Client Alert

CMS Proposes Rule Implementing New Provider Tax Hold Harmless Thresholds

CMS-2452-P would establish new state- and class-specific Medicaid provider tax thresholds, phase down thresholds for expansion states, eliminate the 75/75 test, and create new state reporting requirements.

Proposed Rule

August 11, 2026

16 minutes

Key Takeaways

CMS has proposed significant changes to Medicaid provider tax requirements under CMS-2452-P, implementing Section 71115 of Public Law 119-21, referred to by CMS as the Working Families Tax Cut (WFTC) legislation. The proposed rule would replace the current nationwide indirect hold harmless threshold with state- and permissible-class-specific thresholds, establish a new class for health insurer services, eliminate the 75/75 test, and impose new reporting requirements on states.

New Medicaid provider tax thresholds: Beginning October 1, 2026, CMS would establish state- and class-specific indirect hold harmless thresholds based on taxes enacted and imposed as of July 4, 2025.
Provider tax phase-down: Beginning FFY 2028, thresholds for expansion states would phase down from 5.5 percent to 3.5 percent, with nursing facility and intermediate-care facility (ICF/IID) classes exempt from the phase-down.
New reporting and compliance requirements: States would be required to submit detailed tax collection, net patient revenue, waiver, legislative, and use-of-funds information, beginning with an interim submission due December 31, 2026.

What State Agencies Need to Know: At a Glance

The proposed rule could have significant implications for states that rely on Medicaid provider taxes as a source of non-federal share financing. States will need to establish their July 4, 2025 baseline, evaluate the impact of future threshold phase-downs, understand how state and local taxes will be aggregated, and prepare for new reporting requirements. States should also assess whether their existing provider tax structures and financing arrangements could result in collections exceeding the applicable threshold.

Provider Tax Analysis

Myers & Stauffer can help states quantify existing provider tax collections, calculate net patient revenue, establish baseline thresholds, and model the financial impact of the proposed phase-down provisions.

Compliance & Reporting

Our team can support states in preparing for new CMS reporting requirements, including the December 2026 interim submission and June 2028 final threshold reporting, as well as ongoing quarterly reporting.

Key Applicability Dates

Critical Dates for Tax Structures & Thresholds

July 4, 2025

The proposed rule uses July 4, 2025 as the critical date for determining which tax structures were enacted and imposed for purposes of establishing state- and class-specific baseline thresholds.

October 1, 2026

New state- and class-specific indirect hold harmless thresholds would apply for federal fiscal years beginning on or after October 1, 2026. The frozen threshold would replace the current 6% threshold and 75/75 test.

December 31, 2026

States would submit one-time interim data to CMS, including best-available tax collections and net patient revenue, legislative and waiver information, documentation that taxes were imposed, and information about how tax proceeds are used.

October 1, 2027

The expansion-state phase-down would begin. For FFY 2028, the applicable threshold would be the lower of the state’s frozen threshold or 5.5%.

June 30, 2028

States would submit actual tax collections and actual net patient revenue for the final threshold calculation. CMS expects to announce final thresholds by September 30, 2028.

Key Provisions

On July 23, 2026, the Centers for Medicare & Medicaid Services (CMS) published proposed rule CMS-2452-P (91 Fed. Reg. 46562) implementing section 71115 of Public Law 119-21, referred to by CMS as the Working Families Tax Cut (WFTC) legislation. The rule revises longstanding provisions of 42 CFR Part 433. Comments are due September 21, 2026 (docket CMS-2026-2476 at regulations.gov). Although the proposed rule purports to implement the statutory requirements, certain provisions go beyond the statutory framework.

New Regulatory Definitions. Adds new regulatory definitions of “Expansion State,” “Non-expansion State,” and “Net Patient Revenue,” which had not previously been defined in regulation in this context.
New Permissible Class of Health Care Items and Services. Adds a new permissible class of health care items or services, “services of health insurers.”
New Indirect Hold Harmless Thresholds. Implements new net patient revenue thresholds and phase-down provisions from Section 71115 of the WFTC legislation.
Eliminates the “75/75” test. This exception to the hold harmless threshold would be discontinued.
Penalty Applied Class-Wide for Taxes Exceeding “Net Patient Revenue” (NPR) Threshold. Establishes a class-wide penalty for impermissible tax structures.
New Reporting Framework. Implements new reporting requirements on states so CMS can determine the precise net patient revenue thresholds that are unique to each state’s assessed permissible class.

