WASHINGTON, D.C. — The Centers for Medicare & Medicaid Services proposed new limits on state health care-related taxes that the agency estimates would reduce federal Medicaid spending by $246 billion over the decade ending in 2035.
The proposal, published July 23, would implement provisions of the Working Families Tax Cut legislation restricting how states use provider taxes to finance their share of Medicaid spending.
Health care-related taxes, commonly called provider taxes, are levied on hospitals, nursing facilities and other classes of health care providers. Forty-nine states and the District of Columbia have at least one such tax, according to CMS.
States can use the revenue to fund Medicaid payments and draw additional federal matching dollars, but federal law restricts arrangements that effectively return the tax costs to providers.
The proposed rule would establish new thresholds for determining when a tax structure indirectly holds providers harmless. The initial changes would take effect Oct. 1, 2026, generally based on taxes enacted and imposed as of July 4, 2025.
Additional thresholds for most permissible provider classes in states that expanded Medicaid eligibility to the adult population would begin taking effect Oct. 1, 2027.
CMS would also codify statutory restrictions on states establishing new provider taxes or increasing existing ones beyond the limits set under the legislation.
Federal rules generally require provider taxes to apply broadly and uniformly within a permissible class of health care services. They also prohibit direct and indirect arrangements that guarantee providers will recover some or all of their tax costs.
A direct hold-harmless arrangement occurs when a state provides payments, offsets or waivers guaranteeing repayment of a provider’s tax expense.
An indirect arrangement is determined by the tax structure and level of taxation. CMS has historically applied a mathematical test with a threshold generally capped at 6% of net patient revenue attributable to the affected provider class.
The CMS Office of the Actuary projected that implementing the new limits would lower federal expenditures by $246 billion from 2026 through 2035.
The financial effect on individual states would depend on their existing provider-tax structures and whether those arrangements exceed the new thresholds.
Comments on the proposed rule are due Sept. 21, 2026.
The proposed rule is available in the Federal Register at https://www.federalregister.gov/documents/2026/07/23/2026-14897/medicaid-program-amending-the-indirect-hold-harmless-threshold-of-health-care-related-taxes.
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