Three Republicans from the House Committee on Oversight and Government have written a letter to IRS Commissioner Doug Shulman demanding he explain a recent rule that would extend tax credits to individuals who buy health insurance from an exchange set up by the federal government when their state has failed to set up such an exchange.

The letter was sent Wednesday by Oversight Committee chairman Darrell Issa, R-Calif., and two other members of his committee, Trey Gowdy, R-S.C., who chairs the Subcommittee on Health Care, and Dr. Scott DesJarlais, R-Tenn.

President Obama’s signature health care reform law, known as the Patient Protection and Affordable Care Act, was passed in 2010 despite nearly unanimous opposition from Republicans in Congress. The law sets up exchanges at the state level from which individuals and businesses will be able to buy health insurance from private companies starting in 2014. If states fail to set up the exchanges, then the federal government is authorized to set up exchanges for those states.

A number of Republican governors have vowed to block implementation of the exchanges and the Republican-dominated House has voted repeatedly to repeal the health care reform law in whole or part.

Before Congress recessed this month, Issa held a hearing in which Issa’s letter noted that 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 extending the 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,” 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, Issa’s office noted.  He pointed out that 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 premium assistance tax credits.

As part of its oversight of the health care reform law’s implementation, the Oversight Committee has contended that the IRS’s rule is at odds with the law. On July 23, 2012, the Congressional Research Service’s American Law Division produced a legal analysis of the IRS rule, raising 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.”

Shulman defended the rule in testimony before the committee earlier this month, disagreeing with Issa’s interpretation that the Affordable Care Act restricted the IRS from providing tax credits to individuals who receive health insurance from exchanges set up by the federal government. “We obviously looked at the total statute and think we came to the correct legal reading,” he said.

“I appreciate Chairman Issa and Subcommittee Chairman Gowdy for continuing to conduct oversight on this flagrant abuse of power by the IRS,” said DesJarlais in a statement.

“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 rewriting this important provision of the ACA.”

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