Feds Rewrite Baffling Medicaid Tax Loophole Rules
Published Date: 7/23/2026
Proposed Rule
Summary
Starting October 1, 2026, new rules will change how states handle health care-related taxes under Medicaid. These changes set clear limits on tax amounts based on 2025 levels and will gradually lower those limits in some states by 2027. States and taxpayers should get ready for tighter rules and better oversight that could affect tax collections and Medicaid funding.
Analyzed Economic Effects
4 provisions identified: 0 benefits, 3 costs, 1 mixed.
New 2025-based Hold Harmless Threshold
Starting October 1, 2026, a State’s indirect hold harmless threshold will equal the percent of net patient revenue attributable to taxes that the State or locality had enacted and imposed as of July 4, 2025. If a State had not enacted and imposed a tax for a permissible class by July 4, 2025, the applicable percent for that class is zero percent.
Phase-Down for Expansion States
For Expansion States, beginning in Federal fiscal year (FFY) 2028 the hold harmless threshold will be the lower of the July 4, 2025 calculated percent or a phased-down percent that is 5.5 percent in FFY 2028, then reduced by 0.5 percentage points annually until reaching 3.5 percent in FFY 2032. The phase-down does not apply to taxes on the nursing facility or ICF/IID permissible classes, which remain subject to the July 4, 2025 calculated threshold.
Sunset of Secondary (75/75) Prong
The proposed rule would sunset a secondary prong of the indirect hold harmless test (commonly referred to as the 75/75 test) so that the thresholds calculated as of July 4, 2025 serve as the maximum permissible levels. CMS states this change is intended to ensure the July 4, 2025 thresholds are the ceiling for permissibility.
New Permissible Class: Health Insurers
The rule would add a new permissible class for "services of health insurers" (other than managed care organizations) in Sec. 433.56(a)(19), so taxes on health insurers (for example, based on premium revenue or covered lives) would be evaluated as health care-related taxes and subject to statutory requirements and hold harmless rules. CMS says states may otherwise face compliance actions or treatment of existing insurer taxes as impermissible if not covered by a permissible class.
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