5 Questions and Answers About Medicaid and Provider Taxes

The 2025 reconciliation law imposes significant new restrictions on states’ ability to generate Medicaid provider tax revenue, including prohibiting all states from establishing new provider taxes or from increasing existing taxes as well as reducing existing provider taxes for states that have adopted the Affordable Care Act (ACA) Medicaid expansion. Medicaid is jointly financed by the federal government and the states, with the federal government guaranteeing states federal matching payments with no pre-set limit. In federal fiscal year (FFY) 2024, the federal government paid 65% and states paid 35% of total Medicaid costs. States are permitted to finance the non-federal share of Medicaid spending through multiple sources, including state general funds, health-care related taxes (referred to as “provider taxes” throughout this brief), and local government funds.

Changes to provider tax rules will have significant effects on state budgets and may make it difficult for states to maintain current Medicaid spending without increasing state general fund spending; but could increase transparency around Medicaid financing. The changes come at a time when states are already experiencing overall slower revenue growth, and it is unclear how states will be able to make up the lost revenues. The changes could exacerbate existing state budget challenges and result in lower provider payment rates or reductions in Medicaid benefits or coverage, although the effects will vary by state.

This issue brief uses data from KFF’s 2025-2026 survey of Medicaid directors and from a proposed rule on provider taxes to describe states’ current provider taxes, explore how rules governing provider taxes are changing because of the 2025 reconciliation law and the regulations implementing that law, and summarizes which changes may affect each state.

1.How have states used provider taxes to help finance the state share of Medicaid?   

KFF’s 2025 Medicaid Budget Survey found that the majority of state Medicaid spending came from general fund revenues, but provider taxes contributed 18%. States have considerable flexibility in determining how to finance the state (or non-federal) share of Medicaid payments, within certain limits. Across all states, most of the state share of Medicaid spending comes from state general funds, but there is considerable variation in how much states rely on other funding sources. KFF’s 2025 Medicaid budget survey found that general funds accounted for a median of 70% of the non-federal share in state fiscal year (FY) 2026 enacted budgets, while provider taxes accounted for 18%, and funds from local governments or other sources accounted for 6% (this is relatively similar to 2018 data on non-federal share funding sources reported by the Government Accountability Office (GAO) and 2024 data on general fund spending from the National Association of State Budget Officers (NASBO)). 

All states but Alaska finance part of the state share of Medicaid funding through at least one provider tax and 41 states have three or more provider taxes in place (Figure 1). Medicaid provider taxes are defined as those for which at least 85% of the tax burden falls on health care items or services or entities that provide or pay for health care items or services (see Social Security Act, Section 1903(w)(3)(A)). Provider taxes may be imposed as a percentage of provider revenues or using an alternative formula such as a flat tax on the number of facility beds or inpatient days. States use provider tax revenues to fund Medicaid “base” rates and supplemental payments; to finance eligibility expansions, including the ACA Medicaid expansion; or to more generally support the Medicaid program. Over time, states have increased their reliance on provider taxes, with expansions often driven by economic downturns or a desire to fund eligibility expansions or provider reimbursement increases. Beyond helping finance the state share of Medicaid, permissible tax arrangements may have potential financial benefits for providers who are subject to the tax and serve a high volume of Medicaid patients.

Provider taxes are most common for institutional providers. That includes hospitals (47 states), nursing facilities (45 states), and intermediate care facilities for people with intellectual or developmental disabilities (33 states, Figure 2). Provider tax revenues often finance supplemental payments to institutional providers, which may be a major source of revenues for those providers. Payment policies vary considerably by state, and research has shown that Medicaid base payment rates are below those of Medicare and often below hospitals or nursing facilities’ costs of providing services to Medicaid enrollees, causing some states to rely more heavily on supplemental payments than others to help cover costs. Beyond institutional providers, states have taxes on managed care organizations (MCOs) (22 states), ambulance providers (21 states), and “other” provider types (9 states) such as ambulatory care facilities and home care providers. Provider tax revenues are most likely to be near the 6% safe harbor limit (described in more detail below) for nursing facilities followed by hospitals and intermediate care facilities for people with intellectual or developmental disabilities (Figure 2).

CMS estimates that states will collect nearly $100 billion in provider tax revenues in 2026, mostly from hospital taxes (Figure 3). Historically, the federal government did not provide consistent or comprehensive publicly available data about states’ provider tax policies or revenue collections. In June 2024, the Medicaid and CHIP Payment and Access Commission (MACPAC), called for increased transparency over how states financed the non-federal share of Medicaid payments. However, CMS requested additional data from states about their provider taxes in 2025 and 2026. Using those data and their own projections, CMS estimates that tax revenues in calendar year 2026 will be $98.6 billion, with $61.8 billion coming from taxes on hospitals and $28.1 billion coming from taxes on managed care organizations.

