The Federalism Fallacy in King v. Burwell

By DAVID RIVKIN and ELIZABETH PRICE FOLEY, March 11, 2015

Last Wednesday, the Supreme Court heard oral arguments in King v. Burwell, the latest challenge to the Affordable Care Act (ACA). The case centers on a provision of Obamacare that authorizes federal tax subsidies for individuals only if they purchase health insurance through an “Exchange established by the State.” If an individual purchases insurance through a federal-run exchange (in the event that the state opts out of setting up its own exchange), can she still qualify for Obamacare subsidies? The Obama administration says yes; the King plaintiffs say no.

A great deal is at stake here. If the plaintiffs win, individuals in 34 states—the states that have opted not to operate a state insurance exchange—will still be subject to Obamacare’s individual mandate, but they won’t qualify for federal tax subsidies. As a result, their insurance will cost more out-of-pocket. Moreover, because individuals in these 34 states won’t get tax subsidies, employers in these states won’t be subject to the employer mandate, so they won’t have to offer health insurance and can’t be taxed for failing to do so. And yet, those states would be able to continue registering their profound opposition to the entirety of the Obamacare regulatory scheme, thereby undermining its legitimacy. Given these consequences, supporters of Obamacare are pulling out all the stops to prevent a plaintiffs’ victory.

One recent attempt to save tax subsidies in these 34 states has come from an amicus brief filed on behalf of four law professors, two of whom are former clerks to Justice Ruth Bader Ginsburg. During the King oral arguments, it became apparent that their argument had found favor with Ginsburg and three other liberal justices and had gained some traction with the court’s centrist, Justice Anthony Kennedy.

Ironically, the centerpiece of their argument is federalism—the division of powers between state and federal governments—a concept that, while a key part of the Constitution’s separation of powers architecture, is not particularly favored by liberals. Specifically, the law professors’ claim that the court should rule in favor of the Obama administration by invoking the “clear statement rule,” a legal doctrine designed to protect state sovereignty.

However, applying this rule to the King case would be unprecedented and deeply antithetical to federalism.Read more…

The clear statement rule is a doctrine that helps courts interpret laws in a way that prevents Congress from treading on the states unnecessarily. As the Supreme Court reiterated in Bond v. United States (2014), the clear statement rule counsels courts that they must be “certain of Congress’ intent before finding that a federal law overrides the usual constitutional balance of federal and state powers.”

For example, when interpreting federal statutes that touch upon state sovereignty or areas of traditional state police power, such as criminal law, the court has insisted on a clear statement by Congress of its intent to do so.

Particularly notable is this: In every single instance where the Supreme Court has invoked the clear statement rule, it has been to prevent Congress from using its enumerated powers in a manner that harms the states as states. The clear statement rule is utterly inapplicable, however, when Congress uses its power directly on citizens. And in the Affordable Care Act, when Congress exercises its taxing power to grant (or revoke) tax subsidies to individuals, that power operates directly on individuals, not on states.

This is an extremely important distinction. Indeed, the ability to legislate directly upon individuals, rather than through state intermediaries, was the primary motivation for writing the Constitution to replace the Articles of Confederation. As Alexander Hamilton observed in Federalist No. 15, the “great and radical vice” of the Articles of Confederation was that its legislative power operated only upon “STATES or GOVERNMENTS, in their CORPORATE or COLLECTIVE CAPACITIES, and as contradistinguished from the INDIVIDUALS of which they consist.” He further explained, in Federalist No. 16, that the federal government “must carry its agency to the persons of the citizens” and “must be able to address itself immediately to the hopes and fears of individuals.”

The clear statement argument being advanced in King embraces this notion of “state-as-intermediary” between the federal government and individual citizens. More specifically, the argument is this: If citizens lose tax subsidies, this harms the states as states because without clear notice of the consequences of declining to run a state exchange, states cannot make a meaningful choice to protect their citizens. Specifically, in the law professors’ amicus brief, they assert, “In order to function as sovereigns and protect the interests of their people, including in the legislative process itself, the States are entitled to know the legal consequences of their decisions to participate in a federal-state program.”

But denying tax subsidies to some citizens and making health insurance more expensive in the 34 states without state-run exchanges doesn’t hurt the states qua states. It admittedly hurts some citizens within those states, but hurting individuals within a state cannot be equated, under any existing clear statement or other federalism case law, with hurting states as sovereign entities. Indeed, this view of equating harm to state citizens with the harm to the states was decisively rejected by the Supreme Court in Massachusetts v. Mellon (1923). In that case, the justices ruled that, when the federal government exercises its taxing and spending power—as it has with the Obamacare tax subsidies—states are not representatives of their citizens in a parens patriae manner, as it is “no part of [a State’s] duty or power to enforce [its citizens’] rights in respect of their relations with the federal government.”

