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U.S. judge blocks Obamacare tax rule for non-exchange states

September 30, 2014

An Oklahoma federal judge dealt a blow to President Barack Obama’s health-care law, invalidating IRS rules aimed at making policies affordable for consumers around the country.

U.S. District Judge Ronald White in Muskogee ruled Tuesday that subsidies, in the form of tax credits, apply only to consumers in the 14 states that have set up insurance marketplaces and not to individuals who buy insurance on the federal marketplace. An Internal Revenue Service rule says needy customers in both the federal and state marketplaces are eligible for subsidies.

“The court is upholding the act as written,” White said, citing language in the law that limits subsidies to those in states with their own exchanges. He called the IRS regulations “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.”

In July, a three-judge panel of the U.S. Court of Appeals in Washington also limited subsidies to state exchanges, a ruling the full appeals court has agreed to reconsider. Another U.S. appeals court, in Richmond, Virginia, said on the same day day that subsidies were available on federal exchanges.

Another challenge to the IRS regulations is pending in Indianapolis federal court, where a judge in August denied a U.S. request to dismiss a suit filed by the state of Indiana.

The U.S. Supreme Court in 2012 upheld the Patient Protection and Affordable Care Act of 2010 as a valid exercise of Congress’ tax powers. It didn’t address the question of subsidies.

Oklahoma sued to overturn the IRS provisions, citing the text of the law and arguing that the regulations will cost local governments and other large employers millions of dollars in penalties for noncompliance.

“The administration and its bureaucrats in the IRS handed out billions in illegal tax credits and subsidies and vastly expanded the reach of the health-care law because they didn’t like the way Congress wrote the Affordable Care Act,” Oklahoma Attorney General Scott Pruitt said in a statement Tuesday.

The U.S. Justice Department said it would appeal.

“The district judge in the Oklahoma case made a decision that is inconsistent with the text of the statute, the clear intent of Congress, common sense” and the Richmond court’s “unanimous contrary ruling on the same issue,” Emily Pierce, a Justice Department spokeswoman, said in an e-mail.

White delayed implementation of his ruling until after an appeal.

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