Why an incentive built into Obamacare is backfiring.

Ramesh Ponnuru explains:

Obama’s plan makes tax credits available to people who get health insurance from exchanges set up by state governments. If states don’t establish those exchanges, the federal government will do so for them. The federal exchanges, however, don’t come with tax credits: The law authorizes credits only for people who get insurance from state-established exchanges.

The idea seems to have been to get the states to set up the exchanges, but many — opposed to health care reform — have declined, despite the incentive. So the federal government will have to provide the exchanges, but without the tax credits, people won't be able to afford to buy the insurance.

States have another incentive to refrain from setting up exchanges under the health-care law: It protects companies and individuals in the state from tax increases. The law introduces penalties of as much as $3,000 per employee for firms that don’t provide insurance -- but only if an employee is getting coverage with the help of a tax credit. No state exchanges means no tax credits and thus no employer penalties. The law also notoriously penalizes many people for not buying insurance. In some cases, being eligible for a tax credit and still not buying insurance subjects you to the penalty. So, again, no state exchange means no tax credit and thus fewer people hit by the penalty.

Ponnuru's analysis meets an obstacle: "In May, the Internal Revenue Service decided it would issue tax credits to people who get insurance from exchanges established by the federal government." But his response to that is that these companies and individuals who are set to avoid the penalty will now get stuck with it, so they will have legal claims to challenge the IRS policy. The statute clearly says no tax credits, and there's an expensive consequence for them if the IRS deems the credits into existence.