The looming constitutional icebergs in King v. Burwell

I wanted to point out a new amicus brief that has been filed with the Supreme Court in King v. Burwell. Professor Abigail Moncrieff of Boston University School of Law and the Jewish Alliance for Law and Social Action have filed a brief drawing the Court’s attention to the numerous constitutional difficulties that arise directly from the petitioners’ understanding of how ObamaCare works. (Full disclosure: I advised on this brief.)

In short, the brief argues that the King petitioners’ interpretation of the Affordable Care Act leads to drastically different regulatory systems in states that create exchanges and in states that do not, targeting refusing states with a destructive and potentially unconstitutional regulatory threat. Under basic interpretive principles, the Supreme Court should avoid this reading of the law and adopt the government’s interpretation, making subsidies available on all exchanges.

In King, the Supreme Court is asked to resolve a question of statutory interpretation. The petitioners argue that the ACA denies subsidies to people who purchase insurance on federal exchanges. The government argues that the law makes subsidies available on any exchange. The Court will decide who’s right.

When determining the meaning of a statute, courts typically draw on a number of interpretive canons. One of these is the canon of constitutional avoidance, whereby courts disfavor statutory interpretations that raise constitutional questions. This is based on the presumption that Congress doesn’t intend to pass laws that violate the Constitution.

Indeed, as Chief Justice Roberts reminded us when upholding the ACA’s individual mandate as a tax three years ago, even when a constitutionally problematic reading is “the most natural interpretation” of a statute, “every reasonable construction must be resorted to, in order to save a statute from unconstitutionality.”

Under this mode of interpretation, the petitioners’ theory of how the ACA operates raises several significant constitutional problems.

First, conditioning subsidies for individuals on whether states establish health exchanges might run afoul of the prohibition on federal coercion of the states. In NFIB v. Sebelius, the Supreme Court ruled that Congress could not threaten to cut states’ Medicaid funding if they didn’t comply with the Medicaid expansion. This threat, the Court said, went beyond a run-of-the-mill incentive and amounted to a “gun to the head” of the states.

The same might well be true for the petitioners’ interpretation of the ACA. (Indeed, the petitioners have repeatedly argued that Congress tried to “coerce” the states to create exchanges, analogizing the subsidies to the Medicaid expansion.) Like Medicaid funding, the value of the subsidies is a massive fiscal inducement, reaching up to $2 billion per state. The condition attached to the subsidies is meant to encourage states to establish an entirely different program — a health exchange. The Court invalidated a similar arrangement in NFIB, where Congress leveraged funds for states’ preexisting Medicaid programs to encourage states to adopt a “new” program — expanded Medicaid. Therefore, petitioners’ interpretation that the subsidies are an incentive for states to create exchanges might ultimately make their reading of the ACA unconstitutional.

More significantly, petitioners’ interpretation sets in motion radically different federal regulatory schemes for different states, targeting states that decline to create an exchange with a perverse subset of federal policies that would wreak havoc on their insurance markets. All states would be subject to the ACA’s community-rating requirements and its prohibition on denying coverage for a preexisting condition. But the employer and individual mandates would be virtually inoperative in states where subsidies are not available. Thus, under the petitioners’ interpretation, states that decline to create exchanges lose subsidies, which means that the mandates will not be enforced in those states.

This regulatory arrangement would devastate state insurance markets. Community rating and prohibited medical underwriting without an individual mandate is the precise recipe for rampant instability and adverse selection on insurance markets, as states like New York, New Jersey, and Massachusetts can attest. Without an individual mandate, individuals face a strong incentive to wait until becoming sick to purchase insurance. This means that insurance pools will become sicker and costlier, causing more healthy people to drop insurance, making pools still sicker and costlier again. Under this regulatory regime, insurance premiums will skyrocket and insurers will ultimately exit the market, making it exceedingly difficult for individuals to get coverage.

Under petitioners’ interpretation of the law, the ACA punishes states that decline to create exchanges with this destructive policy package. Simultaneously, it rewards states that do create exchanges with a fully comprehensive and stabilizing regulatory structure.

