Client Alert

Sections 71115 and 71117 of the Working Families Tax Cuts Legislation on Provider Taxes

CMS’s preliminary guidance on the Working Families Tax Cuts Legislation outlines new provider tax hold-harmless thresholds and transition periods for certain non-broad-based and/or non-uniform health care-related taxes.

Working Families Tax Cut Legislation

November 20, 2025

8 minutes

Key Takeaways

The Working Families Tax Cuts Legislation (WFTCL), Public Law 119-21, makes significant changes to Medicaid provider taxes, health care-related taxes, provider tax hold-harmless requirements, and Medicaid financing. In a November 14, 2025, Dear Colleague Letter, the Centers for Medicare & Medicaid Services (CMS) provided preliminary guidance on Sections 71115 and 71117, which address new indirect hold-harmless thresholds and requirements for certain provider tax programs.

Section 71115 establishes new indirect hold-harmless thresholds beginning October 1, 2026, replacing the current six percent net-patient-revenue maximum per permissible class.
The applicable Section 71115 threshold depends on whether a provider tax was “enacted and imposed” as of July 4, 2025, the date WFTCL was enacted.
Section 71117 addresses certain provider taxes that are not broad-based and/or uniform and establishes transition periods for affected tax programs with waivers approved before July 4, 2025.

What State Agencies Need to Know: At a Glance

State Medicaid agencies should evaluate their provider tax programs now to understand how the WFTCL changes may affect Medicaid financing. This includes reviewing state and local provider taxes, determining which tax programs were enacted and imposed as of July 4, 2025, assessing compliance with broad-based, uniformity, and hold-harmless requirements, and evaluating potential fiscal impacts.

Myers & Stauffer helps state Medicaid programs navigate complex provider tax design, compliance, financing, and payment requirements. Our experience with Medicaid financing mechanisms can help states assess existing provider tax structures and prepare for changes resulting from WFTCL.

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Provider Tax Expertise

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Key Applicability Dates

What Agencies Need to Know

July 4, 2025

WFTCL was enacted. CMS uses this date to determine whether a provider tax was “enacted and imposed” for purposes of the new Section 71115 indirect hold-harmless thresholds.

October 1, 2026

The new indirect hold-harmless thresholds established under Section 71115 begin to apply, replacing the current six percent net-patient-revenue maximum per permissible class.

State Fiscal Year Ending in Calendar Year 2026

For managed care organization (MCO) taxes with waivers approved before July 4, 2025, CMS identifies the end of the state fiscal year ending in calendar year 2026 as the transition deadline under Section 71117.

Section 71115: Hold-Harmless Threshold

Section 71115 establishes new indirect hold-harmless thresholds beginning October 1, 2026. The new thresholds replace the current six percent net-patient-revenue maximum per permissible class. The applicable threshold depends on whether a provider tax was “enacted and imposed” as of July 4, 2025.

“Enacted”

CMS defines a tax as enacted when the state or local government has completed the entire legislative process necessary to authorize the tax, including for new and amended taxes, and the tax was in effect on July 4, 2025.

Administrative or legislative changes made after July 4, 2025, with a retroactive effective date, will not be considered “enacted” for purposes of determining the applicable threshold.

“Imposed”

CMS defines a tax as imposed when 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.

Taxes do not necessarily need to have been collected by July 4, 2025, if the state has a routine collection schedule that delays collection beyond that date, provided the tax was in effect on July 4, 2025.

For taxes requiring a broad-based and/or uniformity waiver, CMS must have approved the waiver as of July 4, 2025. Waivers pending on or submitted to CMS after July 4, 2025, will not be included when determining the new threshold.

Section 71117: Provider Tax Loophole Transition Periods

Section 71117 makes statutory changes intended to close a loophole CMS believes exists for certain health care provider taxes that are not broad-based and/or uniform.

CMS believes some states have been able to exploit a vulnerability in the mathematical calculations used to demonstrate that a provider tax is generally redistributive. CMS previously outlined its concerns with this issue in its May 15, 2025, proposed rule, 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 authority to establish transition periods for affected tax programs to come into compliance.

