Newsletter subscribe

Arizona, Elections, Politics

Two reasons why business leaders should oppose an ObamaCare Exchange in Arizona

Posted: November 16, 2012 at 7:45 am   /   by

To Arizona business owners:

Supporters of the idea of establishing a state exchange for the implementation of Obamacare (PPACA) in Arizona—many of them found in the ranks of hospitals, large insurance agencies, and other entities who stand to benefit from massive subsidies from the law—are floating some highly misleading arguments. In fact, they have many business owners convinced of something the opposite of which is true. We’ll start with the bottom line and then explain below.

If you support a state exchange over a federal exchange, you are supporting the imposition of specific tax-sanctions on Arizona businesses. (These taxes will NOT occur under a federal exchange, but they will definitely occur under a state exchange.)

If you have been led to believe that a state exchange will give Arizona more control than a federal exchange, you have been misled. The language is clear: the federal government will be in effective control of state exchanges. (Washington would control a federal or a state exchange, but Arizona would have to PAY for the state exchange, possibly as much as $100 million annually.)

The details . . .

State exchanges mean massive taxes

One of these arguments rests on a legally dubious claim: that the IRS has the power to levy tax penalties on employers under either a state- or a federally run exchange. The statutory language of Obamacare does authorize tax credits for individuals, to be paid for in part by tax penalties on businesses, under the state-exchange system. However, there is no such language in the Affordable Care Act if the exchange is federally run. In spite of this, the IRS issued a “rule” giving themselves the power to provide these tax credits and levy these tax penalties whether the exchange is at the state or the federal level. [1]

The foregoing is excerpted from remarks delivered in testimony to the House Committee on Oversight and Reform on August 1st by Michael F. Cannon and Jonathan H. Adler:

The PPACA’s authors included multiple provisions designed to encourage states to establish Exchanges. Section 1311 commands that each state “shall” create an Exchange.2 The Act gives the Secretary of Health and Human Services the authority to make unlimited grants to states to assist them with start-up costs.3 The Act imposes a “maintenance of effort” requirement on each state’s Medicaid program that lifts only when a state establishes a health insurance Exchange.4Section 1321 directs the Secretary to establish and operate Exchanges in states that fail to create one.5

Consistent with these provisions, the Act authorizes the Secretary of the Treasury to issue refundable “premium assistance tax credits” through Exchanges “established by a state under Section 1311.”6 There is no parallel language authorizing tax credits through Exchanges established by the federal government under Section 1321. During congressional consideration, the Act’s lead author, Senate Finance Committee chairman Max Baucus (D-MT), confirmed this asymmetry was intentional: the bill “conditions” tax credits on states establishing an Exchange.7

Both the text of the statute and Congress’ intent are thus crystal clear. The Act authorizes tax credits only in Exchanges “established by a state under Section 1311,” and withholds tax credits in states that do not establish an Exchange. The section of the law that authorizes tax credits uses or refers to that restrictive language no less than six times. The remainder of the statute supports the plain meaning of that restriction, and there is nothing in the statute that conflicts with it.

The bottom line:
The IRS rule arrogates power that it does not have, and that the PPACA statute does not grant. The IRS rule is illegal, and it a virtual certainty that it will be challenged in federal court.

What this means for Arizona:
If Arizona creates a state-run exchange, the IRS will be able to impose a $2,000/worker tax on employers and, in certain cases, a$3,000/worker tax. Businesses will flee Arizona, taking the jobs with them.

If Arizona does not create a state-run exchange, and instead operates under a federally run exchange, the IRS will not have the legal authority to impose these taxes. Businesses won’t be hit with these job-killing taxes.

There will be some taxes involved with federal exchanges, of course—Obamacare is full of taxes. But this particular business-crushing, job-killing sanction tax will ONLY happen under a state exchange. It’s a bad idea for Arizona.


State exchanges will not be controlled by the state

The other argument—a profoundly disingenuous one indeed—is that state exchanges will give states more control than federally run exchanges. This argument is now being deployed to appeal to the federalist leanings of conservatives. In fact, however, nothing could be further from the truth.

The statutory language of the PPACA (Obamacare) is plain: “An Exchange may not establish rules that conflict with or prevent the application of regulations promulgated by the Secretary [of Health and Human Services] under this subtitle.” [2] Obamacare gives the federal government—and specifically the Secretary of Health and Human Services—unprecedented power, and control over the state exchanges is no exception.

  • The Secretary and the General Accounting Office will have continuing oversight of exchanges.
  • The federal government controls the doctors and other providers that are allowed to participate in an exchange-offered plan.
  • PPACA prescribes the minimum essential benefits that must be included in a plan and gives authority to the HHS Secretary to prescribe more.
  • HHS is also required to establish the criteria for the certification of health plans as “qualified . . . only HHS-approved plans may be sold in the exchange.
  • Both PPACA and the proposed regulations prohibit federal funds for state exchanges after January 1, 2015.No federal grants will be awarded after January 1, 2015. States must ensure that the exchanges are self-sustaining by January 1, 2015, and must find other sources of funding, through “assessments and user fees,” “provider taxes,” “state revenues,” or other sources.
  • The state must enforce the individual mandate and penalty. State exchanges are responsible for determining whether an individual is exempt from the individual mandate and for granting certification for those who are exempt. The exchange must also “support and complement rulemaking conducted by the Secretary of the Treasury” with respect to the law.
  • The state must turn over names of individuals who do not comply with the individual mandate. PPACA requires the exchange to give to the U.S. Treasury the names and taxpayer identification numbers of individuals who have changed employers and ceased coverage under a qualified health plan during a plan year. The state must report citizen information to the federal government. Exchanges must record and report to HHS on a monthly basis all individuals who terminate their enrollment in insurance obtained through the exchange.
  • The Act provides that states can establish exchanges, but only as “prescribe[d]” by the HHS Secretary. The Act also allows states to adopt exchange laws and regulations, but only those that “the Secretary determines implements the standards within the State.”

That is not a description of a scenario in which states have control over their own exchanges. (More details and statutory citations: States Must Protect the Health Care Freedom of their Citizens by Saying No to Federal Health Insurance Exchanges.)

The bottom line:
Under the rules established by Obamacare, states will have very little latitude at all in running their own exchanges. They are state exchanges in name only.

What this means for Arizona:
If Arizona establishes a state exchange, it will be subject to the costs of maintaining the exchange (and it will be required to report its own citizens to the federal government), but it will not have any actual authority over the exchange.


A state exchange is the wrong prescription for Arizona. A number of states have already said they will absolutely refuse to create state exchanges, and many more are leaning in that direction. Arizona will be in fine company if it refuses to go along with this scheme for getting Arizona to pay for, but not control the destiny of, health care in the state.


[1] Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA

[2] State Health Insurance Exchanges Will Impose Federal Control


Christopher Cook

Christopher Cook

Managing Editor at Western Free Press
Christopher Cook is a writer, editor, and political commentator. He is the president of Castleraine, Inc., a consulting firm providing a diverse array of services to corporate, public policy, and not-for-profit clients.

Ardently devoted to the cause of human freedom, he has worked at the confluence of politics, activism, and public policy for more than a decade. He co-wrote a ten-part series of video shorts on economics, and has film credits as a researcher on 11 political documentaries, including Citizens United's notorious film on Hillary Clinton that became the subject of a landmark Supreme Court decision. He is the founder of several activist endeavors, including (now a part of Western Free Press) and He is currently the managing editor of and principal contributor to
Christopher Cook

Two reasons why business leaders should oppose an ObamaCare Exchange in Arizona