2. What federal rules governed provider taxes before the 2025 reconciliation law?

Since the 1990s, federal rules governing provider taxes have included three core components—requiring taxes to be “broad-based,” “uniform,” and not hold providers “harmless.” Provider taxes were established in the 1980s, but particularly aggressive use of provider taxes following their establishment in the 1980s led to statutory and regulatory limitations beginning in the 1990s. Federal rules prior to passage of the 2025 reconciliation law specified that provider taxes must be:

• Broad-based, which means the tax is imposed on all providers within a specified class of providers (e.g., the tax cannot be imposed only on providers that see primarily Medicaid patients);
• Uniform, which means the tax must apply equally to all providers within the specified class (e.g., the tax rate cannot be higher on Medicaid revenue than non-Medicaid revenue); and
• Not hold taxpayers (providers) “harmless,” which means states are prohibited from directly or indirectly guaranteeing that providers will receive their tax costs back (i.e., be “held harmless”).

To ensure tax programs are “broad-based,” CMS has specified 19 classes of providers (see 42 CFR Section 433.56). States may obtain “uniformity waivers” of the requirements that taxes be broad-based and uniform if the state can prove the net effect of the tax is “generally redistributive,” and the amount of tax is not directly related to Medicaid payments. In assessing whether provider taxes comply with federal laws, regulations specify that the hold harmless requirement does not apply when the tax revenues comprise 6% or less of net patient revenues from treating patients (see 42 CFR Section 433.68), a level sometimes referred to as a “safe harbor” or “hold harmless” limit.

3. What are new federal rules related to provider taxes?

Changes in the 2025 Reconciliation Law

The 2025 reconciliation law, signed by President Trump on July 4, 2025, imposes significant new restrictions on states’ ability to generate Medicaid provider tax revenue. The Congressional Budget Office (CBO) estimated provider tax policy changes from the 2025 reconciliation law would reduce federal Medicaid spending by $226 billion between 2025 and 2034. Those savings reflect the following changes to federal rules:

• An effective prohibition on new provider taxes or increases to existing ones ($89 billion in savings). The law effectively prevents the enactment of any new provider taxes by establishing a hold harmless limit of 0% for any taxes that were not in effect as of July 4, 2025. It also prevents any increases to existing provider taxes, which are capped at their rates as of July 4, 2025.
• Reduced limits on provider taxes in states that adopted the Affordable Care Act (ACA) Medicaid expansion ($102 billion in savings).  Beginning in FFY 2028, the law gradually reduces the hold harmless limit for states that have adopted the ACA expansion by 0.5% annually until the safe harbor limit reaches 3.5% in FFY 2032. The new limits apply to all provider taxes except for those levied on nursing facilities and intermediate care facilities.
• Revisions to the conditions under which states may receive uniformity waivers ($35 billion in savings). Effective July 5, 2025, the law prohibits states from using uniformity waivers if the tax charges higher or lower rates based on the volume of Medicaid revenues or patients.

Changes in the July 2026 CMS Proposed Rule

CMS released a proposed rule in July 2026 to implement the hold harmless provisions in the 2025 reconciliation law, which included some provisions not required under the law. The list below highlights some of the key provisions included in the proposed rule:

• Broader interpretation of taxes “in effect.” Under the proposed rule, CMS would recognize provider taxes as being in effect as of July 4, 2025 or earlier if they had been enacted. This is less restrictive than guidance issued in November 2025, which also required that all applicable uniformity waivers to have been approved by July 4, 2025 and for states to be “actively collecting” revenues as of July 4, 2025.
• Establishing health insurers as a permissible class of providers. Although not required by the 2025 reconciliation law, the rule proposes to add a new “health insurer” provider class to expand CMS oversight of health-care related taxes that goes beyond the existing “MCO” provider class including Health Maintenance Organizations and Preferred Provider Organizations. The proposed rule does not define the new class, but CMS is seeking comments on the potential scope of the new provider class. Such taxes would be subject to all other requirements governing Medicaid provider taxes, including new limits in the 2025 reconciliation law. CMS notes that these taxes are often imposed through state insurance commissions or departments.
• Discontinuation of the 75/75 test. The 2025 reconciliation law did not address the “75/75” test, under which taxes exceeding the hold harmless limit could remain permissible as long as more than 75% of taxpaying providers do not receive more than 75% of the cost of the tax back through enhanced Medicaid or other state payments. Starting in FFY 2027, the proposed rule would discontinue the 75/75 test.
• Enhanced Reporting Requirements and Compliance System. The proposed rule would significantly expand state reporting requirements and introduce retrospective CMS review to determine ongoing state compliance with the new hold harmless limits. States would be required to submit data (interim in 2026 and final in 2028) to CMS to determine applicable hold harmless limits as of July 4, 2025. States would also be required to submit quarterly reports beginning October 1, 2026, supplying tax collection data as well as information on how tax revenues are used by the state and whether public providers are exempt from the tax.

