CMS Proposes New Medicaid Provider Tax Thresholds Under WFTC Legislation

Key Takeaways

• The Centers for Medicare & Medicaid Services (CMS) has proposed new regulations to implement statutory changes to Medicaid health care-related tax requirements established under section 71115 of Public Law 119-21, with comments due by September 21, 2026.
• The proposed rule would establish new indirect hold harmless thresholds, revise key regulatory definitions, eliminate the existing 75/75 test, and introduce new state reporting requirements for provider taxes.
• CMS estimates the proposal would reduce federal expenditures by $246 billion over the 2026-2035 period while supporting financial integrity in the Medicaid program.

CMS has issued a Notice of Proposed Rulemaking (NPRM) outlining regulatory changes to implement section 71115 of Public Law 119-21, referred to by CMS as the Working Families Tax Cut (WFTC) legislation. Published on July 21, 2026, the proposal would revise the framework governing Medicaid health care-related taxes, commonly known as provider taxes, and establish new indirect hold harmless thresholds.

How the Proposed Rule Would Modify Provider Tax Oversight

Health care-related taxes are an important financing mechanism used by states to support Medicaid programs. According to CMS, 49 states and the District of Columbia currently have at least 1 health care-related tax.

Section 1903(w) of the Social Security Act requires these taxes to apply to a permissible class of health care services, remain broad-based, and be imposed uniformly across providers. The statute also prohibits arrangements that directly or indirectly reimburse providers for the costs of those taxes through Medicaid or other state payments.

The proposed rule would implement statutory changes that establish new indirect hold harmless thresholds generally based on taxes enacted and imposed as of July 4, 2025. Section 71115 takes effect on October 1, 2026, while new thresholds for most permissible classes in states that expanded Medicaid to the adult group would begin on October 1, 2027.

CMS also proposes revised regulatory definitions to support implementation, including definitions for "Expansion State," "Non-Expansion State," and "Net Patient Revenue." The agency would revise its interpretation of the terms "enacted" and "imposed," replacing interpretations previously described in its November 14, 2025, Dear Colleague Letter.

Additional proposed changes include eliminating the second prong of the indirect hold harmless test—the 75/75 test—under which certain taxes exceeding the indirect hold harmless threshold could still qualify if at least 75% of taxpayers did not receive 75% or more of their tax costs back through Medicaid or other state payments.

CMS also proposes establishing services of health insurers as a new permissible class for health care-related taxes and introducing expanded reporting requirements that would require states to submit detailed provider tax information to support calculation of the new thresholds and ongoing federal oversight.

The CMS Office of the Actuary estimates that the proposal would reduce federal government expenditures by approximately $246 billion over the period from 2026 through 2035.

Compliance Considerations for State Medicaid Programs

Although the proposal primarily addresses Medicaid financing policy rather than clinical practice, it may have implications for health systems, providers, managed care organizations, and state Medicaid agencies that rely on health care-related taxes as part of Medicaid funding.

States would be required to evaluate existing provider tax structures against the new statutory thresholds and reporting requirements. The proposed definitions and revised interpretations of "enacted" and "imposed" would also influence which taxes qualify under the updated framework.

The elimination of the 75/75 test would simplify the indirect hold harmless analysis while shifting compliance toward the new statutory thresholds established by section 71115. CMS also proposes expanding federal oversight by requiring more comprehensive reporting and by bringing taxes on health insurers within the list of permissible health care-related tax classes.

CMS is accepting public comments on the proposed rule through September 21, 2026.

Regulatory Intent Behind the Proposed Changes

CMS states that the proposed rule is intended to implement section 71115 of Public Law 119-21, establish new indirect hold harmless requirements, and codify statutory limits on new and increased health care-related taxes.

The proposal also reflects CMS' effort to standardize oversight through updated definitions, revised interpretations, and expanded reporting requirements for state Medicaid provider taxes.

The proposed rule represents a significant regulatory update to Medicaid provider tax oversight by implementing statutory changes enacted under the Working Families Tax Cut legislation. Following the public comment period ending September 21, 2026, CMS will consider stakeholder feedback before issuing a final rule governing future health care-related tax compliance.

Reference

Centers for Medicare & Medicaid Services. Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes Proposed Rule (CMS-2452-P). Fact Sheet. July 21, 2026. Accessed July 23, 2026. https://www.cms.gov/newsroom/fact-sheets/amending-indirect-hold-harmless-threshold-health-care-related-taxes-proposed-rule-cms-2452-p