Incidentally, the last time the law professors’ argument was seriously advanced was during the pre-Civil War era, when Confederate states asserted that various federal government actions, such as those devaluing a slave-owner’s property interest in his slaves, harmed state sovereignty by harming the state’s citizens. Indeed, the Nullification Crisis of 1832, the brainchild of Sen. John Calhoun of South Carolina, was based on the argument that states didn’t have to obey a federal tariff law because it harmed Southern farmers. This political philosophy—that states are harmed when their citizens are harmed in some way by the federal government—was the heart of the Confederate states’ defense of slavery. We fought a Civil War to put this notion to rest.

The ultimate irony of the clear statement argument in King is that the much-discredited notion that states have a duty to interpose themselves between the federal government and their citizens is a philosophy that’s hardly consonant with the court’s liberal justices. It is thus more than a little odd that these law professors have opportunistically embraced this outdated vision of state sovereignty merely because it could provide a means to accomplish the desired goal of saving Obamacare’s tax subsidies.

But there’s more: Even assuming, however, that one is willing to embrace openly this theory of states-as-intermediaries, the clear statement rule still wouldn’t apply under the facts in King. The amicus brief by the four law professors contends, “states were led to make choices about participation in this federal program with virtually no notice of the consequences of those choices.” And, if states did have notice of the consequences for failing to operate a state exchange, Kennedy suggested during the oral argument that the choice may have been unconstitutionally coercive, “It does seem to me that if [the plaintiffs’] argument is correct, this is just not a rational choice for the States to make and that they’re being coerced.”

The salient questions are therefore whether the states had notice of the consequences of their choice to operate a state exchange and, if so, was this a “real” choice or a coercive one?

States were given perfectly clear notice by the plain language of the statute itself—which makes it clear that tax subsidies are available only to individuals who purchase insurance on an “exchange established by the State”—and which the states were perfectly capable of comprehending; to suggest otherwise, is an affront to the intelligence of state officials and lawyers. But the notice is also evidenced by the fact that in January 2012, seven states asked the Obama administration for a legal opinion or court declaration confirming whether the administration’s announced interpretation of the law—which extended subsidies to individuals purchasing insurance on federal-run exchanges—was correct. This indicates that states were both aware of, and concerned about, the dubious legality of the administration’s position extending subsidies to individuals in states without state-operated exchanges.

Moreover, a well-publicized lawsuit filed by Oklahoma challenged the Obama administration’s interpretation asserting that tax subsidies couldn’t be granted in Oklahoma precisely because Oklahoma had decided not to operate a state exchange. If nothing else, this lawsuit should reasonably have alerted other states to the possibility that citizens in states without state exchanges might not receive tax subsidies. And even so, multiple states decided not to operate a state exchange.

Assuming states were, in fact, aware that declining to operate a state exchange would result in lost tax subsidies for their citizens, this doesn’t mean that their choice to do so was a “coercive” one, forced on them by the federal government, and necessitating invocation of the clear statement rule. Even if Congress had been crystal clear about this consequence, there would be no state coercion triggering federalism concerns. Indeed, if it were otherwise, virtually any exercise of Congress’s taxing and spending power that depends on a state’s decision to opt in (or out) of federal largesse would be considered coercive if opting out would harm the state’s citizens. The entire Medicaid program would thus be unconstitutionally coercive, as would welfare programs such as Temporary Assistance for Needy Families (TANF), as these programs require an initial choice by states to either participate, or not participate. If states decline to participate, the poorest citizens in these states are undoubtedly harmed, in the sense that they will not be eligible for Medicaid or welfare benefits, as are citizens in other states. But no one has ever suggested, until now, that such harms to citizens renders states’ initial choice—to participate or not—coercive. This argument, if accepted, would render this country’s biggest social safety net programs unconstitutional.

Indeed, if the choice given to states under the ACA—to operate a state exchange or not—is coercive, presumably the correct remedy is for the court to strike down the Act’s individual tax subsidy, as it’s the seed from whence the unconstitutionally coercive choice sprouted. The Supreme Court could perhaps mitigate the perceived state coercion by rewriting the law to grant subsidies when purchasing insurance on any kind of exchange. This is what many believe the court did, in an effort to save the ACA’s mandatory Medicaid expansion in NFIB from constitutional infirmity. But engaging in such contortions seems unlikely, as the court is undoubtedly sensitive to the need to preserve its institutional legitimacy as a neutral interpreter of the law and avoid the perception that it is acting (again) as a council of revision.

