Supreme Court Justice Anthony Kennedy (AP Photo/Matt Slocum, 2013file photo)

As I noted on Wednesday, Justice Anthony Kennedy expressed little sympathy for the federal government’s textual arguments in King v. Burwell, but he did seem concerned about the federalism implications of reading the ACA statute as urged by the plaintiffs. Although there are already several VC posts discussing the federalism issues in King, I thought it was worth exploring the nature of Justice Kennedy’s apparent constitutional concern, and its potential implications, in a bit more depth.

To begin, let’s look at some of what Justice Kennedy had to say at oral argument:

JUSTICE KENNEDY: Let me say that from the standpoint of the dynamics of Federalism, it does seem to me that there is something very powerful to the point that if your argument is accepted, the States are being told either create your own Exchange, or we’ll send your insurance market into a death spiral. We’ll have people pay mandated taxes which will not get any credit on on the subsidies. The cost of insurance will be skyhigh, but this is not coercion. It seems to me that under your argument, perhaps you will prevail in the plain words of the statute, there’s a serious constitutional problem if we adopt your argument. . . .

I think the Court and the counsel for both sides should confront the proposition that your argument raises a serious constitutional question. Now, I’m not sure that the government would agree with that, but it it is in the background of how we interpret this how we interpret this statute. . . .

In in South [Dakota] v. Dole where where the matter of funding for the highway, suppose Congress said, and if you don’t build the highways, you have to go 35 miles an hour all over the State. We wouldn’t allow that.

What seemed to bother Justice Kennedy is that the PPACA does not simply condition the receipt of money on state cooperation (though it certainly does that), but also imposes a form of conditional regulation. Specifically, under the plaintiffs’ interpretation of the statute, the costs of the various insurance market regulations imposed under the PPACA (community rating, etc.) are only felt in full in those states that fail to cooperate by creating their own exchange, whereas cooperating states have the costs of these regulations are offset by the tax credits and cost-sharing subsidies.

This precise concern about conditional regulatory burdens – and the speed limit hypo – appear to be drawn from an amicus brief that suggested the Court should be less permissive of conditional regulation than it is of conditional spending. According to this brief, it is constitutionally problematic for a federal statute to threaten to impose differing regulatory burdens on different parts of the country based on whether states cooperate, and that conditional regulatory burdens are themselves constitutionally problematic.

The problem with these arguments is that they’ve already been addressed by the Court in New York v. United States. In the very case that established the current anti-commandeering doctrine, the Court said there was no problem with Congress using its regulatory authority to encourage state cooperation.

Specifically, in New York, the Court held that Congress could offer states the following deal: Either implement federal policy (so as to ensure local disposal capacity for low-level radioactive waste), or producers of such waste (which include hospitals and medical research centers) will face more costly disposal options and eventually be deprived of any ability to dispose of their wastes. Given the volumes of such wastes produced in many industries, health care in particular, this was a particularly draconian condition, but one the Court said was not constitutionally problematic at all because the consequences of state inaction would fall upon private actors, and not the state itself. As Justice Sandra Day O’Connor explained in her opinion for the Court:

The affected States are not compelled by Congress to regulate, because any burden caused by a State’s refusal to regulate will fall on those who generate waste and find no outlet for its disposal, rather than on the State as a sovereign. A State whose citizens do not wish it to attain the Act’s milestones may devote its attention and its resources to issues its citizens deem more worthy; the choice remains at all times with the residents of the State, not with Congress. The State need not expend any funds, or participate in anyfederal program, if local residents do not view such expenditures or participation as worthwhile.

The statute at issue in New York is hardly an isolated example. Other federal statutes impose differential, and more draconian, regulatory burdens on private firms within non-cooperating states. The most prominent example of this is the Clean Air Act. As was noted at oral argument, if a state fails to adopt a “state implementation plan” or “SIP” that meets the Clean Air Act’s requirements, there is a federal fallback: a “federal implementation plan” or “FIP.” But that’s not all. The CAA also provides that non-cooperating states are subject to a series of sanctions, including the loss of federal highway funds and (more relevant here) more stringent regulatory burdens in the form of higher offset requirements for private industry. That is, firms in non-cooperative states face significantly higher regulatory burdens than those in cooperative states.

It is no secret that the CAA operates this way. Indeed, at this precise moment the Environmental Protection Agency is developing regulations to govern the emission of greenhouse gases from power plants under Section 111 of the Act that will operate in this same way. According to the EPA, states will have a choice: Either regulate on the EPA’s behalf, or subject power plants within the state to be subject to more costly, more burdensome, and less flexible federal regulation. Again, substantial regulatory costs are being made conditional on state cooperation.

What’s unique about the PPACA is not that, as written, it conditions the imposition of some regulatory costs on state cooperation but that so many states failed to accept the government’s deal (though some states might well reconsider if the plaintiffs prevail). As a thought experiment, it’s worth considering what would happen to the CAA were an equivalent number of states to refuse to cooperate. About this there is no question: If thirty states refused to adopt SIPs, the CAA’s regulatory program would grind to a halt, as the EPA lacks the ability to assume that much responsibility for CAA implementation. And this would have exceedingly severe consequences for private firms in resistant states, as the CAA requires many firms to obtain operating permits – permits the EPA would lack the resources and staff to issue. So it’s simply false to say that Congress would never enact a statute that could be hamstrung by state resistance. It unquestionably has. What’s never happened before is this many states refusing to hum the government’s tune.

One other factor worth noting in considering whether the PPACA, as interpreted by the plaintiffs, is constitutionally problematic for conditioning subsidies on state cooperation is that this is only part of the choice faced by states. It is true that people in states that refuse to establish their own exchanges are not eligible for tax credits, but they are also not subject to the real costs imposed by the employer mandate, and fewer are burdened by the individual mandate penalty. Thus, while states that choose to forego subsidies are exposing their citizens to an increase in one regulatory burden, they are relieving their citizens of others, and at least some states are perfectly happy to make that choice.

As a final note, let me acknowledge that I have some ambivalence about the federalism arguments at play in King. I am inclined to think that he federal government has too much leverage over the states as a general matter, and would welcome greater judicial scrutiny of such inducements. But such increased scrutiny would, in my judgment, mark a significant shift in the Court’s federalism jurisprudence. That is, to hold that conditioning tax credits on state cooperation is unconstitutionally coercive would be to undermine some of the Court’s prior holdings and raise questions about other federal statutes and other provisions of the ACA. So if the Court were to go in this direction, it would have repercussions far beyond the meaning of “established by the State” in Section 1401 of the PPACA.