What the Proposed Rule Would Change

New Regulatory Definitions — 42 CFR § 433.52

CMS would add definitions of “Expansion State,” “Non-expansion State,” and NPR. An Expansion State is a state that elects to provide medical assistance to all individuals described in section 1902(a)(10)(A)(i) (VIII) of the Act, and a Non-expansion State is a state that has not done so. The definitions of Expansion State and Non-expansion State are consistent with the statutory definitions in Section 71115 of the WFTC legislation.

NPR is defined as revenues received by the taxpayer attributable to the assessed permissible class of health care items or services, regardless of payer source. NPR includes revenues from all providers within the permissible class, regardless of whether they are included in or excluded from taxation within the tax
program itself. CMS notes this simply restates the existing interpretation: all payers, including Medicare, are counted in the denominator; revenue from other service classes and non-patient-care revenue is excluded.

CMS also noted that they considered, but did not propose, defining NPR as only revenue associated with providers in the class that are taxed. They felt doing so would be disruptive to existing taxes and could present a gaming risk due to the ability to manipulate the denominator of the calculation. This allows for certain tax rate groups within the tax program to be taxed above the NPR threshold as long as, in the aggregate, total tax collections do not exceed the NPR threshold for the program.

New Permissible Class of Health Care Items and Services: Services of Health Insurers — 42 CFR § 433.56(a)(19)

A new permissible class would cover “services of health insurers.” The new class is separate from the existing class of managed care organization (MCO) services already classified under § 433.56(a)(8). CMS noted that several states impose premium-based taxes on health insurers even though no permissible class currently exists for them and proposes the class to bring those taxes under the § 1903(w) authority rather than treat them as impermissible. The class would include group and individual market issuers, short-term limited-duration insurance, excepted-benefit (dental-only/vision-only) issuers, Medicare Advantage private fee-for-service and Part D premium revenue, and section 1115 premium assistance coverage. CMS would defer to state law on which entities are health insurers.

Importantly, CMS would apply the new hold harmless threshold requirements to this class: taxes on the class not enacted and imposed as of July 4, 2025, would carry a zero percent threshold, and the class would be subject to the expansion-state phase-down.

New Indirect Hold Harmless Thresholds — 42 CFR § 433.68(f)(3)

Section 71115 of the WFTC legislation requires CMS (not states or localities) to calculate the new indirect hold harmless threshold percentage for each permissible class. The new state-specific and class-specific percentage thresholds will replace the former nationwide six percent threshold. The key provisions relating to the new thresholds are:
Pre-October 2026 periods preserved. The current two-prong test (six percent first prong — 5.5 percent for the January 1, 2008, through September 30, 2011, statutory period — and the 75/75 second prong) is restructured into 42 CFR § 433.68(f)(3)(i) and applies only to periods before October 1, 2026.
Frozen, state- and class-specific thresholds. For federal fiscal years (FFYs) beginning on or after October 1, 2026, each state’s threshold for each permissible class in effect as of May 1, 2025, equals total tax collections divided by NPR under the tax structure enacted and imposed as of July 4, 2025, measured using the state fiscal year (SFY) that contains July 4, 2025. Classes with no tax enacted and imposed as of July 4, 2025, receive a zero percent threshold. CMS also proposes to round to nine decimal places when calculating the new thresholds.
“Enacted” and “imposed” defined — and revised from prior guidance. “Enacted” requires completion of the entire legislative process for the specific tax structure by July 4, 2025; post-July 4 legislation made retroactively effective does not count. “Imposed” means the tax was in effect — a legally enforceable obligation to pay — on July 4, 2025; where a broad-based or uniformity waiver is required, the waiver must be approved with an effective date of July 4, 2025, or earlier. This revises the November 14, 2025, Dear Colleague Letter, which had treated waiver approval as an element of “enacted.” Under the proposed rule, waivers approved after July 4, 2025, count if effective on or before that date. This means that waiver requests received by CMS on or before September 30, 2025, qualify, as waivers are effective the first day of the calendar quarter in which CMS receives the request 42 CFR (§ 433.72(c)). CMS acknowledges this expands the universe of taxes that could be included in threshold calculations.
Expansion-state phase-down. Beginning FFY 2028, thresholds for expansion states become the lower of the frozen amount or 5.5 percent (FFY 2028) and phasing down to 3.5 percent (FFY 2032 and after), as shown in the following table.

