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King v. Burwell: Supreme Court Upholds Subsidies to Federal Exchanges

2 min readBy: Alan Cole, James W. Kennedy

This morning, the Supreme Court issued a 6-3 opinion affirming the IRS decision to offer subsidies to those who purchase plans from the federal healthcare exchange through the Affordable Care Act (ACA.) Writing for the majority, Chief Justice Roberts held that the context of the ACA required the court to deviate from “the most natural reading” of the clause at issue (restricting subsidies to those “enrolled in through an Exchange established by the State under 1311”). In a strident dissent, Justice Scalia argued that the Court is performing “somersaults of statutory interpretation” that prove the “discouraging truth that the Supreme Court of the United States favors some laws over others”.

This is an important case concerning a significant feature of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code.

While the premium subsidies are to be administered by the IRS, they are somewhat unusual compared to traditional IRS responsibilities; they are a refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). for individuals, kind of like the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , but instead of being paid to individuals, they are paid to insurance companies on an individuals’ behalf.

Another unusual feature of them is that they are determined and paid during the year, and then the final amount is settled on tax day through Form 8962. If a taxpayer’s subsidy was determined to be too large, they will owe additional taxes. If the subsidy was too small, the taxpayer receives a credit.

As our previous coverage of this case has noted, the subsidies so far are (relatively) small. However, they are projected to increase as more people begin using the exchanges. In fact, they are projected to become about as big as all other refundable tax credits combined.

In many ways, the subsidies are a typical means-tested benefit. They aren’t particularly well-crafted; their structure puts infinite marginal tax rates in action for some taxpayers, a problem that more wisely-structured programs avoid. But the overall idea – subsidies for individuals for basic living expenses – has merit, and has been used plenty of times before.

The things that most make the subsidies noteworthy, though, are the contentiousness of the ACA in general, the expansion of IRS responsibilities they entail, and their sheer size. In terms of budgetary significance, at least, this is one of the most important Supreme Court cases of all time.

This post also appeared on our Forbes contributor page.

This post has been updated.