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Public Statements

Letter to The Honorable Douglas H. Shulman, Commissioner, Internal Revenue Service

Letter

By:
Date:
Location: Washington, DC

Committee on Oversight and Government Reform have asked the head of the Internal Revenue Service to explain an agency rule that dramatically extends Obamacare's employer mandate tax penalty and likely increases federal spending by $500 billion over the next decade. Independent academics and legal experts do not believe this rule is authorized under the law. The letter to Commissioner Douglas Shulman was signed by Chairman Darrell Issa (R-CA), Rep. Trey Gowdy (R-SC) and Rep. Scott DesJarlais, M.D., (R-TN).

President Obama's health care law created "premium assistance tax credits" for individuals who enrolled in health care "exchanges established by [a] State." As part of its implementation of the law, the IRS issued a final rule in May which extends Obamacare's premium assistance tax credits to individuals purchasing insurance in exchanges established by the federal government--not the state exchanges specified in the law.

"Since there is nothing in the legislative history to support IRS's rule and IRS ignored the legislative history that suggests the plain text of the statute represented Congressional intent about limiting the tax credits to state Exchanges, IRS's defense of its rule using "the relevant legislative history" is flawed and misleading," Chairman Issa said.

Since only 14 states have decided to create state insurance exchanges, the IRS's rule that extends the premium assistance tax credits beyond Congressional intent has substantial implications. First, the rule is a massive new tax increase on the American people since the Congressional Budget Office projects 80 percent of the cost of the tax credit represents new government spending. This tax increase is likely to exceed $500 billion over the next decade.

Second, the rule extends the $3,000 per worker employer mandate tax to businesses in every state since employers are only penalized if their workers receive Obamacare's premium assistance tax credits.
As part of its oversight of Obamacare's implementation, the Committee has documented how IRS's rule is at odds with the law. On July 23, 2012, the Congressional Research Service (CRS) American Law Division produced a legal analysis of the IRS rule. CRS's analysis raises serious doubt that the IRS "implemented the law that was written' when it issued its rule or that the law contained language that authorized credits to federal exchange enrollees, the letter said.

CRS also noted that the original text of the law would create an issue should the law be challenged in court. "According to CRS, a court reviewing the legality of the rule might not "limit itself to consideration of only the plain text of the provision," and might also look at "legislative history, legislative purpose, and context," the letter noted. It also said that two noted health care and legal experts argue that "neither the structure, history nor other indicia of congressional intent support the IRS position," and the IRS rule is thus "illegal."

Dr. DesJarlais added, "I appreciate Chairman Issa and Subcommittee Chairman Gowdy for continuing to conduct oversight on this flagrant abuse of power by the IRS. Commissioner Shulman stated in his testimony before the Committee that his "main job is to implement the law that was written.' I simply fail to see how that statement matches the actions of the agency in circumventing Congress by unilaterally re-writing this important provision of the ACA."

Text of the letter is below:

August 17, 2012

The Honorable Douglas H. Shulman
Commissioner
Internal Revenue Service
Washington, DC 20515

Dear Commissioner Shulman:

The Patient Protection and Affordable Care Act (PPACA)[1] created premium-assistance tax credits for individuals enrolled in "an Exchange established by [a] State."[2] IRS issued a final rule (rule) on May 18, 2012, which extends PPACA's premium-assistance tax credits to individuals purchasing insurance in Exchanges established by the federal government (federal Exchanges).[3] While PPACA requires the Secretary of Health and Human Services to "establish and operate" an Exchange within any state that fails to create one on its own,[4] PPACA does not contain any language that contradicts or overrides the explicit language limiting premium-assistance tax credits to Exchanges established by states only.[5] Since most states, to date, have opted not to create Exchanges, IRS's extension of the tax credits beyond what the statute authorizes likely increases PPACA's cost in excess of $500 billion over the next decade.[6] Moreover, since employers are only subject to PPACA's employer mandate tax penalties if their workers receive PPACA's premium-assistance tax credits,[7] IRS's rule subjects employers in every state to the employer mandate tax penalty. The Committee is conducting oversight on this IRS rule, and we are writing to request more information about the rule's rationale, authority, and development.

