On June 16, the Senate Finance Committee unveiled preliminary bill language for its section of the Senate Republican budget reconciliation bill. Senate Republican leaders could have chosen to moderate the draconian cuts to Medicaid and the Children’s Health Insurance Program (CHIP) included in the House-passed budget reconciliation bill (H.R. 1 or the “One Big Beautiful Bill Act”) which would institute $863.4 billion over ten years in gross spending cuts and would increase the number of uninsured by 7.8 million by 2034, according to Congressional Budget Office estimates (here and here). Instead, Senate Republican leaders chose to make the Medicaid and CHIP cuts even harsher. Chief among the changes worsening the severity of the House-passed bill’s cuts is a new provision related to provider taxes, which is a critical source of revenues for states to help them finance their share of the cost of Medicaid. This new provision would phase down the current limit on the size of most provider taxes (known as the “safe harbor” threshold) but only in the 40 states and the District of Columbia that have adopted the Medicaid expansion.

Under longstanding federal rules, states may institute taxes and assessments on hospitals, nursing homes, managed care plans and other providers to help finance their Medicaid programs. Such provider taxes must comply with three federal requirements: they must be uniform and broad-based and cannot hold taxpayers harmless. The hold harmless requirement can be satisfied under a safe harbor if the tax does not exceed six percent of net patient revenues.

As part of section 71120, the Senate Finance Committee bill includes new language not in the House-passed bill that would lower the safe harbor threshold of 6 percent starting on October 1, 2026 but only in Medicaid expansion states. The threshold would be reduced to 5.5 percent in fiscal year 2027, 5 percent in 2028, 4.5 percent in 2029, 4 percent in 2030 and then to 3.5 percent in fiscal year 2031 and thereafter. The lower thresholds would apply to existing taxes and assessments on all provider types including hospitals, except for nursing homes and intermediate care facilities for individuals with intellectual disabilities (so long as the taxes on such nursing homes and intermediate care facilities were already in effect as of May 1, 2025 and are otherwise in compliance with the current 6 percent threshold). Puerto Rico and the other territories would be exempt from the reduced safe harbor threshold.

According to data from KFF, as of state fiscal year 2024, there are currently 18 expansion states that have taxes on hospitals that are above 3.5 percent of net patient revenues which would be eventually barred by the new, lower safe harbor. (The states are Arizona, Colorado, Connecticut, Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New York, Oklahoma, Oregon, Rhode Island, Utah, Vermont, and Virginia.) Seven of these states have taxes on hospitals that are above 5.5 percent and would be subject to the lower safe harbor next year. (The states are Arizona, Colorado, Connecticut, Michigan, Rhode Island, Vermont, and Virginia.) As a result, these expansion states would have to shrink the size of their existing hospital taxes and thus have considerably less revenues available to finance Medicaid as a result. They would have to raise other taxes like income taxes or sale taxes, cut other parts of their budget like K-12 education, or, as is far more likely, dramatically cut their Medicaid programs. (As discussed below, they would be barred under a separate provision from instituting new provider taxes or raising existing taxes to replace the lost revenues, even if those new taxes or increased taxes are set below the reduced safe harbor threshold.).

Moreover, some of the existing taxes on hospitals that would be barred include hospital tax increases that were explicitly used to finance the Medicaid expansion (as well as to finance specific other improvements to the rest of the Medicaid program such as increasing access to behavioral health services and home- and community-based services and enhancing hospital payment rates to support safety net and rural hospitals). These expansion states would therefore be at risk of being unable to continue to finance the Medicaid expansion moving forward. At the very least, all of the affected expansion states would face fiscal and political pressures to drop the expansion, in order to retain current provider tax revenues and avoid major Medicaid and overall general fund budget shortfalls over time that states would otherwise be unable to close.

In addition, the KFF data show that states have existing taxes on other affected provider types whose size now exceeds 3.5 percent of net patient revenues. At least five states have taxes on managed care plans above 3.5 percent. (The states are California, Illinois, Louisiana, New Jersey, and Pennsylvania, although the taxes in California, and New Jersey would already be newly prohibited under the “uniformity waiver” provision discussed below.) Similarly, nine states have taxes on ambulance providers above 3.5 percent. (The states are California, Colorado, Kentucky, Louisiana, Massachusetts, Oklahoma, Utah, Washington, and West Virginia.) Furthermore, several states have other taxes on providers in excess of 3.5 percent (including Maine for an unreported provider type, Kentucky for community living supports, and West Virginia for lab/x-ray providers.) Loss of state revenues from these taxes would create further budget gaps that would lead to severe Medicaid cuts, including but not limited to the expansion.

