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1. Key Questions
1.How have states used provider taxes to help finance the state share of Medicaid?
2. What federal rules governed provider taxes before the 2025 reconciliation law?
3. What are new federal rules related to provider taxes?
4. Which states may face reductions in existing provider tax revenues?
5. Which states may need to rework their “uniformity waivers?”
2. Appendix
Key Questions
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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 jointlyfinancedby 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’s2025-2026 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
All states but
All States but Alaska Use Provider Taxes To Help Finance the State Share of Medicaid Spending
Number of provider taxes or fees in place in FY 2025
FY = state fiscal year. Includes Medicaid provider taxes as reported by states. FL, KS, and MS did not respond to the 2025 survey; publicly available data used to verify taxes in place (reported in previous surveys) but not the size of these taxes.
Annual KFF survey of state Medicaid officials conducted by
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).
Provider Taxes Are Most Common for Institutional Providers
Number of states with provider tax in tax size range* by provider type, FY 2025
*Reported tax sizes are the approximate size as a percentage of net patient revenues. FY = state fiscal year, MCO = managed care organization, ICF/ID = intermediate care facility for individuals with intellectual disabilities. 31 expansion states have a non-exempt tax above 3.5% (hospital – 28 states, MCO – 6 states, ambulance – 10 states). FL, KS, and MS did not respond to the 2025 survey.
Annual KFF survey of state Medicaid officials conducted by
CMS estimates that states will collect nearly
Over 90% of Provider Tax Revenues Come from Hospitals and Managed Care Organizations (MCOs)
Amending the Indirect Hold Harmless Threshold of Health-Care Related Taxes
2. What federal rules governed provider taxes before the 2025 reconciliation law?
Since the 1990s, federal rules governing provider taxes have included three core componentsrequiring 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 rulesprior 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 (see42 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 requirementdoes not applywhen the tax revenues comprise 6% or less of net patient revenues from treating patients (see42 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
An effective prohibition on new provider taxes or increases to existing ones (
Reduced limits on provider taxes in states that adopted the Affordable Care Act (ACA) Medicaid expansion (
Revisions to the conditions under which states may receive uniformity waivers (
Changes in the
CMS released a proposed rule in
Broader interpretation of taxes “in effect.” Under the proposed rule, CMS would recognize provider taxes as being in effect as of
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
Under the proposed rule, CMS estimates that federal Medicaid spending would decrease by
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
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.
The Effective Prohibition on New or Increased Provider Taxes Could Impact All States, With Expected Cuts to Existing Taxes in At Least 31 States
ACA expansion states with a provider tax on hospitals, MCOs, ambulances, or other affected providers above 3.5% of net patient revenues as of
ACA = Affordable Care Act, MCO = managed care organization. Figure excludes health insurer taxes which would be subject to the new rules if CMS’ proposed rule is finalized. Provider taxes on nursing facilities and intermediate care facilities are exempt from the new limits on provider taxes in expansion states. Other affected providers include community living supports (also known as HCBS or home care) in
Annual KFF survey of state Medicaid officials conducted by
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
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
For taxes on MCOs with a waiver approval within 2 years of
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
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
Box 2: CMS’ Final Rule on Uniformity Waivers
Since 1993, CMS has assessed whether proposed taxes are “generally redistributive” using a statistical formula that assesses whether a state’s tax has a tendency to “derive revenues from taxes imposed on non-Medicaid services in a class and to use these revenues as the State’s share of Medicaid payments” (58 Fed. Reg. 43164,
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