Congressional Investigation: Treasury, IRS, HHS Conspired To Create An Unauthorized, Half-Trillion Dollar Entitlement

Last week, two congressional committees issued a little-noticed report detailing how Treasury Department, Internal Revenue Service, and Health and Human Services officials conspired to create a massive new entitlement not authorized anywhere in federal law.
In the summer of 2012, the House of Representatives’ Committee on Oversight & Government Reform and Committee on Ways & Means launched an investigation to determine “whether IRS and Treasury conducted an adequate review of the statute and legislative history prior to coming to [the] conclusion that [the Patient Protection and Affordable Care Act's] premium subsidies would be allowed in federal exchanges.” Over the next 18 months, the committees held numerous hearings with senior Treasury and IRS officials, while investigative staff conducted interviews with key agency attorneys responsible for developing the regulations in question. Investigators also reviewed what few documents Treasury and IRS officials allowed them to see.
Here is what seven key Treasury and IRS officials told investigators.
In early 2011, Treasury and IRS officials realized they had a problem. They unanimously believed Congress had intended to authorize certain taxes and subsidies in all states, whether or not a state opted to establish a health insurance “exchange” under the Patient Protection and Affordable Care Act. At the same time, agency officials recognized: (1) the PPACA plainly does not allow those taxes and subsidies in non-establishing states; (2) the law’s legislative history offers no support for their theory that Congress intended to allow them in non-establishing states; and (3) Congress had not given the agencies authority to treat non-establishing states the same as establishing states.
Nevertheless, agency officials agreed, again with apparent unanimity, to impose those taxes and dispense those subsidies in states with federal Exchanges, the undisputed plain meaning of the PPACA notwithstanding. Treasury, IRS, and HHS officials simply rewrote the law to create a new, unauthorized entitlement program whose cost “may exceed $500 billion dollars over 10 years.” (My own estimate puts the 10-year cost closer to $700 billion.)
Finally, what little research the agencies performed on Congress’ intent was neither ”serious” nor “thorough,” and appears to have occurred after after agency officials had already made up their minds. For example, Treasury and IRS officials were unaware of numerous elements of the statute and legislative history that conflicted with their theory of Congress’s intent and supported the plain meaning of the statute.
Background
Section 1311 of the PPACA directs states to establish health insurance Exchanges. If a state declines, Section 1321 directs the federal government to establish an Exchange within that state. Other sections authorize health-insurance subsidies as well as penalties against individuals and employers who do not purchase coverage.
The PPACA authorizes the IRS to issue health-insurance tax credits only to taxpayers who purchase coverage “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.” The tax-credit eligibility rules repeat this restriction, without deviation, nine times. The undisputed plain meaning of these rules is that when states decline to establish an Exchange and thereby opt for a federal Exchange — as 34 states accounting for two-thirds of the U.S. population have done — the IRS cannot issue tax credits in those states.
Treasury, IRS, and HHS officials simply decided that Congress was wrong, and conspired to disregard the clear restrictions Congress placed on this new entitlement program. In effect, they created a new entitlement program that no Congress ever authorized. The IRS is dispensing those unauthorized subsidies today, which means that two-thirds of the tax credits the IRS is issuing are illegal.
The following account of how the agencies created this massive new entitlement program is taken from the congressional investigators’ report.
How Changing a Few Words Can Create a $700 Billion Entitlement
In the summer of 2010, IRS officials began working on rules to implement the PPACA’s premium-assistance tax credits. Like the statute itself, early drafts of their regulations reflected the requirement that tax-credit recipients must be enrolled in health insurance through an Exchange “established by the State under section 1311.”
In March 2011, Emily McMahon came across a news article noting that the Act only authorizes tax credits through state-established Exchanges. McMahon told investigators that article was the first she had heard of this provision of the law. That’s significant, because as the Acting Assistant Secretary for Tax Policy at the Department of Treasury, McMahon was responsible for implementing that provision of the statute. A full year after President Obama signed the PPACA into law, McMahon was unaware of a very important feature of the statutory language she was charged with implementing.
According to investigators, shortly after McMahon learned that the language “established by the State under section 1311” appears in the statute, it disappeared from the IRS’s draft regulations. It was replaced with language permitting tax credits to be issued through federal Exchanges.

Emily S. McMahon, Deputy Assistant Secretary for Tax Policy at the Treasury Department, testifies before Congress about Treasury’s decision to create an unauthorized new entitlement.