At the Committee's hearing on August 2, 2012, you testified that your "main job is to implement the law that was written."[8] You also testified that you thought "Section 36B [the Section of the Internal Revenue Code added by PPACA] had some contradictory language in it."[9] On July 23, 2012, the American Law Division, an arm of the Congressional Research Service (CRS) and who the Congress relies upon for guidance, produced a legal analysis of the IRS rule.[10] CRS's analysis raises serious doubt that IRS "implement[ed] the law that was written" when it issued its rule or that Section 36B contained "contradictory language" with respect to whether PPACA authorizes tax credits in federal Exchanges. According to CRS:

The plain language of Section 36B suggests that premium tax credits are available only where a taxpayer is enrolled in an "Exchange established by the State." As noted previously, a strictly textual analysis of the plain meaning of the provision would likely lead to the conclusion that the IRS's authority to issue the premium tax credits is limited only to situations in which the taxpayer is enrolled in a state-established exchange. Therefore, an IRS interpretation that extended tax credits to those enrolled in federally facilitated exchanges would be contrary to clear congressional intent, receive no Chevron deference, and likely be deemed invalid.[11]

According to CRS, a court reviewing the legality of the rule might not "limit itself to a consideration of only the plain text of the provision"[12] and might also look at "legislative history, legislative purpose, and context."[13] Jonathan Adler, a law professor at the Case Western Reserve University School of Law, and Michael Cannon, director of health policy studies at the CATO Institute, argue that "[n]either the structure, history, nor other indicia of congressional intent support the IRS position."[14] According to Adler and Cannon, Congress purposefully limited the law's premium tax credits to Exchanges "established by the State"[15] and the IRS rule that extends the tax credits to federal Exchanges is thus illegal:[16]

PPACA's authors strongly preferred state-run Exchanges over federal Exchanges. The statute repeatedly uses financial incentives to encourage states and others to comply with the Act's regulatory scheme. Both of PPACA's antecedent bills contained the same feature of withholding credits from residents of uncooperative states. During congressional consideration, PPACA's lead author said that a state must establish an Exchange in order for tax credits to become available.[17]

In issuing the final rule allowing tax credits in federal Exchanges, IRS argued that "the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges."[18] For IRS to issue a rule that contradicts "a strictly textual analysis of the plain meaning of the provision,"[19] the legislative history should clearly support the IRS's interpretation of the rule. However, IRS failed to cite any legislative history that showed Congress intended for individuals in federal Exchanges to receive PPACA's tax credits. According to Michael Cannon's testimony at the Committee's August 2, 2012, hearing, the relevant legislative history is limited, but the limited legislative history suggests that Congress intended for the tax credits to be confined to state Exchanges:

[M]y staff and I did a pretty extensive search of the Congressional Record, including markups and Committee action, on this statute. We found only two mentions in the Congressional Record of what would happen if States did not create a health insurance Exchange on their own. The first was the chairman of the Senate Finance Committee said that tax credits are conditioned upon States establishing their own Exchanges. . . . The only other mention was in the House during House consideration of the Patient Protection and Affordable Care Act by Congressman Michael Burgess. He said, "What happens if the States don't create an Exchange? Well, a federal Exchange will impose a public option." It made no mention of tax credits. Those are the only two [examples] we have found.[20]

Although the Congressional debate was limited on the question of whether tax credits would apply to federal Exchanges, Senate Finance Chairman Max Baucus's comments offer support to the interpretation that the tax credits are only available in Exchanges established by states.[21] Moreover, neither of PPACA's antecedent bills, which were reported by the Senate Finance Committee and the Senate Health Education Labor and Pension Committee, supports IRS's rule.[22] According to Adler and Cannon, "Each of those bills withheld credits from taxpayers whose state governments failed to establish an Exchange or otherwise failed to implement the law in accord with federal dictates."[23] Since there is nothing in the legislative history to support IRS's rule and IRS ignored the legislative history that suggests the plain text of the statute represented Congressional intent about limiting the tax credits to state Exchanges, IRS's defense of its rule using "the relevant legislative history" is flawed and misleading.

In order to assist the Committee in understanding how IRS arrived at the rule to extend PPACA's premium-assistance tax credits to individuals purchasing insurance in federal Exchanges, please provide the following information to the Committee by September 4, 2012.

1. Please provide all legal analysis, internal or external, conducted by the IRS which authorizes IRS to grant premium-assistance tax credits in federal Exchanges.

2. Please provide all documents and communications between IRS employees and employees of the White House Executive Office of the President or any other federal agency or department referring or relating to the proposed IRS rule[24] or final IRS rule[25] between March 23, 2010, and August 17, 2012.

When producing documents to the Committee, please deliver production sets to the Majority Staff in Room 2157 of the Rayburn House Office Building and the Minority Staff in Room 2471 of the Rayburn House Office Building. The Committee prefers to receive all documents in electronic format.

The Committee on Oversight and Government Reform is the principal oversight committee of the House of Representatives and may at "any time" investigate "any matter" as set forth in House Rule X. An attachment to this letter provides additional information about the Committee's request.

If you have any questions about this request, please contact Brian Blase with the Committee staff at 202-225-5074. Thank you for your attention to this matter.

Sincerely,

Darrell Issa Trey Gowdy


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