FFY	2028	2029	2030	2031	2032+
Threshold	5.5%	5.0%	4.5%	4.0%	3.5%

Nursing facility and ICF/IID for individuals with intellectual disabilities classes (42 CFR § 433.56(a)(3) and (4)) are exempt from the phase-down in all states but remain subject to their frozen thresholds. Thresholds are applied on an FFY basis, so states with non-aligned SFYs must manage mid-year threshold changes through period-specific assessment or pro-ration. A state that newly expands Medicaid becomes subject to the phase-down percentage in effect for the FFY of expansion.

Eliminates the 75/75 Test — 42 CFR § 433.68(f)(3) For FFYs beginning on or after October 1, 2026, the
frozen threshold is the sole indirect hold harmless test; the 75/75 prong would no longer be available as a pathway for collections above the threshold. CMS cites circumvention risk following the WFTC changes, the test’s near-total disuse (only one tax has ever qualified), and a 2018 HHS OIG recommendation
to re-evaluate the framework. CMS also seeks comments on the alternative of deleting the test
entirely.

Penalty Applied Class-Wide for Taxes Exceeding NPR Threshold — 42 CFR § 433.70(b) CMS would clarify that when the aggregate of all taxes on a permissible class — state and local combined — exceeds the class threshold, all revenue from all taxes on that class is deducted from medical assistance expenditures before FFP is calculated, not merely the excess. CMS provides an example of a 5.5 percent tax during the FFY in which a 5 percent threshold is in effect. In this scenario, the entire 5.5 percent tax is impermissible, not only the amount (0.5 percent) above the threshold. If a state has multiple taxes, or a combination of state and locality taxes, that comprise the 5.5 percent, the totality of the tax revenues from all taxes would be deducted from medical assistance expenditures.

New Reporting Framework — 42 CFR § 433.74 The proposed rule would impose new requirements on states to report data for calculating the indirect hold harmless thresholds and disclose information about changes to and usage of tax proceeds. For determining the new thresholds, states would have two one-time reporting requirements – for calculating an interim threshold and the final threshold. States would also have ongoing quarterly reporting requirements that would accompany quarterly CMS-64 filings. The table below summarizes the new reporting requirements.

Requirement	Date/Frequency	Content Highlights	Citation
One-time interim reporting	December 31, 2026	Best-available tax collections by tax and class and NPR by class for the SFY containing July 4, 2025, (state and local); authorizing legislation dates/citations; waiver types/dates; documentation that the tax was imposed; what each tax funds, including specific Medicaid payments. Estimates permitted for this submission only.	42 CFR § 433.74(b)(2)
One-time final threshold data	June 30, 2028	Actual tax collections (reported to the period the liability relates to) and actual NPR for all providers in each class, taxed or not, including local taxes. CMS announces final thresholds by September 30, 2028.	42 CFR § 433.74(b)(3)
Ongoing enhanced reporting	Quarterly (CMS-64), beginning FFY 2027	Collections by tax and class; NPR by class; use of funds; notification when a governmental provider is removed from a tax without a waiver submission; any additional information the Secretary requests. Actual data only; two-year window to amend prior quarters.	42 CFR § 433.74(b) (4)–(5)

After reviewing state submissions, CMS will notify each state of the interim and final indirect hold harmless percentages for each permissible class. CMS’ determination of the final threshold will include any applicable phase-down amounts. CMS expects states to report their best available data and noted the following expectations regarding the data states will report:

For interim one-time reporting, states should use their best available data but can use estimated, projected, or extrapolated data. However, for the final one-time reporting and ongoing reporting, states should use actual data (no estimates, projections, or other statistical methods). CMS noted they have structured the reporting timeline to allow states time to obtain the data.
States generally receive two years after each FFY to correct data and remediate — including proportional, uniformity-preserving refunds to taxpayers — before CMS assesses compliance and pursues expenditure reductions, modeled on the two-year timely filing and DSH reconciliation
time frames.
Tax collections are for the reporting period even if collected after. Net patient revenue is for the entire class, even if some providers in the class are not taxed.
CMS retains discretion to enforce earlier — including back to October 1, 2026 — for excessive or intentional over-collection, inaccurate
reporting, or fraud, and cautions that the remediation period is not a vehicle for interest-free over-collection. An approved tax waiver does
not shield revenue that ultimately exceeds the final threshold.
Consistency is required. If a state uses a particular methodology for the final one-time reporting, the same methodology must be used for ongoing reporting.
Proportional allocations are permitted for separating hospital revenue into inpatient hospital and outpatient hospital revenue.