For taxes with waivers approved before July 4, 2025, CMS identifies the following transition periods:

Managed care organization taxes: End of the state fiscal year ending in calendar year 2026.
All other taxes: End of the state fiscal year ending in calendar year 2028, but no later than October 1, 2028.

CMS explains that the different transition dates reflect its view that MCO taxes are more likely to demonstrate significant noncompliance with the generally redistributive principle than taxes on other provider classes. CMS cited an example of an MCO tax imposing a rate on Medicaid taxable units that was 117 times higher than the rate imposed on commercial business, while noting that it has not observed disparities of that magnitude among other taxable classes.

Other Notable Considerations

CMS describes the November 14 Dear Colleague Letter as preliminary guidance intended to support state planning efforts. Final policies, including the transition dates under Section 71117, will be addressed through pending rulemaking.

CMS is also gathering information to inform the calculation of the new indirect hold-harmless thresholds under Section 71115. This may include information collected through CMS’s recent indirect hold-harmless information-gathering process, which collects provider tax information using a standardized template as part of the quarterly CMS-64 review process.

All provider taxes will be subject to the new indirect hold-harmless thresholds under Section 71115. However, only a subset of provider tax programs is expected to be affected by the loophole-related changes under Section 71117.

On November 18, 2025, CMS issued a CMCS Informational Bulletin summarizing the Medicaid and Children’s Health Insurance Program provisions included in WFTCL. The bulletin highlights CMS’s plans to integrate the new indirect hold-harmless thresholds and loophole-closure requirements with additional payment, financing, and oversight changes under WFTCL.

States should continue to monitor CMS guidance and upcoming rulemaking, which may clarify or expand on the preliminary positions outlined in the Dear Colleague Letter.

Assess Provider Tax Programs

States should determine which provider tax programs were enacted as of July 4, 2025, and identify the percentage of net patient revenues currently being taxed.

Review both state and local provider tax programs when determining the percentage of net patient revenues currently being taxed.
Coordinate across multiple government entities when necessary to develop a complete provider tax inventory.
Summarize existing provider tax programs and associated broad-based and uniformity waivers.
Review tax definitions and applicable statutory and regulatory language.
Confirm that hold-harmless requirements are being met.
Review the public policy rationale supporting existing tax rate groups and tax exclusions.

Evaluate Compliance Risks

States should review their current provider tax landscape to identify potential compliance risks associated with the changes under Sections 71115 and 71117.

Include all provider tax programs in the review, including taxes imposed on managed care organizations.
Calculate Medicaid utilization for each tax-rate group and compare utilization with the taxes paid.
Evaluate provider tax programs for broad-based, uniformity, and generally redistributive requirements.
Perform mathematical waiver tests on modified tax programs to determine compliance.
Identify tax structures that may be affected by the Section 71117 loophole-closure requirements.

Evaluate Fiscal Impacts

States should assess the financial effects of the WFTCL provider tax changes and determine whether modifications to existing financing structures may be necessary.

Perform fiscal impact analyses to calculate the financial effects of phasing down provider tax revenue percentages for expansion states.
Determine the effect of potential compliance changes on existing tax program structures.
Evaluate potential modifications to provider tax programs.
Explore alternative financing solutions for Medicaid programs where necessary.

How Myers & Stauffer Can Help

Myers & Stauffer helps states navigate provider tax design, compliance, payment strategies, and Medicaid financing requirements.

Provider Tax Expertise

Design, implementation, and compliance support for Medicaid provider tax programs.

Medicaid Financing

Support with provider payment strategies and federal revenue enhancement opportunities.

Compliance Support

Analysis of provider tax structures, waiver requirements, and Medicaid financing impacts.

Need More Information?

The changes under Sections 71115 and 71117 may have significant implications for state Medicaid financing and provider tax programs. Myers & Stauffer can help states assess their current provider tax landscape, identify potential compliance risks, evaluate fiscal impacts, and develop strategies to address evolving federal requirements.

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