The Volokh Conspiracy

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Did the IRS engage in reasoned decision making?


The federal government makes a series of arguments in defense of the IRS rule authorizing tax credits for the purchase of insurance in exchanges established by the federal government, textual and otherwise. One thing that is interesting about these arguments is that they are all of recent vintage. In its brief to the Court in King v. Burwell, the Solicitor General maintains that the phrase "exchange established by the state" is a "statutory term of art" (albeit an undefined one). Yet this precise argument was not made to the courts below, nor was it made by the IRS when it finalized its rule. This argument, like most that appear in the SG's brief, was developed long after the IRS made its decision and finalized the relevant rule.

It is a well-established principle of administrative law that agencies are required to engage in reasoned decision making. Among other things, this means that agencies are supposed to consider relevant information and arguments, respond in a reasoned manner to critical comments received during the notice-and-comment process, and fully explain the basis for its ultimate decisions. Failure to do so renders an agency's decision arbitrary and capricious. This is true when an agency adopts a policy position, as well as when it chooses how to interpret ambiguous statutory text, selecting one potential interpretation over another. As courts and commentators have recognized, at Chevron step two it is not enough that the agency's interpretation is reasonable; the agency must also have offered a reasonable explanation for the interpretation it adopted.

Because a "reasonable" agency interpretation of relevant statutory text must be supported by a reasoned explanation, agencies often undertake extensive analyses of relevant statutory text before adopting a potentially contested statutory interpretation. Here, for instance, is a recent memorandum from the Environmental Protection Agency explaining the basis for its interpretation of Section 111 of the Clean Air Act, which is the predicate for proposed regulations governing greenhouse gas emissions from coal-fired utilities. Such extensive analyses are quite common, particularly once an agency is aware that others may contest its interpretation.

When the IRS first proposed treating exchanges established by the federal government as the equivalent of exchanges established by the states, commenters questioned the legality of such a move. Despite adverse comments, and internal concerns about the lawfulness of its proposed course of action, the IRS provided no meaningful explanation for its ultimate conclusion.

When it finalized the rule at issue in King v. Burwell, this is all the IRS said by way of explanation for its decision:

Commentators disagreed on whether the language in section 36B(b)(2)(A) limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans on State Exchanges.

The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.

That's it. No reference to relevant text or other authority. No identification of what provisions "support" the IRS interpretation. No mention of what the IRS considered to be "relevant" legislative history." No substantive response to comments claiming that the plain text of the PPACA only authorizes tax credits in exchanges "established by the state." And nothing resembling the various arguments now made by the Solicitor General on the IRS's behalf. Any analysis the IRS may have made was completely absent from its notice in the Federal Register.

Whether or not one believes the IRS should be able to adopt its interpretation of the PPACA, it seems clear the IRS did not comply with the well-established requirements for reasoned agency decision-making when making this rule. This may not be an issue in King v. Burwell, however, as the plaintiffs are not challenging the IRS's reasoning so much as its result. Nonetheless, it says something about the nature of this case that the government's current legal arguments were developed long after the IRS's decision was made.