Supporting State Flexibility: NAMD’s Response to CMS’ Health Care-Related Tax Proposed Rule

This resource provides a high-level summary of NAMD’s full comments on CMS’ proposed rule (CMS-2448-P) regarding health care-related taxes. For a more detailed analysis, read the full comments here. Notably, the proposed rule closely aligns with Section 71117 of the One Big Beautiful Bill Act (OBBBA), which includes similar criteria for determining when health care-related taxes are not considered generally redistributive.

Background

Health care-related taxes are used by nearly every state to help finance the non-federal share of Medicaid. These taxes are a core financing tool and support a range of uses, including eligibility expansions and provider reimbursement. Federal law and regulation define 19 provider classes that these taxes may be levied on, with the most common categories being hospitals, nursing facilities, and managed care organizations. To be approvable, health care-related taxes must meet four federal requirements: (1) they may only be imposed on permissible classes of providers; (2) they must be broad-based (apply to all providers within the class); (3) they must be uniform (apply the same rate across providers); and (4) they must not include hold harmless arrangements, meaning states cannot guarantee that providers will receive back the cost of the tax.

States may request a waiver of the broad-based and uniformity requirements if the tax is considered generally redistributive, meaning it draws more revenue from non-Medicaid services or providers and uses that funding to support the Medicaid program. CMS uses a statistical test known as B1/B2 to assess whether taxes meet this standard but has raised concerns that some taxes pass the test while still relying heavily on Medicaid revenue. In May 2025, CMS issued a proposed rule that would add new “described attributes” to disqualify certain tax structures from being considered redistributive, even if they pass the B1/B2 test.

NAMD’s Policy Perspective

NAMD supports CMS’ goal of strengthening fiscal accountability. Our policy perspective reflects feedback from state Medicaid directors. Based on this input, NAMD believes the proposed approach introduces uncertainty and subjectivity into the health care-related tax approval process, making compliance and long-term fiscal planning more difficult for states. Given that Medicaid accounts for approximately one-third of state budgets, even modest changes to the rules governing provider taxes can significantly affect states’ ability to generate their share of Medicaid financing. If this rule is finalized, NAMD strongly recommends a minimum three-year transition period for all states.

Key Concerns and Recommendations

Described Attributes Would Introduce Uncertainty and Subjectivity

The proposed “described attributes” would allow CMS to define when a tax is not generally redistributive even if it passes the long-standing B1/B2 statistical test.

For taxes that explicitly reference Medicaid, Medicaid agencies are concerned that the proposal would limit their ability to apply more than one tax rate within a permissible class, even when the net effect of the tax and associated expenditures is generally redistributive. This provision could also limit states’ ability to design taxes that reflect legitimate local policy needs.

• For example, a state might choose to use Medicaid-paid bed days (i.e., the number of days a patient occupies a hospital or nursing facility bed) as a basis for taxation due to data timeliness or completeness. Under the proposed attributes, the state would be barred from applying a higher rate to providers with more Medicaid-paid bed days, even if the state’s intent is to apply the tax to larger providers for a valid public policy purpose.

For taxes that do not explicitly reference Medicaid, agencies report that the proposed framework is too broad and would create subjectivity. The rule would require CMS to judge whether a tax uses characteristics that have the “same effect” as referencing Medicaid directly, or whether a tax is based on a proxy for Medicaid utilization. Agencies are concerned that these determinations are highly subjective; what counts as a proxy or a legitimate policy goal could vary across CMS staff reviewers or over time. This uncertainty would make it difficult for states to know if a proposed tax structure would be approved and would undermine states’ ability to make accurate fiscal projections.

Recommendation: CMS should work with Medicaid agencies to develop a new objective standard for determining whether a tax is generally redistributive. If CMS proceeds with its proposed approach, it should explicitly incorporate the exclusion for tax designs that serve legitimate public policy goals into regulation.

Proposed Transition Period Is Inadequate

CMS proposes a one-year transition period only for states with health care-related taxes that were approved more than two years before the rule’s effective date. States with more recently approved taxes would not receive any transition period.

Medicaid agencies report serious concerns with this approach. In the rule, CMS justifies the lack of a transition period by pointing to companion letters sent to some states. However, these letters did not outline the new policy framework or provide clear guidance, making it impossible for states to modify their tax structures in advance. As written, the rule would effectively penalize states for failing to comply with requirements that had not yet been proposed at the time of waiver approval.

Agencies also report that the proposed one-year transition period is not sufficient. If finalized, states would need to take several steps to comply with the rule, including seeking federal guidance and technical assistance, redesigning tax structures, obtaining state legislative authority (in some cases, through biennial sessions), and securing federal approval. Without adequate time, states risk disruptions to provider payments and services. Many use provider taxes to fund core parts of their Medicaid programs, including coverage, reimbursement rates, and long-term care.

Recommendation: CMS should finalize a transition period of at least three years for all states, regardless of when their waivers were last approved.

Moving Forward

NAMD appreciates CMS’ focus on fiscal integrity but urges revisions to avoid unintended disruptions to Medicaid financing. To support successful implementation, NAMD encourages CMS to work with states to develop an objective test for determining whether a tax is generally redistributive and to finalize a three-year transition period for all states, providing the clarity, consistency, and time agencies need to comply while continuing to serve their members and providers.