That seemingly minor change is significant for several reasons.
First, the IRS doesn’t have the authority to issue tax credits on its own, and Congress clearly authorized these credits only in specific circumstances.
Second, these “tax credits” are actually cash payments that the IRS sends straight to private health insurance companies.
Third, the tax credits trigger a host of other measures, including additional subsidies as well as penalties against both individuals and employers who fail to purchase adequate coverage. If a state doesn’t establish an Exchange, no tax credits are allowed, and those employers and individuals are explicitly exempt from such penalties. But when the IRS issues unauthorized tax credits in those states, it subjects individuals and employers to illegal penalties.
Again, this is happening right now, in 34 states accounting for two-thirds of the U.S. population. By my estimate, over 10 years this seemingly innocuous change will result in the IRS taxing, borrowing, and spending a staggering $700 billion more than the PPACA allows, which is almost as much as the PPACA’s initial price tag. All for no more reason than a few unelected bureaucrats felt like it. I wish that were an exaggeration.
A Conspiracy against Taxpayers
Congressional investigators found that from the moment this issue came to the attention of Treasury and IRS officials, everyone involved agreed not to follow the statute — even though the statutory language was (as Treasury officials would later describe it) “apparently plain,” and they recognized that Congress had given the IRS no authority to designate an Exchange established by the federal government under Section 1321 to be “an Exchange established by the State under section 1311.”
To get around that problem, Treasury and IRS officials asked HHS to issue a rule declaring that federally established Exchanges are in fact “established by the State.” HHS had no authority to make such a paradoxical designation either, yet the agency obliged. When the IRS published its proposed tax-credit rule on August 17, 2011, it adopted HHS’s counter-textual designation. That had the effect of proposing to offer tax credits in federal Exchanges; or more precisely, of proposing a massive new entitlement program that is in fact specifically precluded by federal law.
The proposed rule met instant condemnation in the media, from members of Congress, and from individual citizens during the rule’s public-comment period. Critics noted the IRS was planning to do the exact opposite of what the statute permits the agency to do.
The U.S. Department of…Yeah, Whatever
Congressional investigators found Treasury and IRS officials never took the law or these criticisms seriously:

The evidence gathered by the Committees indicates that neither IRS nor the Treasury Department conducted a serious or thorough analysis of the PPACA statute or the law’s legislative history with respect to the government’s authority to provide premium subsidies in exchanges established by the federal government. IRS and Treasury merely asserted that they possessed such authority without providing the Committees with evidence to indicate that they came to their conclusion through reasoned decision-making.

“On three separate occasions,” investigators wrote, “IRS and Treasury employees were unable to provide the Committees with detailed information about the factors they considered before determining that premium subsidies should be allowed in federal exchanges.”
Indeed, according to investigators, IRS and Treasury officials said they “did not consider the statutory language expressly precluding subsides in federal exchanges to be a significant issue” and “spent relatively little time on it.”
Here are a few of the things investigators were able to learn.

