The Centers for Medicare & Medicaid Services (CMS) released the Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes proposed rule, which implements provisions in the Working Families Tax Cut legislation (WFTCL) to impose new restrictions on states’ use of provider taxes.
By lowering the regulatory limit on funds that can be raised through provider taxes to finance Medicaid provider payments, the WFTCL effectively prohibits new provider taxes after July 4, 2025. It also maintains but prohibits increases to existing provider taxes “enacted and imposed” as of July 4, 2025. For these existing taxes in Medicaid expansion states, the legislation further phases down the limit starting Oct. 1, 2027, until the tax reaches 3.5%.
CMS in November 2025 released guidance that defined a tax as “enacted and imposed” if:
- As of July 4, 2025, the state or local government had completed the entire legislative process to authorize the tax supporting the specific tax structure in effect, or, if the tax required a waiver, CMS had approved the tax waiver. Waivers pending before CMS or submitted after this date did not qualify, as they are not enacted.
- The government was actively collecting the tax on July 4, 2025
The rule revises CMS’ interpretation of “enacted and imposed” to mean that the legislative process to enact a tax must have been completed by July 4, 2025, but that state was not required to begin collection by this date. In addition, CMS clarified that a tax subject to a waiver that was approved after July 4, 2025, but has an effective date of July 4, 2025 (or earlier) is considered enacted.
The rule also defines net patient service revenue, eliminates the 75/75 test, creates a new tax class for health insurer services subject to the WFTCL tax provisions, and sets new provider tax reporting requirements.
Contact Director of Policy Rob Nelb, MPH, at rnelb@essentialhospitals.org or 202.585.0127 with questions.
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