The Centers for Medicare & Medicaid Services (CMS) has published a Proposed Rule to implement Section 71115 of H.R. 1, which CMS refers to as the Working Families Tax Cut (WFTC). The rule revises the regulatory framework around provider taxes and the indirect hold harmless safe harbor, which governs how states use healthcare-related taxes to fund their share of Medicaid spending. CMS actuaries estimate the proposal would reduce federal Medicaid spending by roughly $246 billion over 10 years. Comments are due by September 21, 2026.

Background

Provider taxes have long been a key tool states use to fund the non-federal share of Medicaid costs. Under existing rules, these taxes are allowed as long as they are broad-based, applied uniformly, and do not include a hold harmless arrangement that effectively refunds providers for what they paid. Historically, a provider tax was considered compliant if it stayed below 6 percent of providers' net patient revenues.

The WFTC changes this framework significantly. Instead of one uniform 6 percent threshold that applies to everyone, Section 71115 replaces it with class-specific limits based on provider taxes that were both enacted and imposed as of July 04, 2025. These new thresholds take effect for fiscal years beginning on or after October 01, 2026. States that did not have a provider tax in place for a particular provider class as of July 04, 2025 will generally not be allowed to create a new one, since their applicable percentage would be zero.

Medicaid expansion states face an additional layer of restrictions. Starting in federal fiscal year (FFY) 2028, those states must comply with whichever is lower: the new class-specific threshold or a rate that phases down by 0.5 percentage points each year until it reaches 3.5 percent in FFY 2032.

Key Highlights of the Proposed Rule

For FFY 2027, CMS proposes replacing the current two-step evaluation method with a single "applicable percent" standard calculated on a statewide basis for each provider tax class, based on taxes that were both enacted and imposed as of July 04, 2025.

One of the most notable shifts from CMS's November 2025 guidance involves how the terms "enacted" and "imposed" are interpreted. Under the Proposed Rule, CMS is taking a more flexible approach. A tax would be considered "enacted" if the state completed the legislative process to authorize the tax structure that was in place on July 04, 2025. It would be considered "imposed" if the tax was in effect on that date and any required waiver has been approved with a retroactive effective date of July 04, 2025 or earlier. Importantly, the earlier requirement that states be actively collecting the tax as of July 04, 2025 has been dropped.

CMS is also proposing to eliminate the 75/75 alternative compliance test starting October 01, 2026. Under the old system, states could use this test to qualify provider taxes that exceeded the 6 percent threshold. CMS says keeping it would undermine the new class-specific thresholds Congress established. States that already had a CMS-approved rate above 6 percent under the 75/75 test as of July 04, 2025 can keep that rate, though Medicaid expansion states will still be subject to the phasedown.

In addition, CMS is proposing a brand new permissible provider tax class for services of health insurers, separate from the existing class for managed care organization services. This new class would follow the same threshold and phasedown rules, with a zero percent applicable threshold for any taxes not enacted and imposed by July 04, 2025.

Finally, the Proposed Rule significantly expands reporting requirements. States would need to submit one-time interim reports on provider tax and net patient revenue data for the state fiscal year containing July 04, 2025 by December 31, 2026, using best available or estimated data. Final reports using actual data would be due by June 30, 2028. Starting October 01, 2026, states would also need to file quarterly reports on provider tax collections, how those revenues are being used, and whether public providers are exempt.

This is one of three major rules implementing the Medicaid financing provisions in the reconciliation law. CMS previously released a Proposed Rule on State Directed Payments in May 2026, and a third rule titled "Strengthening the Integrity of Medicaid and CHIP (Children's Health Insurance Program)" is still under review by the Office of Management and Budget (OMB).