Sections 71115 and 71117 of the Working Families Tax Cuts Legislation on Provider Taxes
Understanding the Dear Colleague Letter from the Centers for Medicare & Medicaid Services
November 20, 2025
On November 14, 2025, the Centers for Medicare & Medicaid Services (CMS) issued a Dear Colleague Letter to state Medicaid agencies to provide preliminary guidance on legislative changes under H.R. 1, now referred to as the Working Families Tax Cuts Legislation (WFTCL), Public Law 119-21, that affect health care provider taxes. This letter addresses two key provisions of Sections 71115 and 71117 of WFTCL.
Section 71115 changes the threshold for the indirect hold-harmless provision of health care-related (provider) taxes. Section 71117 establishes new requirements to close a loophole CMS believes exists for certain health care provider taxes that are not broad-based and/or uniform. We previously summarized these changes in our July client alert regarding WFTCL. The preliminary guidance CMS provides in this letter addresses the following items.
Section 71115 Hold Harmless Threshold – Definition of Tax Programs “Enacted and Imposed”
Section 71115 establishes new indirect hold-harmless thresholds, beginning on October 1, 2026, replacing the current six percent net-patient-revenue maximum per permissible class. We outlined the new threshold amounts and related effective dates in our July client alert. The determination of the applicable threshold for a tax program depends on whether the tax is “enacted and imposed” as of the date of the enactment of WFTCL on July 4, 2025. CMS provides the following definitions of “enacted” and “imposed:”
- Enacted. The state or local government has completed the entire legislative process necessary to authorize the tax, for both new and amended taxes, in effect on July 4, 2025. Administrative or legislative changes to the tax structure after July 4, 2025, with a retroactive effective date will not be considered “enacted” for purposes of this section.
- Imposed. The state or local government was actively collecting revenue, as of July 4, 2025, for the specific enacted tax structure in effect on that date. CMS notes that the taxes need not be collected by July 4, 2025, if the state has a routine collection schedule that is delayed beyond July 4, 2025, provided the tax is in effect on that date.
CMS also notes that if the tax requires a broad-based and/or uniformity waiver, CMS must have approved the tax waiver as of July 4, 2025. Tax waivers pending on or submitted to CMS after July 4, 2025, will not be included in the determination of the new threshold.
Section 71117 Provider Tax Loophole Transition Periods
Section 71117 implements statutory changes to federal law to close a loophole CMS believes exists in certain taxes that are not broad-based and/or uniform. Under the loophole, CMS believes states are exploiting a vulnerability in the mathematical calculations required to demonstrate that a tax is generally redistributive. CMS outlined its concerns about the loophole in the May 15, 2025, proposed rule titled Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Tax Loophole Proposed Rule at 90 FR 20578.
Section 71117 gives CMS the authority to grant states transition periods to bring affected tax programs into compliance. CMS provides the following transition periods for taxes for which a waiver was approved before the enactment of WFTCL on July 4, 2025:
- For managed care organization (MCO) taxes: the end of the state fiscal year ending in calendar year 2026.
- For all other taxes: the end of the state fiscal year ending in calendar year 2028, but no later than October 1, 2028.
CMS indicates that the different transition dates are because they believe MCO taxes are more egregious in their non-compliance with the generally redistributive principle than taxes on other health care provider classes. They note an example of an MCO tax that imposes a rate on Medicaid taxable units that is 117 times higher than on commercial business, whereas they have not observed a disparity of this magnitude on other taxable classes. Therefore, CMS is prioritizing MCO tax compliance.
Other Notable Items
There are a few additional notable items for consideration by state Medicaid agencies:
- CMS notes they are providing this preliminary guidance to aid state planning efforts, and final policies, including the transition dates under Section 71117, will be contained in pending rulemaking.
- CMS is gathering information to inform the calculation of the new indirect hold-harmless thresholds under Section 71115. This will likely include the recent indirect hold-harmless information-gathering process through which CMS is collecting tax information in a standardized template as part of the quarterly CMS 64 review process.
- All taxes will be subject to the new indirect hold-harmless thresholds outlined in section 71115, and all states and localities with tax programs should be aware of the upcoming changes. However, only a subset of tax programs will be affected by the loophole changes in section 71117.
- On November 18, 2025, CMS issued a CMCS Informational Bulletin (CIB) summarizing each of the Medicaid and Children’s Health Insurance Program provisions contained in WFTCL. The CIB highlights CMS’ plans to integrate the new indirect hold-harmless thresholds and the loophole-closure requirements with additional payment, financing, and oversight changes in WFTCL. States should monitor these developments closely, as upcoming rulemaking may clarify or expand on the preliminary positions outlined in this Dear Colleague Letter.
Recommended State Actions
In our July client alert, we outlined recommended actions states should consider:
- Determine the provider tax programs that are enacted as of July 4, 2025, and the percentage of net patient revenues currently being taxed. This includes both state and local provider tax programs in the determination of the percentage of net patient revenues currently being taxed, which may require coordination between multiple government entities.
- Review your current tax landscape and identify potential risks to compliance. All provider tax programs, including taxes on managed care organizations, should be part of this review. This may include summarizing existing tax programs and associated waivers of broad-based and uniformity requirements, reviewing language for tax definitions, ensuring hold-harmless requirements are met, and reviewing public policy rationale for the original determination of all noted tax rate groups and tax exclusions.
- Calculate Medicaid utilization for each tax-rate group and compare to the taxes they pay.
- Perform fiscal impact analysis to calculate the financial impacts of phasing down the provider tax revenue percentages for expansion states.
- If risk areas are identified, determine the effect on and potential modifications to existing tax program structures.
- Perform mathematical waiver tests on any modified tax programs to determine compliance.
- Explore alternative financing solutions for your Medicaid program where necessary.
Need More Information?
Myers and Stauffer has assisted our government health care clients with provider tax program design, implementation, and compliance since the enactment of the provider tax and health care related donation regulations. We also help states identify federal revenue enhancement opportunities and develop provider payment strategies. This includes approaches and methodologies for calculating and administering provider payments, as well as the funding mechanisms and compliance requirements that accompany such programs. For more information, reach out to one of our subject matter experts below.
| Dan Brendel Principal PH 317.815.5492 dbrendel@mslc.com |
Tim Guerrant, CPA Member PH 317.815.2935 tguerrant@mslc.com |
| Tara Clark, CPA Member PH 888.749.5799 tclark@mslc.com |
Bob Hicks, CPA Member PH 800.374.6858 bhicks@mslc.com |
| Joe Gamis, CFE, MBA Principal PH 816.945.5315 jgamis@mslc.com |
