The Origin of the Treasury Department’s Halbig Regulation

July 29th, 2014

In her Potomac Watch Column, Kimberly Strassel discusses at length how the Treasury Department promulgated the rule at issue in Halbig. Based on report by the House Government Oversight and Ways and Means Committee, Strassel observes that political appointees in Treasury and HHS pushed to issue the rule, even though career employees thought the statute prohibited the payment of subsidies in states that did not establish exchanges. Here are the key paragraphs.

We know that in the late summer of 2010, after ObamaCare was signed into law, the IRS assembled a working group—made up of career IRS and Treasury employees—to develop regulations around ObamaCare subsidies. And we know that this working group initially decided to follow the text of the law. An early draft of its rule about subsidies explained that they were for “Exchanges established by the State.”

Yet in March 2011, Emily McMahon, the acting assistant secretary for tax policy at the Treasury Department (a political hire), saw a news article that noted a growing legal focus on the meaning of that text. She forwarded it to the working group, which in turn decided to elevate the issue—according to Congress’s report—to “senior IRS and Treasury officials.” The office of the IRS chief counsel—one of two positions appointed by the president—drafted a memo telling the group that it should read the text to mean that everyone, in every exchange, got subsidies. At some point between March 10 and March 15, 2011, the reference to “Exchanges established by the State” disappeared from the draft rule.

Emails viewed by congressional investigators nonetheless showed that Treasury and the IRS remained worried they were breaking the law. An email exchange between Treasury employees in the spring of 2011 expressed concern that they had no statutory authority to deem a federally run exchange the equivalent of a state-run exchange.

Yet rather than engage in a basic legal analysis—a core duty of an agency charged with tax laws—the IRS instead set about obtaining cover for its predetermined political goal. A March 27, 2011, email has IRS employees asking HHS political hires to cover the tax agency’s backside by issuing its own rule deeming HHS-run exchanges to be state-run exchanges. HHS did so in July 2011. One month later the IRS rushed out its own rule—providing subsidies for all.

I went through the lengthy report, which provides a fascinating window into the rule-making process, or what I have affectionally dubbed regulation by blog post. These Issa reports are like crack for policy wonks. Here are some of the highlights.

IRS discovered the rule after reading about Thomas Christina’s finding:

According to IRS and Treasury employees interviewed by the Committees, the first discussion of whether the Administration had the statutory authority to provide subsidies in federal exchanges occurred in March 2011.61 Emily McMahon, then Acting Assistant Secretary for Tax Policy at the Department of Treasury, saw an article in Bloomberg BNA which discussed the legal challenges to PPACA.62 The article referenced remarks by Thomas Christina, an employee benefits attorney, who had discussed the restriction of PPACA’s premium tax credits to citizens of states that elected to create exchanges at an American Enterprise Institute conference held on December 6, 2010.63 Ms. McMahon then forwarded the Bloomberg BNA article to the working group for their input. At the June 13, 2013, briefing, both Mr. Dunham and Ms. Koch told the Committees that they discussed the article.65 However, they were unable to provide any details on these discussions other than the working group’s conclusion that PPACA’s tax credits should be available in both state and federal exchanges. According to documents reviewed by Committee staff in camera, an early draft of the 36B proposed rule included the language “Exchange established by the State” in the section entitled “Eligibility for the Premium Tax Credit.”66 Between March 10, 2011, and March 15, 2011, the explicit reference to “Exchanges established by the State” was removed and the phrase “or 1321” was inserted in its place.67

Much of the report focuses on the level of care that the Treasury Department took prior to issuing the rule. This report should shake the faith of any Chevron-devotees.

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. The Committees have learned that IRS and Treasury employees tasked with evaluating the key legal questions surrounding PPACA’s premium subsidies did not consider the statutory language expressly precluding subsides in federal exchanges to be a significant issue.

Also fascinating is how political appointees in Treasury and HHS worked together to both enact these rules:

However, the Committees have reviewed documents indicating that, as early as March 2011, IRS and Treasury personnel noticed the lack of statutory language authorizing tax credits in federal exchanges. IRS personnel conveyed their concerns to senior officials with the Department of Health and Human Services (HHS) with the hope that HHS would deem exchanges established by the federal government as state-established exchanges in its rulemaking. Despite expressing concern about a lack of statutory language to authorize premium subsidies in federal exchanges, IRS and the Treasury Department did not conduct a thorough or adequate review of the text and legislative history to determine whether their decision to allow premium subsidies in federal exchanges represented a reasonable interpretation of the statute.

In March 2011, IRS and Treasury officials expressed concern that there was no direct statutory authority to interpret federal exchanges as an “Exchange established by the State.” Specifically, they were concerned there was no statutory provision that would deem a federal exchange to be an “Exchange established by the State.” IRS personnel emailed many senior HHS personnel seeking clarification of the issue in HHS’s rulemaking.

At the June 13, 2013, briefing, Mr. Dunham and Ms. Koch told the Committees that they discussed whether to elevate the issue to a larger departmental group, which included senior IRS and Treasury officials, for additional comments and discussion as part of a meeting covering many topics.68 The working group ultimately decided to elevate the issue to the larger departmental group and in preparation for the larger group meeting on the 36B regulation on March 25, 2011, IRS’s Chief Counsel’s Office drafted a memo to explain the issue to the attendees.