• IRS and Treasury officials produced just one paragraph of analysis on this issue prior to promulgating the proposed rule, and just one further paragraph of analysis between issuing the proposed rule and the final rule.
• A May 16, 2012, policy memorandum accompanying the final rule stated, “we carefully considered the language of the statute and the legislative history and concluded that the better interpretation of Congressional intent was that premium tax credits should be available to taxpayers on any type of Exchange.” Yet that memo raises more questions than it answers.
• The memo’s author was “Cameron Arterton, a Deputy Tax Legislative Counsel for Treasury hired in late 2011…to conduct a review of the legislative text and history surrounding the issue of whether tax credits should be available in federal exchanges.”
• Investigators wrote that Arterton “did not remember ever discussing the issue of whether the statute authorized premium subsidies in federal exchanges with other members of the working group” developing the rule. This raises the question: was Arterton tasked with discerning Congress’ intent, or merely finding support for the agencies’ decision to do the opposite of what the statute says? The available information suggests it may have been the latter.
• An email exchange from December 2011 shows Arterton counseled Treasury attorneys that “tension/conflict between two statutory provisions can create sufficient ambiguity” for courts to defer to an agency’s interpretation. When asked by investigators, Arterton could not identify which provisions of the PPACA created such ambiguity.
• An October 2012 letter from Treasury to congressional investigators claimed there was “no discernible pattern” in the statute that suggests Congress meant to restrict tax credits to state-established Exchanges. Yet Arterton along with a colleague who searched for certain terms in the statute “admitted…that neither of them made any attempt to categorize or organize the results of their search in any way to determine whether a pattern existed with PPACA.”
• Arterton likewise “told the Committees that she never produced a written review of any kind related to her search of the law’s legislative history.”
• Arterton told investigators her legislative-history search incorporated statements made by House members prior to the Senate approving the PPACA in December 2009. Such statements would not shed any light on the intent behind the PPACA. The House bill took a different approach to Exchanges and subsidies than the PPACA. Among other differences, it explicitly authorized subsidies through both state-established and federal Exchanges. Statements about the House’s approach cannot constitute congressional intent, because that approach did not and could not pass Congress.
• McMahon confirmed at a congressional hearing that Treasury and IRS considered the House bills when trying to ascertain the intent behind the PPACA.
• At the same time Arterton was researching inapposite legislative history, she failed to consider a January 2010 letter from Rep. Lloyd Doggett (D-TX) and 10 other Texas Democrats that spoke to the issue at hand. The Texas Democrats’ letter warned that the PPACA’s approach to Exchanges would allow states to block the hoped-for coverage expansion and that “millions of people will be left no better off than before Congress acted.”
• Interestingly, prior to joining the IRS, Arterton worked for Doggett at the Ways & Means Committee. So while Arterton was inappropriately researching House members’ thoughts about the House bill, she overlooked her former employer’s thoughts on the PPACA itself, which happen to conflict with the IRS’s theory of what Congress intended and to confirm the plain meaning of the statute.
• The agencies admitted the legislative history of the PPACA does not support their interpretation. “Arterton told the Committees that the legislative history was inconclusive, echoing then-Deputy General Counsel for Treasury Chris Weideman’s statement…that IRS and Treasury concluded that there was a lack of evidence in PPACA’s legislative history to support its interpretation and that there was also a lack of evidence in the legislative history that contradicted their interpretation.”
• If Treasury and the IRS didn’t find any evidence from the PPACA’s legislative history that contradicted their interpretation, it can only be because they weren’t looking very hard. The investigators report, for example, “the seven IRS and Treasury employees stated they did not consider the Senate’s preference for state exchanges during the development of the rule.” A preference for state-run Exchanges offers a good rationale for restricting tax credits to state-established Exchanges: the tax credits would serve as an inducement to states.
• And yet: “none of the seven IRS and Treasury employees interviewed by the Committees were aware of any internal discussion within IRS or Treasury, prior to the issuance of the final rule, that making tax credits conditional on state exchanges might be an incentive put in the law for states to create their own exchanges.” That’s pretty remarkable. The very article that first brought this issue to the agencies’ attention – the one Emily McMahon saw in March 2011 – and countless articles and commenters since have all described the tax credits as an inducement to encourage states to establish Exchanges. Yet every official interviewed by the committees admitted they never considered that possibility.
• Investigators showed Treasury and IRS officials an article from early 2009, in which influential health-law professor Timothy Jost noted that because the Constitution does not permit Congress to commandeer states into establishing Exchanges, Congress might consider encouraging states to comply “by offering tax subsidies for insurance only in states that complied with federal requirements (as it has done with respect to tax subsidies for health savings accounts)” — which the IRS also administers. Yet “none of the seven key employees from IRS and Treasury interviewed by the Committee had seen Timothy Jost’s January 2009 article prior to being shown it by Committee staff.”
• Emily McMahon, furthermore, “was unfamiliar with the term ‘commandeering problem’” and “none of the officials working on the rule could recall anyone raising the commandeering problem and its applicability to its rulemaking in this area.”
• None of the seven Treasury and IRS employees the Committees interviewed could recall whether they considered other incentives the PPACA creates for states to establish Exchanges (e.g., unlimited start-up grants or a costly new requirement on state Medicaid programs that only lifts once “an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act is fully operational”). Nor could they recall discussing the highly relevant and undisputed fact that the PPACA also conditioned Medicaid funding on state cooperation.
• The officials were unaware that the PPACA contains language providing that U.S. territories that establish Exchanges shall be treated as a state, and offering small-business tax credits through “an Exchange,” and that these provisions show Congress knew how to use inclusive Exchange language when it desired.
• The officials “did not consider” a 2009 statement by the PPACA’s lead author, Finance Committee chairman Max Baucus (D-MT), in which he acknowledged the bill places conditions on tax credits, and that that is how the Finance Committee had jurisdiction to direct states to establish Exchanges, which would otherwise be outside its jurisdiction.

The IRS finalized its rule in May 2012. Employers and individuals who will be subject to illegal taxes under the IRS’s unauthorized entitlement program began filing legal challenges shortly thereafter.
The committees’ report does not provide a complete picture of how Treasury, the IRS, and HHS conspired to create this new entitlement program. Treasury and the IRS have refused to show certain documents to congressional investigators. Even when they are willing to share documents, they allow investigators to review them only briefly, without taking notes.
Even so, the Committees’ report tells a story of government officials who decided they knew better than Congress how many taxpayer dollars they should spend. Who had a vision of health care reform that they were determined to enact, even though their vision did not and could not pass Congress. Who could not be bothered to obey the law. It should help put pressure on Treasury and the IRS to be more forthcoming about how they reached this decision.