The military is operating very much within the law. You use "declaration of war" as a legal criterion, but that is not the applicable criterion.
Rather, the Congress themselves have authorized the use of military force explicitly, both in Afghanistan (and against Al Qaeda and associated movements generally) and in Iraq.
But the military is only a single (albeit important) branch of the government, whereas a declaration of war would encompass a vast accumulation of government power to the Executive across a wide range of the branches of government.
There is a reason Congress has not declared war (even assuming one could literally declare war on "terrorism"): It would grant the President powers far in excess of that which Congress wishes.
So in fact you have it completely opposite; Congress refuses to declare war because refusing this declaration constrains the power of the President.