HHS was brought into the picture to issue a complementary rule:

Committee staff also reviewed an email sent after the March 25, 2011, large group meeting, where the issue of subsidy availability in federal exchanges was discussed. 74 This email highlighted three specific points. First, Treasury and IRS considered that the language restricting tax credits to state- established exchanges may have been a “drafting oversight.”75 Second, the email between Treasury department employees expressed concern that there was no direct statutory authority to interpret an HHS exchange as an “Exchange established by the State.”76 Third, the email suggested that IRS request HHS clarify the issue in their rulemaking by deeming HHS exchanges to be exchanges established by States.77 On March 27, 2011, IRS employees then sent an email to several HHS officials, including Cindy Mann (Deputy Administrator at the Centers for Medicare and Medicaid Services), Penny Thompson (Deputy Director of the Center for Medicaid and CHIP Services, within the Centers for Medicare & Medicaid Services), and Chiquita Brooks LaSure (Deputy Director for Policy and Regulations at the Center for Consumer Information & Insurance Oversight), asking that HHS remedy the problem by deeming HHS exchanges to be exchanges established by states in HHS’s exchange regulation.78 HHS issued their proposed rule on Health Insurance Exchanges on July 15, 2011. According to the proposed rule: The definition for an ‘‘Exchange’’ in § 155.20 is drawn from the statutory text in section 1311(d)(1) and 1311(d)(2)(A). We interpret section 1321(c) of the Affordable Care Act to mean that this definition includes an Exchange established or operated by the Federal government if a State does not establish an Exchange.79 After the HHS proposed exchange rule was released, IRS and Treasury incorporated the HHS definition of exchange into their premium tax credit rule.80

Judge Edwards’s opinion specifically notes this cross-reference in his Chevron analysis:

Here, there is no issue of one agency interpreting the statute in a way that conflicts with the other agency’s interpretation. The IRS’s rule defines “Exchange” by reference to the HHS’s definition, which provides that subsidies are available to low-income taxpayers purchasing insurance on an Exchange “regardless of whether the Exchange is established and operated by a State. . . or by HHS.” 45 C.F.R. § 155.20; 26 C.F.R. § 1.36B-1(k).

The report also discusses how the agency responded, or didn’t, to comments:

After IRS published the proposed rule, numerous commenters suggested that the rule exceeded the agencies’ statutory authority.6 At least 25 Members of Congress, including Ranking Member Orrin Hatch of the Senate Finance Committee, as well as members of the general public, commented that IRS’s proposed rule was incompatible with the language of the statute. Despite these comments, the evidence indicates that IRS and Treasury failed to engage in reasoned decision-making prior to finalizing the rule. For example, Treasury brought in Cameron Arterton, a former staff member to Representative Lloyd Doggett of the House Ways and Means Committee, to review the issue of whether premium subsidies would be available in federal exchanges. The evidence indicates that Ms. Arterton did not consider evidence supporting the statutory language that would have contradicted IRS and Treasury’s initial interpretation. The evidence also indicates that IRS and Treasury staff did not consider that the statute may have included language that restricted subsidies to state-established exchanges as an incentive to entice states to implement key provisions of the law. Despite having nearly a year between the release of the proposed rule and the release of the final rule to review the statute and legislative history for evidence supporting their interpretation, the agencies promulgated a final rule that appears to contradict the plain meaning of the statute. Furthermore, IRS and Treasury have not provided robust evidence in support of their interpretation, nor have they shown evidence that they undertook a thorough review of the law and its relevant legislative history prior to finalizing the rule to ensure that it was consistent with the text of the statute.

It seems that Treasury disagreed with a Congressional Research Service report that such a rule would “receive no Chevron deference.”

[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.

Even more fascinating–senior Treasury officials asked to research Chevron deference, no doubt worried that their rule would not survive.

According to an email exchange reviewed by the Committee on Oversight and Government Reform, Treasury officials began considering the applicability of Chevron to this issue nearly six months before the promulgation of the final rule.99 On December 1, 2011, Jessica Hauser, Deputy Tax Legislative Counsel at the Department of Treasury, sent an email to Ms. Arterton, with the subject line “can you send me and Jeff [Van Hove, former Tax Legislative Counsel]…The two good chevron cases?”100 Later that day, Ms. Arterton emailed her response: Here are the two Chevron cases you asked for (plus Chevron for good measure)… I should also be clear that I don’t think these cases are unique in the proposition that tension/conflict between two statutory provisions can create sufficient ambiguity, these are just the two clearest I have found so far.101 In the June 13, 2013, briefing, Ms. Arterton was unable to explain which provisions of PPACA created the “sufficient ambiguity” within the statute.105 Both Mr. Dunham and Ms. Koch could not remember ever working on a previous rule where Chevron was discussed prior to the publication of the final rule.106 Mr. Dunham further stated that considering Chevron prior to the promulgation of a final rule was very unusual.107

Despite receiving numerous comments, including those from Members of Congress, the evidence shows that Treasury failed to engage in a serious or thorough review of the issue between the publication of the proposed rule and the publication of the final rule. Rather, Treasury’s cursory review, which included discussions about whether Chevron would apply to its decision to allow the premium subsidies in federal exchanges, simply reiterated the Administration’s previous interpretation and did not even take into account reasons for why a plain text reading of the statute could preclude PPACA’s premium subsidies from being available in federal exchanges.