Under the proposed rule, CMS estimates that federal Medicaid spending would decrease by $246 billion over the next ten years (2026- 2035). This is similar to the CBO estimates although the CBO estimate does not include effects for the year 2035, which accounted for $44 billion of CMS’ total federal spending reduction. While the difference in estimates is relatively small, there are a few key differences in the agencies’ assumptions:

• States response. CBO assumed that states would replace 50% of the lost provider tax revenues with other funding sources but CMS assumes they will only replace 30%.
• Coverage loss. CBO estimated that provider tax changes in the 2025 reconciliation law will increase the number of uninsured people by 1.2 million by 2034, but CMS estimates that there will be no enrollment loss associated with the loss of revenues. 

4. Which states may face reductions in existing provider tax revenues?

States that have adopted the ACA Medicaid expansion and have certain provider taxes above the new hold harmless limits will face reductions in existing provider tax revenues. KFF data show that an estimated 31 states will have to reduce one or more provider taxes on hospitals, MCOs, or ambulances because of the lower hold harmless limits in ACA expansion states (Figure 4). Additional states are likely to be affected because of taxes on other classes of providers. Hospital taxes are the most frequently affected, with 28 of the 31 affected states having a hospital tax over 3.5% of net patient revenues as of July 1, 2025. Over half of the Medicaid provisions in the 2025 reconciliation law apply only to ACA expansion states, including the lower hold harmless limits. Those changes—coupled with lower provider tax revenues—may make it particularly difficult for ACA expansion states to navigate a challenging fiscal climate and increasing numbers of uninsured residents.

If CMS’ proposed regulation is finalized with the new health insurer provider class, additional states will be affected, though it is unclear how many states currently have such taxes in place. CMS’ decision to establish health insurers as a provider class for the purposes of Medicaid provider tax rules means that additional taxes will be subject to new hold harmless limits and in ACA expansion states, additional taxes may be subject to the decreasing hold harmless limits over time.

5. Which states may need to rework their “uniformity waivers?”

Uniformity waivers have allowed states to waive the requirement that provider taxes be broad-based and uniform if CMS determines that the tax is “generally redistributive.”  Provider taxes established through such waivers have generally taxed some types of providers within a class more heavily than others. States may use uniformity waivers to achieve policy goals such as limiting tax burdens for sole community hospitals, rural hospitals, or other vulnerable providers; but states have also used the waivers to impose taxes primarily on Medicaid providers. The disproportionate taxation of Medicaid providers has raised CMS concerns, including during the Biden Administration, and in May 2025, the Trump Administration released a proposed rule that aimed to address those concerns. The final rule was published on February 2, 2026 (Box 2).

The 2025 reconciliation law prohibits states from using uniformity waivers if the tax charges higher or lower rates based on the volume of Medicaid revenues or patients. The law specifies that taxes may not be considered generally redistributive if the state effectively varies tax rates based on the providers’ Medicaid revenues or patients, even if the tax does not explicitly name “Medicaid” when establishing the tax rates. The requirement is largely targeted at MCO taxes but may also apply to other provider tax types. It is effective as of July 5, 2025, but the Secretary may give states up to three fiscal years to come into compliance. The final rule on uniformity waivers provides states with transition periods that depend on what type of tax the waiver applies to and the most recent date of CMS approval for the waiver. Specifically:

• For taxes on MCOs with a waiver approval within 2 years of April 3, 2026, states have until the end of the current calendar to transition their taxes (this is expected to be the case in California and at least three other states).
• For all other taxes on MCOs, states have until the end of FY 2027 (which in most states, means they would need to be complying by July 1, 2027).
• For taxes on entities other than MCOs, states have through the end of FY 2028 to come into compliance.

States may come into compliance by either submitting a new waiver proposal that meets the new requirements from the final rule (Box 2) or they may otherwise modify their tax such that no waiver is necessary.

The final rule states that new limits on uniformity waivers will affect at least nine taxes in at least seven states, with effects starting as early as January 1, 2027 (Figure 5). CMS did not identify the specific states in the final rule, but in the proposed rule, CMS specifically named California, Massachusetts, Michigan, and New York as being affected.  KFF and other researchers expect that the other three states are Illinois, Ohio, and West Virginia. The final rule states that existing MCO taxes would now be prohibited in seven states unless the taxes were modified, and that within those seven states, there were at least two additional taxes affected, including one on hospitals and one on nursing homes. However, elsewhere, in the preamble to the final rule, CMS indicated that there were two nursing facility taxes that would now be prohibited. (It’s unclear whether the second nursing facility tax is within the seven states or in an eighth state.) CMS indicates that additional taxes may need to be modified or eliminated, but it is unknown which states have such taxes or what types of providers the taxes pertain to. Beyond uncertainty surrounding the scope of affected taxes, much remains unknown about how states may respond to the new rule.