The Centers for Medicare & Medicaid (CMS) continues to publish preliminary guidance on the Medicaid provisions in H.R. 1, now referred to as the Working Families Tax Cuts legislation (WFTCL). On November 14, the agency sent a “Dear Colleague” letter to states interpreting certain aspects of the law’s provider tax provisions. The letter acts as preliminary guidance for states until CMS can promulgate a final rule; ultimately, the policies outlined in the final rule with govern.
The WFTCL prohibits states and localities from establishing new provider taxes that were not “enacted and imposed” as of July 4, 2025. It also freezes the hold harmless percentage for existing provider taxes in all states for fiscal years beginning on or after October 1, 2026. As of this date, for all states, the hold harmless threshold is equal to the amount of tax “enacted or imposed” in the state as of July 4, 2025, for a particular service. For expansion states, for fiscal years (FYs) on or after October 1, 2028, the hold harmless threshold is equal to the lesser of (1) the tax “enacted and imposed” as of July 4, 2025 or (2) the applicable phase down amount specified in the law (5.5% in FY 2028, declining to 3.5% for FY 2032 and thereafter).
The guidance defines when a tax is “enacted and imposed”:
- A tax is enacted if, as of July 4, 2025:
- The state or local government completed the entire legislative process necessary to authorize the tax that supports the tax structure in effect on that date; and
- If the tax requires a broad-based and/or uniformity tax waiver, CMS approved the waiver.
- A tax is imposed if, as of July 4, 2025, the state or local government was actively collecting revenue or it collected the revenue on a delayed schedule consistent with routine collection or billing practice.
The law also heightened the test for states to receive a provider tax waiver by adding new conditions for a state to show that the tax is “generally redistributive.” The letter reiterates the three instances in which a tax is not generally redistributive as written in statute and provides a limited transition period for noncompliant taxes with waivers approved by July 4, 2025. Specifically:
- For managed care organization (MCO) taxes, a state has until the end of its state FY 2026 to comply with the new requirement.
- For all other provider taxes subject to the requirement, a state has until the end of its state FY 2028 (but no later than October 1, 2028) to comply with the requirement.
As of mid-December, a final rule implementing the provider tax waiver changes was pending review by the Office of Management and Budget. CMS had yet to issue proposed rules implementing the other provider tax provisions enacted under the WFTCL.
If you have questions about how this guidance and the provisions of the WFTCL may affect your provider tax programs, please reach out to any Eyman Partners attorney to discuss.