City of Arlington v. FCC and Subsidies in Federally Facilitated Exchanges

By Jeremy Kreisberg

Plaintiffs in a pair of cases — Oklahoma v. Sebelius and Halbig v. Sebelius — are challenging the authority of the IRS to issue tax credits to individuals purchasing insurance through federally facilitated exchanges under the ACA.  While these cases are still pending at the district court level, the Supreme Court may have already signaled that its framework for deciding these cases will be friendly to the government.

Section 1311 of the ACA provides that each State “shall, not later than January 1, 2014, establish an American Health Benefit Exchange.”  Section 1321 is a fallback provision that allows for the creation of federally facilitated exchanges by requiring the Secretary of HHS to “establish and operate such Exchange within” any State that does not establish its own exchange.  Section 1401 of the ACA provides a calculation for tax credits provided to individuals purchasing insurance through “an Exchange established by the State under [section] 1311.”  Proponents of the aforementioned challenges argue that the ACA does not contain a calculation of tax credits for individuals purchasing insurance on a federally facilitated exchange, and therefore the IRS may not issue tax credits to those individuals.  Professor Timothy Jost has countered that “such Exchange” in section 1321 refers to those exchanges established by a state under section 1311.  Therefore, when other sections of the ACA (including section 1401) refer to an “Exchange established by the State under section 1311,” all of those references apply equally to federally facilitated exchanges.  In light of this apparent statutory ambiguity, the IRS has promulgated a rule clarifying that tax credits will be available through both state exchanges and federally facilitated exchanges.

Under the Chevron doctrine of judicial deference, courts generally defer to agency interpretations of ambiguous statutes.  However, a line of Supreme Court cases has previously suggested a “major questions exception” to Chevron whereby courts would hesitate before deferring to agency interpretations on questions of economic and political significance.  The Court explained the logic of the exception in FDA v. Brown & Williamson: while Chevron deference is “premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency,” the major questions exception reflects a belief that, “[i]n extraordinary cases, . . . there may be reason to hesitate before concluding that Congress has intended such an implicit delegation.”  Last year, I noted some possible ambiguity over whether a court could invoke the “major questions exception” in a case concerning the IRS’s authority to issue tax credits through federally facilitated exchanges.  But as David Baake correctly concluded, the Supreme Court’s recent decision in City of Arlington v. FCC should put an end to any notion that the “major questions exception” has continuing vitality in the Chevron doctrine.

City of Arlington addressed the scope of the Court’s inquiry before deferring to an agency interpretation of an ambiguous statute.  Rather than instructing courts to search for a congressional delegation of interpretive authority over each particular provision at issue in a case, Justice Scalia explained that “Chevron . . . provides a stable background rule against which Congress can legislate: Statutory ambiguities will be resolved, within the bounds of reasonable interpretation, not by the courts but by the administering agency.”  Of course, courts still provide a level of de novo review before granting Chevron deference.  But City of Arlington stands for the proposition that a court’s pre-Chevron review in this context is limited to the questions of (1) whether Congress granted interpretive authority to the relevant agency over the statute at issue and (2) whether the agency acted with the force of law pursuant to that authority. Taking City of Arlington to its logical conclusion, the major questions exception cannot stand.  If the judicial inquiry no longer involves a provision-by-provision search for congressional delegation of interpretive authority, then there is no occasion for courts to raise doubts over whether Congress truly intended to delegate interpretive authority over a particularly important part of a statute.

After the decision, Professor Cass Sunstein predicted that City of Arlington would give the ACA a “big boost.”  I believe the dispute over tax credits in federally facilitated exchanges should prove his point.  A dutiful application of City of Arlington should direct a court to ask (1) whether Congress gave the IRS interpretive authority over section 1401 of the ACA and (2) whether the IRS acted with the force of law.  The inescapable answers to these questions are “yes” and “yes.”  Section 1401 states that the Secretary of the IRS “shall prescribe such regulations as may be necessary to carry out the provisions of this section,” and the IRS promulgated its rule authorizing tax credits on federally facilitated exchanges through notice-and-comment procedures.  Whatever one thinks of this particular rule, it should at least be clear that the framework courts use to evaluate its legality is highly deferential to the IRS on any issues of statutory ambiguity.

The Petrie-Flom Center Staff

The Petrie-Flom Center Staff

The Petrie-Flom Center staff often posts updates, announcements, and guests posts on behalf of others.

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