This disparate state treatment is constitutionally problematic under the fundamental principle of equal state sovereignty that the Supreme Court relied on in Shelby County v. Holder. In that case, the Court invalidated the Voting Rights Act’s coverage formula that subjected some states to federal preclearance for their voting laws, but not others. This “disparate geographic treatment” is disfavored, for the constitutional presumption is that the states be treated as equals. In the absence of an exceptional circumstance, such an arrangement is likely unconstitutional.

Petitioners’ interpretation inherently creates disparate geographic treatment based on whether a state creates an exchange. And there’s little exceptional circumstance to justify this treatment. The Voting Rights Act was sustained from the 1960s until 2013 by the exceptional condition of historic racial discrimination in voting. There’s no comparable condition that would justify subjecting state insurance markets to such categorically different treatment.

Moreover, the only practical relief from this harsh regulatory treatment available to states declining to create exchanges is to apply for a federal waiver — a procedure highly reminiscent of the preclearance regime under the Voting Rights Act struck down in Shelby County.

This disparate regulatory treatment also likely points a gun to the head of the states under NFIB. In essence, petitioners think that Congress threatened the states with grave economic destruction in their insurance industries if they failed to comply with federal demands to create a health exchange. This seems highly coercive, going well beyond a normal incentive where states retain actual autonomy to make a choice.

Each of these highly problematic scenarios is a direct consequence of the petitioners’ reading of the ACA in King. Never before has Congress threatened to impose a different and destructive set of substantive federal policies in states that don’t cooperate with federal demands.

Fortunately, the Court can avoid wrestling with the problems raised by this unprecedented brand of punitive federalism. It can do so by simply adopting the government’s reading of the law. Because the government reasonably interprets the ACA to make subsidies available on both federal and state exchanges, the subsidies are not wielded as an incentive of any kind. This structure creates none of the constitutional problems that arise from the petitioners’ interpretation, for it treats all states equally.

Therefore, the brief argues, the Court should disfavor the petitioners’ argument because it may render large pieces of the ACA’s operation unconstitutional. The Court should instead adopt the government’s plausible argument that the IRS may make subsidies available on all exchanges under the ACA, protecting insurance subsidies for millions of Americans across the country.

I’ve written about some of these constitutional flaws in the petitioners’ argument on several occasions (among others). It will be interesting to see whether this thread of argument gains any traction before the Court. If the Court rules for the petitioners in King without seeing these constitutional icebergs coming, it will undoubtedly confront them someday soon. And given the scant evidence that Congress intended to use the subsidies as an incentive — let alone that it intended to torch the insurance markets in non-compliant states — the Court should wonder whether it really must let the petitioners steer us toward these icebergs.

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A right to paid leave?

Back in May, I spent a post exploring the question of why liberals claimed a right to healthcare in a way that they haven’t claimed for other similar basic human needs. Extrapolating from the push to make healthcare a legislated right, I identified three criteria for when momentum for new social rights builds: (A) the right addresses an essential human need; (B) the right implicates interests that cut across all income levels; and (C) the right causes minimal economic disruption.

Because healthcare satisfied these criteria, it was the “easiest” social right to recognize first. Healthcare wasn’t special, I wrote: “liberals do support positive rights to other similar needs. FDR’s New Deal vision remains the unfinished business of American liberals, intending to tick off his proposed social rights one political mobilization at a time. Under this piecemeal approach, health care now serves as a precedent, with food, shelter, and others to follow in the future.”

For those watching closely, the White House appears to be laying the groundwork for this precise strategy to push for paid family and sick leave for more American workers. In the run-up to health reform, President Obama and other liberals repeatedly asserted that health care is a right and not a privilege. That rhetoric helped build momentum for legislative reform. It argued that reform was a moral imperative, and that we simply had to bear the costs of reform to provide a basic human entitlement.

Building on the success of health reform, the White House is foreshadowing the next liberal movement in social policy reform. Earlier this month, White House advisor Valerie Jarrett published a LinkedIn post arguing that “Paid Leave Is a Worker’s Right, Not a Privilege.” Jarrett explained the emotional ravishment that workers faced when forced to choose between missing work and staying home with a sick child or a newborn. She also pointed out the economic gains for businesses offering paid leave by attracting and retaining superior talent.

