Jonah B. Gelbach
Because many states refuse to operate their own health
insurance exchanges, millions of people must buy coverage through the federal
exchange known as healthcare.gov. The IRS pays subsidies to insurers on behalf
of qualifying enrollees who buy their plans through healthcare.gov. These
subsidies play a critical role in the operation of the Affordable Care Act.
In the D.C. Circuit’s Halbig
and 4th Circuit’s King
cases, plaintiffs and their supporting amici contend that the text of the ACA
forecloses the federal government from paying such subsidies. Section 1401 of
the ACA, which authorizes federal subsidies and sets out the formula for
determining who is eligible and for how much, states that the subsidy shall be
provided for any “coverage month.” A coverage month is defined as any month in
which an individual taxpayer, her spouse, or her dependents are covered by a
qualified plan in which the taxpayer enrolled through “an Exchange established
by the State” under another section of the ACA.
The Halbig and King cases turn on whether the federal
healthcare.gov exchange can qualify as “an Exchange established by the State.”
Absolutely not, says Michael F. Cannon, who has participated in these cases as
an amicus. Cannon has repeatedly insisted
that the phrase “an Exchange established by the State” cannot possibly be read
to encompass healthcare.gov:
(1)
Everyone knows that the federal government is
not a State.
(2)
A website established by the federal government
therefore cannot possibly be considered “an Exchange established by” a “State.”
(3)
Therefore, it is impossible for a “coverage
month” to include months in which health coverage was enrolled in through
healthcare.gov, so there is no lawful basis for providing subsidies to those
who buy coverage on the federal exchange.
Cannon has categorically rejected any other interpretation,
declaring that the IRS’s interpretation of the ACA requires “the
absurd claim that the federal government can establish an Exchange that is
established by a state.”*
But Cannon’s claim is the absurd one. It rests on an approach
to reading the tax code—one little bit at a time, with no consideration of the
rest of the law—that is not just indefensible, but which, outside the
particulars of the Halbig and King litigation, no one does defend.
To see why, let’s ask what would happen if we applied Cannon’s
isolated textualism to the Internal Revenue Code generally,** by considering how
much tax would have been owed by a married couple filing jointly and having
$17,000 in taxable income in 2013.
The opening sentence of the U.S. Internal Revenue Code, 26 U.S.C. 1(a), imposes
a tax of 15% on the first $36,900 in “taxable income” of married couples who
file joint tax returns. The text in
question is a bit more long-winded than this description, but otherwise it
couldn’t be plainer. Using Cannon’s approach to reading text—one little bit at
a time, with no consideration of the rest of the law—the couple owes 15% of their
taxable income, and that’s it.
But that’s not the tax the IRS would have sought to collect.
To understand why, all you have to do is what any law student taking Federal
Income Taxation should learn on day one: keep reading. Subsequent parts of 26
U.S.C. 1 operate jointly to create an additional tax bracket that applies a tax
of 10% of the first $17,850 of a married-filing-jointly couple’s taxable income
(see this IRS
page). Consequently, no one suggests the IRS is behaving unlawfully when it
collects less than 15% in taxes from such couples.*** Yet Cannon’s argument,
applied here, would suggest that this practice by the IRS requires “the absurd
claim that a tax rate of 10% is a tax rate of 15%.”
Other such examples abound. Capital gains are taxable
income, yet the tax rate applied to them is often different from that applied
to other sources of taxable income (see Section 1(h)). The child tax credit
reduces the tax owed (see 26 U.S.C. 24); ditto the earned income tax credit
(see 26 U.S.C. 32).
Further, certain parts of the tax code treat familiar terms
in unusual ways. One can imagine Cannon decrying “the absurd claim that property
does not include corporate stock,” or “the absurd claim that brothers and
sisters are not related persons.” Yet Section 317 excludes corporate stock from
the definition of “property,” and Section 318 excludes siblings from those
covered by the term “related persons” in other sections of the code. Any
absurdity in such examples would be the consequence of reading the tax code as
Cannon wants to in Halbig and King—one little bit at a time, with no
consideration of the rest of the law.
If you doubt the relevance of these examples, consider one
more time the implications of reading Section 1(a) of the tax code the way Cannon
advocates reading Section 1401 of the ACA. Because Section 1(a) says nothing
about any tax credits, if we read it the way that Cannon wants to read the ACA—one
little bit at a time, with no consideration of the rest of the law—then Section
1(a) is clearly inconsistent with the payment of any ACA subsidies, regardless of the “Exchange” where plan
purchases are made. These subsidies are described in Section 1401 as tax
credits, so their payment necessarily leads to a tax rate different from that
specified in Section 1(a)’s tax rate schedule. Ergo, Cannon’s approach to
reading the text— one little bit at a time, with no consideration of the rest
of the law—would require the IRS not to pay any subsidies at all.
So why don’t Cannon and the plaintiffs in the Halbig and King cases make this argument? They are avowed opponents of the ACA
generally—not just as to its subsidies for those who buy coverage on the
federal healthcare.gov exchange. It’s hard to imagine they would decline a
chance to argue that all ACA subsidies are unlawful.
But it isn’t hard to guess why Cannon and company didn’t
argue that all ACA subsidies are unlawful. Indeed, I doubt they even thought of
it, because it would be absurd to read 26 U.S.C. 1 one little bit at a time,
with no consideration of the rest of the tax code. It’s just as absurd to pick
out a single phrase in Section 1401 and read it without reference to the rest
of the ACA.
Jonah B. Gelbach is Associate Professor of Law at the University of Pennsylvania School of Law. You can reach him by e-mail at jgelbach at law.upenn.edu
*Many problems with this and other aspect of the Halbig and King plaintiffs’ arguments have been ably answered, and I will not
rehash them here (see, e.g., Abbe
Gluck’s recent
Politico piece, or her various posts at Balkinization, e.g., this
one).
** This is a variation on a theme Cannon recently whistled,
when he asked, “What
If We Applied the IRS’s Reasoning in Halbig
& King to the Patriot Act or
RFRA, Instead of the ACA?”
*** Actually, the exact tax due might be slightly different
from 10%, thanks to 26 U.S.C. 3, which provides discretion for the Secretary to
create those tax tables we’re all familiar with. A married couple filing
jointly with $17,000 in taxable income in 2013 would have owed $1,703; see the IRS’s 2013 tax table.