CMS intends to scrutinize more closely data and structural changes states make to taxes that may facilitate a hold-harmless arrangement. Examples include:

Exempting public providers, such as a state
hospital system from a tax, then establishing an intergovernmental transfer for financing payments to the public provider(s).
Removing providers from a tax followed
by an increase in the tax imposed on the
remaining providers to maximize room under the threshold.
Reviewing Medicaid utilization data for
providers subject to and exempted from a tax during the course of tax waiver reviews and financial reviews in conjunction with Medicaid payment proposals.

A state that fails to report faces grant-award reductions and deferrals or disallowances — and, under new proposed language, CMS may withhold approval of state payment proposals (such as supplemental and state directed payments [SDPs]) where it cannot verify a permissible non-federal share source due to the reporting failure. If a tax omitted from the final threshold calculation later surfaces and pushes a class over its threshold, collections for the class may be impermissible.

Interim Thresholds, Remediation, and Enforcement Timing. CMS will issue non-binding interim thresholds
from December 2026 reporting to guide waiver submissions and monitoring until final thresholds are announced (targeted by September 30, 2028).

Key Considerations & Comment Opportunities for States and Localities

Evaluate baseline under the revised “enacted and imposed” definitions. Taxes thought to be ineligible for threshold calculation purposes under the Dear Colleague Letter may now count towards the threshold, if the tax waiver was approved after July 4, 2025, but effective on or before that date.
Evaluate the health insurer class. States with insurer premium taxes — including taxes administered by insurance departments rather than Medicaid agencies — should assess how their taxes would be classified, documented,
and baselined.
Quantify phase-down impacts. Expansion states with hospital, MCO, or other non-exempt class collections above 5.5 percent of NPR face stepped reductions beginning October 1, 2027. Threshold changes apply to the FFY, creating mid-SFY threshold changes for most states.
Prepare for one-time interim threshold reporting. The interim submission reporting due December 31, 2026, requires tax-by-tax collections, NPR by class, legislative citations, waiver history, imposition documentation, and use-of-funds detail — with local taxes included. States with numerous locality taxes should begin assembling documentation well before the final rule.
Assess the class-wide penalty and state–local aggregation risk. States with multiple taxes on the same class and states with state and local (city, county) taxes should be aware that all taxes on each permissible class should be aggregated when calculating the threshold.
Prepare for one-time final threshold reporting. The final submission reporting due June 30, 2028, requires actual tax collections (reported to the period the liability relates to) and actual NPR for all providers in each class, taxed or not, including local taxes. States may need to establish processes to receive this information timely from other agencies (e.g. Department of Revenue) and various data sources (e.g. cost reports, claims data, etc.). It may take time to align these data collection processes.
Be aware that preamble enforcement restraint is not codified in the proposed rule. CMS’ stated intent to not penalize slight overages where historically accepted estimate-based data would have shown compliance, not use the interim thresholds for penalties, and round the
thresholds to nine decimal places appear only in the preamble.
Verify refund authority. Remediation depends on the ability to issue proportional refunds; states with statutory dedications or trust-fund structures may need legislation or state plan amendments to enable compliant refunds.

How Myers & Stauffer Can Help

Myers & Stauffer has helped public health care clients with provider tax program design, implementation, and compliance since the enactment of the provider tax and donation regulations. We can help states quantify their July 4, 2025, baseline thresholds and phase-down exposure; assemble enacted-and-imposed documentation and the December 2026 interim submission; design NPR methodologies and ongoing CMS-64 monitoring; model remediation and refund mechanics; evaluate alternative non-federal share financing; and develop comment letters responsive to the rule’s solicitations. For more information, reach out to one of our following subject matter experts.

This is the third WFTC financing rulemaking. The section 71117 “loophole closure” final rule (CMS-2448-F, 91 FR 4794, February 2, 2026) tightened waiver tests for taxes that disproportionately burden Medicaid; this proposed rule does not amend those provisions, but the new health insurer class would route existing insurer taxes through the same waiver and hold harmless framework. Section 71116 SDP proposed rule (CMS-2449-P, 91 FR 30400, May 22, 2026) limits SDPs that provider taxes frequently finance; this rule quantifies the combined effect for the first time. Explore our prior client alerts for further information.

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This alert summarizes a proposed rule and is provided for general informational purposes only; it is not legal advice. Provisions may change in the final rule.