On Wednesday March 4th, 2015, the U.S. Supreme Court heard oral arguments in King vs. Burwell, a case challenging the validity of the tax subsidies in the Affordable Care Act in the 37 states that did not set up their own health care exchanges. Because the subsidies affect an estimated 8 million taxpayers in these states, an unfavorable outcome for the government could be a near fatal blow for the entire health care law. 
The argument before the court hinges on the interpretation of four words in the law; “established by the states.” The plaintiffs contend that these words should be taken literally to mean that only exchanges established by the states could qualify for tax subsidies. The government argues that it was simply a “drafting error” and that clearly Congress intended to include both state and federally established exchanges. During the implementation of the law, the IRS agreed with the government and allowed taxpayers in all 50 states to apply for health care subsidies.
How the Justices Reacted: The Supreme Court is currently made up of four justices appointed by Democrats and five appointed Republicans. However, they do not always vote in lockstep in every case. For example, the first challenge to the ACA that reached the Supreme Court in 2012 was upheld with Chief Justice John Roberts voting with the four liberal members of the court.
In this case, it is expected that the four liberal justices will side with the government and at least three of the conservatives will likely vote to strike down the subsidies. The two swing votes are believed to be Justice Anthony Kennedy and Chief Justice Roberts. If just one of the two sides with the government, the subsidies would most likely be upheld.
Justice Roberts remained mostly silent throughout the proceedings while Justice Kennedy made some remarks that indicated he was skeptical of the plaintiff’s case.
“It seems to be that…there is a serious constitutional problem if we adopt your argument,” Kennedy said. “…that if petitioners’ argument is correct, this is just not a rational choice for the states to make, and that they are being coerced.”
Kennedy seemed to be saying that the whole idea of withholding subsidies from states that failed to set up their own exchanges amounted to coercion and may be unconstitutional.
Justice Roberts asked only one substantive question, and it was directed at the government, “If you’re right ¬¬… that would indicate that a subsequent administration could change that interpretation?”
In other words, if the argument of the defense is correct that an arm of the administration such as the IRS could interpret this portion of the law, then a new administration with a different IRS commissioner could later interpret the law differently, putting the ability of millions of taxpayers to receive health care subsidies in the hands of a bureaucratic agency rather than Congress.
The questions of the justices may give some indication of which way they might be leaning, but it is by no means an accurate predictor of the outcome of the case.
What happens if the subsidies are struck down? If the Supreme Court does end up siding with the plaintiffs and striking down the subsidies, it is uncertain what will happen next. It could be that the court stays the ruling until the next tax year to give Congress and the President time to come up with a fix. Another possibility is that the Administration simply turns the federal exchanges in 37 states into 37 “state” exchanges, technically established and owned by the states but run by the federal government. The Supreme Court is expected to issue their ruling by the end of June. For updates on this case and how it may affect your tax situation, speak with your local accounting firm.