How does paid leave stack up under my three-part test? First, it certainly addresses a basic human need. Reproduction, nurturing youth, and resting while ill all fit squarely within the lower tiers of Maslow’s hierarchy of needs. On the threshold does-this-feel-like-a-basic-right smell test, paid leave seems to pass muster.

Second, paid leave is undoubtedly an issue that brings the middle-class into the political coalition for broader access. Vast swaths of average American families lack paid sick leave or paid family leave. Like with pre-reform health insurance, these ostensible rights are currently provided (or not) at the whim of our employers’ HR decisions. When the middle-class is invested in social policy proposal, reform becomes significantly more likely.

Where paid leave might stumble is on the economic disruption question. Rights involve redistribution, as we must transfer resources to provide the right to those who lacked it under the status quo. Under one conception of guaranteed paid leave, the costs of extending this right are borne entirely by employers, who would need to fund employee time-off and cope with staffing uncertainty.

Jarrett attempts to preemptively rebut these concerns by pointing out the benefits of paid leave for employers. But there’s another version of paid leave that avoids the political hurdles of regulatory mandates on employers altogether. We could fund paid leave as a public social insurance program, circumventing an employer-provided regime by compensating sick workers and new parents directly. Doing so would absolve firms of the administrative burden of running these complex insurance schemes.

Moreover, there’s little reason to think that guaranteed paid leave would burden employers any more than guaranteed health insurance has. So under any formulation of paid leave, the economic disruption might be more minimal than first thought — minimal enough to make passage realistic.

Jarrett’s claim to a right to paid leave thus fits sensibly within the framework for new social rights. Liberals are following the model of healthcare reform, seizing the moral high ground of asserting “X is a right, not a privilege.” So while guaranteed paid leave from work might not be a right we find in our Constitution or — for now — any statute, it rings true as a deeper, moral right fundamental to the human experience.

Fixing American childcare

Childcare policy is finally getting its moment in the sun, courtesy of a new push in President Obama’s State of the Union address. “In today’s economy, when having both parents in the workforce is an economic necessity for many families, we need affordable, high-quality childcare more than ever,” Obama declared.

Childcare in the United States has long been a scattershot mess. It has been a distressingly unregulated and uneven non-system, leaving the children of working parents dependent on their family’s purchasing power to pay for decent care. It’s an under-attended national scandal, raising familiar problems of quality, affordability, and access.

Recently, Congress took several important steps to improve American childcare. While reauthorizing the Child Care and Development Block Grant program, it attached conditions a series of conditions to improve the quality of care, such as by requiring background checks and training. It also increased funding for the CCDBG, making it more affordable for more families. And it encouraged states to create Yelp-like websites that would make it easy for parents to vet others’ experiences with potential daycare facilities.

The tripartite problems of quality, affordability, and access in childcare echo those that we’ve confronted in American healthcare. But childcare has little of the entrenched institutional attachment to a particular system that’s analogous to private, employer-provided health insurance. This makes childcare a particularly interesting policy area, for it might be more amenable to fundamental change than healthcare proved to be.

One solution would be to provide free or subsidized public options for childcare at schools or other public facilities. This would be a simple and elegant solution for the core problem in American childcare: the lack of a public option. The public education system’s primary purpose is, of course, educating children. But for working parents, it doubles as a valuable place for children to go during work hours. We provide no such public option for parents with young children. If we entrust the public sector to look after our four- and five-year-olds, there’s little reason to think that they can’t do the same for three-year-olds.

This might sound radical (or even French!), but we had universal childcare in the United States once. As Obama referenced in his speech, the Lanham Act established government-provided daycare so mothers could go to work during World War II.

This was a temporary wartime program, but we very nearly had this same type of system enacted permanently in the 1970s. Congress passed the Comprehensive Child Development Act, which would have created a “national network of federally funded child care centers, with tuition subsidized depending on a family’s income,” as Emily Badger explains. But for President Nixon’s veto, we may have had universal daycare for the last forty years.