Notably, at the same time, the Senate Finance Committee bill retains the House-passed bill’s two provisions related to provider taxes with almost no change. As we have explained, the first provision (in section 71120) would immediately bar states from instituting any new provider taxes or increasing existing taxes. This would leave states zero flexibility on provider taxes moving forward to compensate for current and future budget shortfalls (including during recessions or due to cost-shifts to states instituted under various provisions of the budget reconciliation bill such as the requirement for states to newly contribute to the cost of SNAP benefits) or to finance improvements to expand Medicaid eligibility and benefits and enhance provider payment rates. Moreover, as noted, this permanent prohibition on new provider taxes or increases in existing taxes, which takes effect on the date of enactment, would also mean that states could not replace revenues lost from the reduction in the safe harbor threshold (even if such new taxes or tax increases are set to stay below the considerably lower safe harbor limits).

The second provision (in section 71122) would essentially codify a new proposed rule from the Centers for Medicare and Medicaid Services (CMS) prohibiting certain existing “uniformity waiver” provider taxes (in at least 7 states, all of which are expansion states: California, Illinois, Massachusetts, Michigan, New York, Ohio, and West Virginia) but without the rule’s limitations and clarifications protecting other current taxes. It would also continue to not offer any guarantee of a transition period for these states. (Under the provision, the Secretary of Health and Human Services may provide a transition period of up to three years but is not required to provide any transition period at all. The only change, relative to the House-passed bill, would be to clarify that states could come into compliance by modifying the non-compliant tax in ways that increase the rate or expand the base of the tax that without violating the new prohibition against increasing existing taxes. But this change is not likely to be meaningful because the exception is only available until either the date of enactment or the end of any transition period even though no transition period would actually be required and a transition period may be much shorter than three years.). This would result in substantially less state funding available to finance Medicaid in these affected states, leaving them no choice but to raise other taxes, cut other parts of their budget like education, or more likely, sharply cut their Medicaid programs.

By themselves, these two provisions would already seriously undermine state financing of Medicaid. But adding the new phasedown of the safe harbor threshold would further devastate state Medicaid financing by requiring expansion states to dramatically scale back the size of many of their existing provider taxes (including taxes on managed care plans that would not be prohibited under the uniformity waiver provision, such as in Louisiana, New Jersey and Pennsylvania).

Under the Senate Finance Committee bill, some expansion states would see existing provider taxes prohibited immediately under the prohibition against certain “uniformity waiver” provider taxes. Soon after, by as early as October 2026, more and more expansion states would be forced to scaled back the size of existing provider taxes on hospitals and other providers under the reduction in the permissible safe harbor threshold. In some cases, states would be forced to repeal provider tax increases that have been used to explicitly finance the state share of the cost of the Medicaid expansion. In other cases, states would be forced to roll back provider taxes that have been used to finance other Medicaid improvements such as eligibility expansions, expanded access to home- and community-based services, and payment rate increases to rural hospitals and other safety net providers. At the same time, states would be permanently unable to add new provider taxes or increase other existing provider taxes to raise alternative revenues.

As a result, faced with drastically reduced funds to finance their Medicaid programs, states would have no choice but to deeply cut their Medicaid programs over time. That includes dropping the Medicaid expansion entirely or slashing expansion enrollment and benefits, which is clearly a priority of the reconciliation bill as multiple provisions are specifically intended to undermine the Medicaid expansion including mandatory work reporting requirements, more frequent eligibility redeterminations, and increased cost-sharing. It is also clearly the intent of House and Senate Republican leaders to deter the 10 remaining non-expansion states from taking it up in the future, as these provider tax restrictions would make it much harder for states to newly finance the expansion (and cut revenues raised from existing provider taxes if they decide to adopt the expansion in the future under the safe harbor provision). But these provider tax restrictions would also lead to states cutting coverage and access for children, seniors, and people with disabilities as well, as provider taxes are a critical source of financing widely used by states to sustain and improve their overall Medicaid programs.