Congress’ Provider Tax Proposals Would Be A Huge Blow to State Budgets

Proposals in the House-passed and Senate-proposed budget bills to freeze and/or cut health care provider taxes put all state Medicaid budgets in an extremely precarious position. What’s more, these proposals insert federal decision-making into state budgeting affairs, denying states the freedom to debate and design a Medicaid financing structure that meets their own unique needs and economic priorities.

At a time when more governors and state lawmakers are grappling with budget deficits than at any point since 2020, revenues from provider taxes are more important than ever to keep Medicaid and state health care systems afloat. Equally important is preserving states’ ability to determine the best course of action for generating revenues to balance their budgets.

Congress’ proposal on provider taxes is not just a draconian attempt to cut Medicaid programs, but an abusive attempt to interfere with state affairs and undermine their budgetary freedom. To be clear — both versions of this proposal currently being debated in Congress would wreak havoc on state budgets and should be rejected. States should have the power to decide how to raise revenue and allocate resources that support local priorities, including how to ensure their vulnerable residents have health care through Medicaid.

Cuts to provider taxes mean states will have fewer policy tools to maintain current Medicaid eligibility, benefits and provider payment rates.

Health care provider taxes currently support Medicaid programs and entire state budgets in every state except Alaska. The House-passed and Senate-proposed bills place a freeze on provider taxes at 2025 levels, meaning states no longer have the flexibility to increase or expand this tax base going forward to help close Medicaid budget shortfalls, finance improvements to Medicaid programs and services, or generate the funding needed to adopt Medicaid expansion. The Senate proposal builds on the House’s provider tax freeze by proposing an additional penalty to all states that have expanded their Medicaid program under the Affordable Care Act (“expansion states”) by lowering the cap on most provider taxes from 6% to 3.5% (phased in over time).

According to the Congressional Budget Office, the tax freeze proposed by Congress would reduce state Medicaid budgets by $89 billion over ten years. The additional Senate Finance proposal would hit state Medicaid budgets that much harder, especially for the many Medicaid expansion states that tax hospitals, ambulance providers and managed care organizations above 3.5%. Faced with this funding gap, all states will be forced over time to cut benefits, services or provider reimbursement. Should the Senate’s version move forward, expansion states may face fiscal pressures to drop their Medicaid expansion in order to retain higher provider tax rates that make other Medicaid programs viable. And where states have financed their expansion through provider taxes, Medicaid expansion may face near-automatic extinction.

States with sunset provisions may lose their provider tax base entirely.

While many state provider tax laws are permanent, some laws contain “sunset” provisions which cause taxes to terminate on a future date unless the legislature acts to extend them. For example, in Alabama, three provider tax types — on hospitals, nursing facilities and emergency medical providers — will expire in 2028. In Missouri, all of the state’s provider taxes will expire in 2029. Provider taxes with sunset provisions are at great risk as their ongoing existence depends on legislative authorizations in future years. Read strictly, Congress’ proposal would not allow states to make any future changes, meaning states like Alabama and Missouri would be stuck with their sunset laws as written, a costly mistake ripping at least $400 million per year (FY 2024 dollars) from Alabama’s budget and $1.5 billion per year (FY 2026 dollars) from Missouri’s.

Congress proposes to leave Alabama, Missouri and other similarly situated states with few options to adequately fund their Medicaid programs. Missouri and its residents have recent experience with the devastating impact of Medicaid budget cuts which caused more than 100,000 people to lose coverage and forced revenue shortfalls at hospitals due to ballooning numbers of uninsured patients.

Recent state efforts to expand provider taxes may not survive.

If Congress’ bill moves forward quickly, recent state efforts to increase or expand provider taxes may fail:

• Ohio: Governor Mike DeWine recently proposed an increase in the state’s hospital provider tax (known as the “franchise fee”), a proposal that would bring in an additional $912 million in FY2026 for the state Medicaid program. While the Ohio House and Senate both included broad language authorizing this hospital tax increase in their respective budget bills, as of mid-June, the two legislative bodies are still deep in negotiations over other aspects of the state’s biannual budget. If Congress advances their provider tax freeze before Ohio lawmakers can move their budget, Ohio may not get their new taxes in under the finish line, despite conservative lawmakers in both chambers and the state’s republican Governor all approving of the new assessment. (If Ohio can move their budget in time, the hospital tax increase would become an important base of Medicaid funding should the House-passed tax freeze move forward; however, if the Senate’s provider tax cap moves forward, Ohio’s would-be hospital tax increase would not survive unless the state drops its Medicaid expansion).
• Kansas: In the 2025 legislative session, lawmakers approved an increase in hospital provider taxes, raising the current cap of from 3% to “not greater than 6%” of hospital operating revenue, a move that could bring an additional $180 million in revenue to the state Medicaid budget each year. At first glance, it may appear that Kansas snuck in this tax increase just under the wire (as a nonexpansion state, Kansas is not subject to the Senate’s proposed 3.5% cap). The problem is that Kansas’ new law does not authorize the tax increase outright but rather instructs state administrative bodies to determine the appropriate tax amount at a later date. Even assuming health administrators could set a new tax quickly (and in advance of Congressional proposals becoming law), the state’s new law sets out additional hospital types that are exempt from the provider tax and, under Kansas law, the state is required to submit such changes to the Centers for Medicare and Medicaid Services (CMS) for approval. Given the haste with which Congress is pushing its tax bill forward, it does not seem conceivable that Kansas could get an increased hospital provider tax approved in time.

Had lawmakers in Ohio and Kansas known the timeline they were up against, they may have moved things differently — for example, Ohio might have addressed provider taxes separately from larger state budget negotiations or Kansas might have drafted its law to directly authorize the tax increase rather than include state administrators in the process.

There are undoubtedly many more states that would have taken on provider taxes this past term had they known Congress would freeze them at current rates going forward. Notably, Maine lawmakers recently examined how a new assessment on ambulance providers could help plug an expected $40 million shortfall in state Medicaid funds, but legislators and the governor disagreed on the approach and proposals did not advance. If the federal budget bill is enacted, they would not have the chance to revisit this proposal in their next legislative session.

If the budget bill ultimately passes with either the House-passed or Senate-proposed provider tax provisions, states will be forced to scramble and to make the impossible choice of whether to raise taxes or cut Medicaid benefits for its residents. Families USA is urging the Senate to reject this budget bill and instead focus on solutions that will lower costs and improve health care for Americans.