Source: http://yalejreg.com/how-king-v-burwell-creates-tax-problems-for-consumers-and-what-the-treasury-can-do-about-it/
Timestamp: 2019-04-19 19:04:16+00:00

Document:
* Associate Professor of Law, University of Iowa. Comments, corrections, and criticisms are welcome at agrewal@iowa.uiowa.edu.
This focus on future enrollment seasons masks the potentially harsh tax consequences for consumers who purchase federal policies during the 2014-2015 enrollment season. Many such consumers cannot pay the sticker price for federal policies and receive tax credits to assist with their monthly insurance payments. However, an adverse decision in King v. Burwell would generally require that they pay back those credits.
This conclusion might seem surprising to 2014-2015 purchasers of federal policies. Under the ACA’s advance payment mechanisms, consumers seemingly take the premium tax credit immediately upon the purchase of a federal policy.3 Unsophisticated consumers—or even sophisticated ones—can easily assume that advanced payments do not have to be paid back.4 After all, those payments go straight to insurers and never appear on consumers’ bank accounts.
Excessive advance payments commonly arise when a consumer estimates her credit using a household income lower than the actual income for the year.8 Under Section 36B, the allowable credit shrinks as income increases, so underestimation of income generally causes a consumer to overstate her anticipated credit.9 Excessive payments will also arise if the government loses King v. Burwell because any advance payment on a federal policy would necessarily exceed the proper credit of $0.
Although it might seem harsh, this result follows from the Tax Code’s annual accounting rule.10 Under the Code, transactions generally do not independently establish tax credits or liabilities. That is, a consumer does not earn a credit simply by purchasing a health policy, whether on a federal exchange or a state exchange, and a consumer does not face a tax liability simply because, for example, he sold property for a big gain.11 The year as a whole requires examination.12 And if the Court decides King v. Burwell against the government, that end-of-year examination will show that purchasers of federal policies were entitled to no premium tax credits.
However, Section 7805(b)(8) may provide some relief to consumers.13 Under that statute, the Treasury can deny retroactive effect to judicial rulings, even ones made by the Supreme Court. But any action by the Treasury will fully protect only those who purchased federal policies during the 2013-2014 enrollment season. Purchasers of federal policies during the current enrollment season will not definitively establish their right to tax credits until after December 31, 2015, approximately six months after a potentially adverse decision in King v. Burwell.14 These taxpayers would need the Treasury to deny prospective effect to the Court’s ruling, a power not contemplated by Section 7805(b)(8).
But even under this scenario, consumers face potential problems. In the months after King v. Burwell takes effect, no credit related to a federal policy would be allowable, and taxpayers would have to repay any advance payments made for those months. Alternatively, the government might stop making advance payments on federal policies in July 2015, such that taxpayers would effectively see an unaffordable spike in their monthly premium payments. Either way, trouble awaits.
Arguably, the Treasury can turn off King v. Burwell only for consumers who purchase federal policies and allow it to take full effect for other individuals and for employers. Section 7805(b)(8) allows the Treasury to “prescribe the extent, if any, to which any ruling” operates without retroactive effect. The Treasury might thus deny retroactive effect to King v. Burwell only to the “extent” that it protects a consumer’s tax credits for federal policies, but no further.
However, it is not obvious that Section 7805(b)(8) allows the Treasury to slice and dice a judicial decision that way. Instead, Section 7805(b)(8) might refer solely to temporal elements, not substantive ones. That is, the Treasury can choose only the “extent” of King v. Burwell‘s retroactivity period and may prescribe, for example, that it takes effect as of June 1, 2015, or as of May 1, 2015, or as of some other date. Under this reading, the Treasury could not chop up the Court’s holding; it would have to accept the decision in toto, subject to whatever period of retroactivity it chooses.
Congress, of course, could adopt a commonsense statute that protects purchasers of federal policies during the current enrollment season. But a legislative fix seems unlikely given the strained relationship between the President and Congress. It is unfortunate that the people who can most easily protect purchasers of federal policies probably will not reach a sensible compromise.
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