The CCDBG reauthorization has taken a different tack, one reminiscent of the structure of healthcare reform established in the Affordable Care Act. It moves us toward a system of state marketplaces for parents to explore childcare options. It tightens quality controls by setting requirements for licensing and requiring due diligence in hiring by care facilities. And it provides subsidies for care among some low-income families purchasing it.

Even within this nascent framework, there’s substantial room to improve our support for working families. The CCDBG’s current funding is only enough to serve one out of every six eligible families. Yet childcare has become prohibitively expensive for all families. The average cost of care exceeded the average homeowner’s mortgage costs in 22 states in 2011. It even exceeded the costs of instate college tuition and fees in 35 states.

Families need far more help than they are getting. Both President Obama and the House Democrats have proposed making care more affordable by boosting our other childcare subsidy, the Child and Dependent Care Tax Credit. Obama would triple it, offering families as much as $3,000 annually for each child under age 5. The House Democrats propose doubling the CDCTC, subsidizing up to 25 percent of childcare costs up to $8,000 per child (or $16,000 for two or more children).

Just as we encountered with health reform, fixing childcare in the United States will undoubtedly raise fraught political tensions. Most notably, subsidizing families who place their children in care facilities raises the question of whether we should likewise subsidize parents who stay home with their children. Conservatives at the National Review have breathlessly portrayed Obama’s CDCTC proposal as an assault on traditional motherhood. “Most mothers, especially of small children, prefer to work part-time or drop out of the labor force for a time,” the editors write. “Commercial child care is the least favored option for most parents. The president’s plan encourages families to do what they do not wish to do and penalizes them for refusing.”

In reality, the CDCTC is no more a tax penalty on stay-at-home parents than the Home Mortgage Interest Deduction is a tax penalty on renters. By helping offset the costs of childcare, the government provides relief to millions of families for whom “commercial care” is an economic necessity. In fact, researchers have seen a slight rise in the number of stay-at-home mothers in response to our current state of affairs, where childcare costs have become so daunting as to make workforce participation an economic wash for some mothers.

Still, there is a strong case for compensating parents doing the serious and socially beneficial work of full-time childrearing. Though doing so might come at an economic cost by removing some parents from the labor force, this is a cost we ought to be willing to bear. It might make sense to simply package the CDCTC and the Child Tax Credit into one large child subsidy. (Indeed, the National Review proposes just this sort of alternative.)  We might give a larger subsidy to children under the age of 5 to compensate parents for providing care before their children reach school age.  And ideally, we might provide this subsidy as a periodic child allowance throughout the year, rather than just during tax season.

Second, how we fix childcare might influence how we design other policies, like family leave.  For instance, how early are we comfortable with putting children in the care of others?  Research seems to indicate that children benefit from spending the first year with their parents. This suggests a need for longer guaranteed parental leave, perhaps six months per parent instead of the three months currently provided by the Family Medical Leave Act.

And third, childcare might be a policy area where it makes sense to impose some kind of employer mandate or otherwise encourage firms to provide for on-site or nearby childcare. Yes, this would impose costs on business, but we could provide tax nudges to ease the burden. And these costs might be worth the benefits — psychic, convenience, and economic — that parents would enjoy from having their young children close by during the workday.

These questions are ones worth grappling with. For too long, our childcare system in the United States has hardly been a system at all. We’re just now beginning to tackle the project of making childcare better and more affordable to the average family — and there’s still much to be done.

The Advantage of a Middle-Out Economy

In advance of the State of the Union address on Tuesday, President Obama has unveiled a number of aggressive policy proposals to combat the wage stagnation that is squeezing the middle-class.

This includes a series of proposed tax cuts for the middle-class that would be funded by new tax revenue from the wealthy. Obama would eliminate a pair of tax preferences that have long subsidized the wealthy through the tax code, closing a loophole that has shielded trust funds from taxation and raising the top marginal tax rate on capital gains to 28 percent (up from 23.8 percent).

This proposal has obvious political appeal for Obama and his fellow Democrats: it’s a populist initiative that forces the GOP to choose between absolutist protection of capital gains and lowering taxes for average Americans.

But it also reflects a deeper debate between the two parties over the core of our macroeconomic policy. Namely, who spurs economic growth in the United States: the wealthy, or the middle-class?

