D. 9590) regarding the health insurance premium tax credit enacted by the Patient Protection and Affordable Care Act passed into law in 2010.   According to IRS Deputy Commissioner for Service and Enforcement Steven T. Miller, due to this provision in the Affordable Care Act, starting in 2014, “individuals who do not have access to affordable employer-sponsored insurance or other minimum essential coverage may be eligible to receive advance premium tax credits for private insurance that they purchase through the Exchanges.”  The regulation was scheduled to have gone into effect on May 23, 2012, with the comment period ending on August 21, 2012.  In the Affordable Care Act, states are strongly encouraged to create their own health insurance state exchanges by January 1, 2013.  The act authorizes the federal government, through the department of Health and Human Services (HHS), to create insurance exchanges for those states failing to comply with the Affordable Care Act. 

 

 

Impact on the United States:

 

The IRS did not estimate what the regulation would end up costing.  According to the American Action Forum (AAF), there will be 250,000 annual paperwork hours necessary to comply with the rule.  Tax Foundation President Scott A. Hodge estimated that the cost of the Health Premium Tax Credit, when combined with the cost of the exchange subsidies, is expected to total more than $800 billion. 

 

In a Cato Institute paper, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits under the PPACA”, authors Jonathan H. Adler and Michael F. Cannon lay out in an opening summary the illegality of the rule:

 

The Patient Protection and Affordable Care Act (PPACA) provides tax credits and subsidies for the purchase of qualifying health insurance plans on state-run insurance exchanges. Contrary to expectations, many states are refusing or otherwise failing to create such exchanges. An Internal Revenue Service (IRS) rule purports to extend these tax credits and subsidies to the purchase of health insurance in federal exchanges created in states without exchanges of their own. This rule lacks statutory authority. The text, structure, and history of the Act show that tax credits and subsidies are not available in federally run exchanges. The IRS rule is contrary to congressional intent and cannot be justified on other legal grounds. Because the granting of tax credits can trigger the imposition of fines on employers, the IRS rule is likely to be challenged in court.

 

 

In Closing:

 

This rule is yet another example of the enormous and costly changes a major sector of the economy has undergone with that passage of the Affordable Care Act.  Despite not having sufficient legal underpinning for this major regulation, the IRS has forged ahead in creating what is effectively a new entitlement program through tax credits. 

 

 

Relevant Legislation:

 

On September 11, 2012, the Committee on Ways and Means held a hearing entitled, “The Internal Revenue Service’s Implementation and Administration of the Democrats’ Health Care Law”.  At that hearing, the President of the Tax Foundation Scott A. Hodge stated in his opening statement, “The relentless growth of credits and deductions over the past 20 years has made the IRS a super-agency, engaged in policies as unrelated as delivering welfare benefits to subsidizing the manufacture of energy efficient refrigerators.”  In the same statement, Mr. Hodge goes on to say, “The ACA’s generous tax credits and cost-sharing payments – with an average value of $4,000 – will no doubt increase the number of nonpayers while increasing the IRS’s role as deliverer of social benefits. The cost of the Health Insurance Premium Tax Credit and exchange subsidies is now expected to total more than $800 billion during the ten years after it goes into effect in 2014.”