CMS Medicaid Tax Proposal Puts States on Notice Before Oct. 1

The Centers for Medicare & Medicaid Services is proposing tighter limits on how states use health-care-related taxes to finance Medicaid. Public comments are due September 21, 2026, while the first statutory changes are scheduled to apply October 1.

The proposal, CMS-2452-P, was published July 23. It would implement changes enacted in Public Law 119-21, which CMS refers to as the Working Families Tax Cut legislation. The rule is not final, and it does not itself create an immediate nationwide reduction in Medicaid benefits, enrollment or provider payments.

What CMS proposed

States commonly tax hospitals, managed-care organizations, ambulance providers and other health-care entities to raise money for the non-federal share of Medicaid. That state or local money can then help draw federal matching funds.

Under the longstanding federal rules, a provider tax generally stayed within an indirect “hold harmless” threshold if it did not exceed 6 percent of net patient revenue for the affected provider class. CMS proposes replacing that general threshold with a limit based largely on the percentage of revenue attributable to a tax that was enacted and imposed by July 4, 2025.

If a state or locality had not enacted and imposed a tax for a provider class by that date, the applicable threshold would generally be zero. The 2025 law also effectively prevents states from using new taxes or increases to existing taxes to generate additional federally matchable Medicaid financing under this framework.

CMS separately proposes ending the secondary 75/75 test. Under that test, a tax above the 6 percent threshold could remain permissible if at least 75 percent of taxpayers did not receive at least 75 percent of their tax costs back through enhanced Medicaid or other state payments. CMS says the new July 4, 2025 thresholds should serve as the maximum permissible levels.

The proposal would also establish health insurers as a permissible provider class for Medicaid health-care-related tax purposes and add reporting requirements so CMS can review state tax collections, exemptions and the use of tax revenue.

What changes first

The statutory changes generally begin October 1, 2026. That date reflects the start of the new federal financing framework; it is not necessarily the day every state changes its tax structure or Medicaid program.

The July 4, 2025 date is the key baseline. The applicable threshold would generally be tied to taxes that had completed the required enactment process and were imposed by that date. CMS’s proposed interpretation would treat a tax as imposed if it was in effect on July 4, 2025, with any required waiver approved effective on or before that date.

For states that expanded Medicaid under the Affordable Care Act, additional limits for most permissible provider classes would begin October 1, 2027. The applicable threshold would phase down from 5.5 percent in federal fiscal year 2028 to 3.5 percent in federal fiscal year 2032.

The phase-down would not apply to taxes on nursing facilities or intermediate-care facilities for individuals with intellectual disabilities. Those provider classes would still be subject to the threshold calculated from the July 4, 2025 baseline.

How many states could be affected

KFF estimates that 31 Medicaid expansion states have at least one non-exempt provider tax above 3.5 percent. Hospital taxes are the most common exposure: KFF found that 28 of those 31 states had hospital taxes above that level as of July 1, 2025. Managed-care organization and ambulance taxes could also be affected.

KFF’s estimate is based on its survey of state Medicaid officials and the proposed federal rules. It is not a CMS determination that all 31 states will make the same changes or experience the same financial result. Additional states could be affected if CMS finalizes the proposed health-insurer provider class.

Why the financing question matters

CMS estimates that the proposed rule would reduce federal Medicaid expenditures by $246 billion from 2026 through 2035. The Federal Register impact analysis separately estimates that state provider-tax revenue would decline by about $198.7 billion over the same period.

Those are agency projections, not completed savings or confirmed state losses. CMS’s analysis assumes the lower provider-tax revenue would result in reduced Medicaid spending, particularly through provider-payment changes and benefits. CMS estimates no enrollment effect from this proposal under its assumptions, but other analysts have used different assumptions about how states would replace lost revenue and whether coverage would be affected.

States could use general-fund dollars or other non-federal financing to replace some lost provider-tax revenue. They could also revise provider payments, covered services or other Medicaid policies. The Alliance of Safety-Net Hospitals has warned that these choices could put added pressure on hospitals that treat large numbers of Medicaid patients. Those are potential outcomes, not established nationwide results.

What to watch next

The immediate deadline is September 21, 2026, when public comments close. CMS could revise the proposal before issuing a final rule.

For patients and providers, the most important signals will be the final CMS regulations, state budget actions, changes to provider-tax laws and any adjustments to Medicaid payment rates, benefits or coverage. Until those decisions are made, the proposal is best understood as a federal financing change moving toward implementation—not as an immediate nationwide Medicaid benefit cut.

Sources

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