Moreover, it should be noted that the court has never employed the clear statement rule in a situation involving a new regulatory bargain being offered to states by Congress. In the case of a new law such as Obamacare, the choice being presented to the states wasn’t altering states’ long-established expectations, as it was in NFIB v. Sebelius. In that case, the court concluded that Obamacare’s mandatory Medicaid expansion, in fundamentally revising Medicaid’s nature, was a coercive “gun to the head” of states, who had chosen years ago to operate Medicaid programs but under very different terms.

Beyond this fundamental understanding of when the concept of coercion can be properly applied, it’s important to realize that states had a meaningful choice, with pros and cons of both sides, regarding whether to operate a state exchange. If a state decided to operate a state exchange, it would cost it millions of dollars, but its residents would qualify for subsidies when they bought health insurance on the exchange. By contrast, if a state opted not to operate a state exchange, its residents would lose tax subsidies, but the state itself would save millions of dollars. And perhaps most importantly, the employers in that state would avoid the employer mandate and be able to create more jobs with the money saved.

Avoiding the ACA’s employer mandate would obviously be an economic boon for employers, and a victory for employers’ liberty. This is salient because the court has made it clear, most recently in a unanimous decision in Bond v. United States (2011), that “by denying any one government complete jurisdiction over all the concerns of public life, federalism protects the liberty of the individual from arbitrary power.” If, in King, the court concludes that states can’t opt out of the employer mandate, the liberty-enhancing function of federalism will be thwarted. If employers are subject to the employer mandate regardless of whether their state operates a state exchange, this is a net reduction of liberty for employers, with no net increase in liberty for individuals, who are subject to the individual mandate regardless of where they live. Since the purpose of federalism is to preserve individual liberty, this strongly suggests that the plaintiffs’ interpretation, not the Obama administration’s, furthers federalism.

The bottom line is that declining to operate a state exchange has both good and bad consequences—and each state is free to weigh those consequences as it thinks best. In this regard, as Oklahoma Attorney General Scott Pruitt argued in a recent Wall Street Journal op-ed, “The states are not children that the federal government must paternalistically ‘protect’ from the consequences of their choices by rewriting statutes. In our constitutional system, states are free to make decisions and bear the political consequences, good or bad, of those choices.” He further explained that declining to operate an exchange “allowed Oklahoma to voice its strong political opposition to the Affordable Care Act as a whole,” as well as proclaim that it didn’t want the “employer mandate … to have effect within its borders.” While Oklahoma’s citizens lost tax subsidies, the state believed the benefits of declining to operate an exchange outweighed this cost. And its choice, while difficult, “was a choice the state was happy to make.”

States thus had good reason to decline operating a state exchange. The fact that declining to operate a state exchange would have negative consequences for some of those states’ citizens isn’t the same as a negative consequence for the state qua state. Even if it is—which would be a novel interpretation of the clear statement rule indeed—there is no reason to believe that the states made the choice to opt out with anything less than eyes wide open.

Invoking the clear statement rule in King would thus turn the Court’s federalism case law on its head, converting it from a principle that requires giving states a choice to one that forbids giving them a choice if they might make a “wrong” choice that hurts some of their citizens. The not-so-subtle insinuation is that states are incapable of making difficult choices and should be paternalistically protected from doing so. This would transform federalism and the clear statement rule from a shield designed to protect state sovereignty into a weapon that can be used to disregard state choices and impose a one-size-fits-all, top-down federal solution. This interpretation, in short, is a perversion of the clear statement rule and the federalism principle that animates it. It cannot be countenanced by anybody who is truly committed to federalism.

David Rivkin served in the Justice Department and the White House Counsel’s Office in the Reagan and George H.W. Bush administrations. He practices appellate litigation with particular focus on constitutional law at Baker Hostetler LLP and represented the 26 states that challenged the constitutionality of Obamacare. Elizabeth Price Foley is professor of constitutional law at Florida International University College of Law. She is the author, most recently, of The Tea Party: Three Principles.

Source: http://www.politico.com/magazine/story/2015/03/king-v-burwell-supreme-court-obamacare-subsidies-case-federalism-argument-115997.html

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