The conservative prescription for accelerating growth has long been to create a business-friendly environment by slashing taxes and relaxing regulations on high earners, who will then invest their savings, expand their businesses, and grow the economy. That’s why conservatives like Sen. Orrin Hatch (R-Utah) were quick to denounce the revenue side of Obama’s tax plan. “Slapping American small businesses, savers and investors with more tax hikes only negates the benefits of the tax policies that have been successful in helping to expand the economy, promote savings, and create jobs,” Hatch claimed.

In response the to top-down growth favored by conservatives, liberals have begun championing “middle-out” economic growth. This budding liberal alternative would have us ease the strain on middle-class budgets on both ends of the balance sheet. It would boost their assets by cutting their taxes and increasing their take-home pay. And it would chip in for their liabilities by making modern-day necessities like health insurance, education, and childcare more affordable.

So which model is more effective for bringing about growth? This largely depends on a pair of economic effects — each of which indicates that liberals have the better path to robust shared prosperity.

There are two different responses that individuals might have to a change in their tax rates. If my tax rates go down, the amount of time I put in working becomes more valuable, which ought to make me work harder and work more, generating more economic activity. Economists call this the substitution effect, because I’d substitute more work hours in place of leisure time.

Alternatively, if my tax rates decline, I might instead realize that I can maintain the same income while working fewer hours. With an unexpected windfall from a new tax cut, I could keep my take-home income constant while working less than I had been. Economists call this the income effect, because I elect to use my new income from the tax cut to “consume” more leisure and thus work less.

So the debate over targeted tax cuts depends on which effect wins out: whether tax cuts make us work more or work less. But there’s reason to think that these effects vary when we look up and down the income scale.

High-income individuals may very well respond to greater disposable income by consuming more leisure. Because they already enjoy economic security, a newfound lower tax burden might incentivize these individuals to work less while taking home the same amount of money. If so, tax cuts for the wealthy are an economic windfall, not a stimulant.

Further down the income scale, middle- and working-class Americans might make the opposite choice and work more hours in the wake of a tax cut. With less of a financial cushion to rely on, making work more valuable ought to encourage more working hours among these individuals. When work becomes more lucrative, leisure time correspondingly becomes more expensive and harder to justify. This generates higher incomes and more economic growth.

So we might expect to get more economic growth out of cutting taxes — and thereby expanding disposable income — for middle-class and low-income Americans than we would by making things easier on the wealthy. This makes intuitive sense: The poor and middle-class simply need new income more than high-earners do for basic survival and security. They therefore respond to policy changes by maximizing their incomes rather than their leisure.

If the wealthy respond to a tax cut by pocketing more leisure time, we’d expect the inverse to be true, too. That is, the wealthy might consume less leisure — and work more — when their taxes go up. This expectation is backed up by behavioral studies demonstrating that individuals tend to react more strongly to prospective asset losses than they do to opportunities for asset gains — a phenomenon known as the “endowment effect.” In the face of a tax hike, then, the wealthy might work more in order to sustain the same after-tax income level.

To promote growth, then, we ought to raise taxes on the wealthy and cut them on the middle-class — precisely what Obama proposes to do. We’d expect this to generate more economic activity than relying on tax cuts for the wealthy. Indeed, this is borne out in the data. Lower income groups have a highermarginal propensity to consume” than the well-off do. That means that they spend a higher percentage of each additional dollar received than the wealthy would, providing greater stimulus for economic growth.

For much of the twentieth century, the United States grew its economy on the back of an ascendant and secure middle-class. It’s not coincidental that rising income inequality corresponded with a shift toward top-down economic policies implemented by conservatives in the 1980s. For the better part of three decades, average Americans have been waiting for a trickle-down that never happened.

As an alternative to the doldrums of supply-side inequality, “middle-out economics” isn’t just some populist platitude. It’s a serious and persuasive prescription for promoting economic growth. It returns the United States to its roots as a society of egalitarian growth and shared prosperity. And best of all, it’s very likely a more effective and pragmatic plan for the economy than the the top-down alternative offered by conservatives.