This is pretty big news (via Michael Cannon.) The way the Affordable Care Act (also known as “ObamaCare”) is written, subsidies for health insurance plans purchased through health insurance exchanges can only go to individuals buying insurance in “state-based” exchanges — that is, exchanges that the states create. If there is no state exchange, the text of the law says there can be no subsidies in that state. Insurance plans sold in exchanges that the federal government creates would not get the subsidies.

For states, that is a huge distinction with major policy implications. Many employers under the ACA can be fined/taxed if they do not provide health insurance to individuals who qualify for the federal government’s subsidies. However, if a state does not build its own exchange, then no employee would qualify for the subsidy, and therefore employers in the state would not be subject to the tax because none of their employees would meet the criteria set out in the law.

Then there is the national implication. If the federal government cannot collect those taxes/fines from employers, then the ACA — already rife with budgetary gimmickry — becomes even less sustainable and more fiscally dangerous. If enough states choose not to create exchanges, the ACA would become basically unworkable. (Credit goes to Cannon for really hammering this point home over the last year. You can find his full study on the matter here.)

Not surprisingly, it was only recently that Washington woke up to this reality. The Internal Revenue Service has now put forward an administrative rule that would expand the subsidies and taxes to federal exchanges, despite what the law says. Of course, there are some barriers to the IRS just making up new taxes. Enter the Oklahoma suit:

Under Defendants’ Interpretation, [this rule] expand[s] the circumstances under which an Applicable Large Employer must make an Assessable Payment . . . with the result that an employer may be required to make an Assessable Payment under circumstances not provided for in any statute and explicitly ruled out by unambiguous language in the Affordable Care Act.

Plaintiff believes . . . that subjecting the State of Oklahoma in its capacity as an employer to the employer mandate would cause the Affordable Care Act to exceed Congress’s legislative authority; to violate the Tenth Amendment; to impermissibly interfere with the residual sovereignty of the State of Oklahoma; and to violate Constitutional norms relating to the relationship between the states, including the State of Oklahoma, and the Federal Government.

Earlier this year, Christie Herrera, formerly of the American Legislative Exchange Council (ALEC), and I wrote an op/ed for the Southeast Missourian on the issue of state exchanges. As we made clear, Missouri has not, and should not, implement a state insurance exchange under Obamacare for a variety of reasons. One of the most important reasons out there is that by declining to create the exchange, the state could avoid a bevy of burdensome taxes on employers. Granted, there is no telling exactly how a court will rule on this and to what extent the law could be saved despite itself, but the Oklahoma challenge begins the process of determining once and for all whether the law means what it says, or means something else completely.