New limits on health care-related taxes and closure of a tax loophole projected to save taxpayers $200 billion over 10 years
The Centers for Medicare & Medicaid Services (CMS) is issuing preliminary guidance for states regarding the implementation of new federal requirements on health care-related (provider) taxes in Medicaid. Providing this guidance now allows states time to plan their efforts to meet the requirements laid out in the Working Families Tax Cuts legislation (Public Law 119-21) while CMS develops additional policies, guidance, and implementing regulations. The letter sent today provides details regarding limits on new or increased healthcare-related taxes. It also includes information about transition periods related to the closure of a financing loophole and the next steps for compliance.
In line with the changes made under the WFTC legislation, CMS will generally prohibit new or increased health care-related taxes and end financing practices that previously allowed certain states to inappropriately draw down federal matching funds. These provisions are projected to save taxpayers more than $200 billion over the next 10 years, reinforcing the fiscal integrity and long-term sustainability of the Medicaid program.
"CMS is restoring the federal-state partnership by ensuring that Medicaid dollars are spent responsibly, transparently, and in service of the beneficiaries who depend on this program for their health and dignity," said CMS Administrator Dr. Mehmet Oz. "While closing a loophole that some states were taking advantage of to shift billions in costs onto federal taxpayers, we have crafted policy that gives states time to transition as the new tax limits are implemented."
While health care-related taxes have played a role in Medicaid financing and are widely used in state Medicaid programs, they have had the effect of shifting longstanding state responsibility to finance the Medicaid program to federal taxpayers. MACPAC estimated that non-general revenue sources have contributed to a shift of 5.4%,[1] and the reforms in the legislation start to restore the balanced commitment to financing the Medicaid program. CMS analysis shows that improper use of these financing mechanisms inappropriately generates billions of dollars annually, weakening fiscal accountability and shifting costs away from states and their shared responsibility required under the law. CMS understands this shift will require a transition and is committed to providing guidance to states on how their existing structures will be addressed under the changes made by the WFTC legislation. By implementing the new safeguards, starting with state fiscal years beginning in 2026, CMS aims to ensure Medicaid resources are directed appropriately to strengthen program integrity and protect patient care.
The letter provides key program elements and preliminary guidance on sections 71115 and 71117:
- Indirect Hold Harmless Threshold: Effective October 1, 2026, there are new tax revenue thresholds based on taxes that were enacted and imposed as of July 4, 2025. The letter explains the terms "enacted" and "imposed" and the potential impact on state provider tax proposals. CMS intends to issue additional guidance and engage in rulemaking necessary to implement this section of the legislation.
- Provider Tax Loophole Transition Periods: The provider tax (including taxes on managed care organizations) loophole closed by section 71117 was an unintended consequence of regulations implementing prior law. States that took advantage of that loophole, inappropriately shifting the financing burden to the federal government—such as in California and New York—must unwind those practices. This letter details the transition periods granted to states with tax waivers approved before the date of enactment (July 4, 2025 ), under the authority provided in Public Law 119-21 section 71117(c), to provide states some certainty while CMS completes associated rulemaking:
- Transition Period for Taxes on Services of Managed Care Organizations: States will have until the end of their state fiscal year ending in 2026 to fully comply with these new requirements.
- Transition Period for Taxes on All Other Permissible Tax Classes: States will have until the end of their state fiscal year ending in 2028 to fully comply with these new requirements.
With today's guidance, CMS is taking decisive action to ensure federal resources are used exactly as Congress intended— supporting care for Medicaid beneficiaries through a true federal-state partnership that protects taxpayer dollars from waste and abuse.
For more information, please visit: https://www.medicaid.gov/medicaid/downloads/providertax_dcl_11142025.pdf
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