Mandatory Spending
Function 550 - Health
Limit State Taxes on Health Care Providers
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
Billions of dollars | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025– | 2025– | |
Lower the tax threshold to 5 percent | |||||||||||||
Change in outlays | 0 | -2 | -3 | -4 | -5 | -6 | -6 | -7 | -7 | -8 | -14 | -48 | |
Change in revenuesa | 0 | * | * | * | * | * | * | * | * | * | * | * | |
Decrease (-) in the deficit | 0 | -2 | -3 | -4 | -5 | -6 | -6 | -7 | -7 | -8 | -14 | -48 | |
Lower the tax threshold to 2.5 percent | |||||||||||||
Change in outlays | 0 | -13 | -16 | -20 | -24 | -29 | -32 | -35 | -38 | -41 | -73 | -248 | |
Change in revenuesa | 0 | * | * | -1 | -1 | -1 | -1 | -1 | -1 | -1 | -2 | -7 | |
Decrease (-) in the deficit | 0 | -13 | -16 | -19 | -23 | -28 | -31 | -34 | -37 | -40 | -71 | -241 | |
Eliminate the tax threshold | |||||||||||||
Change in outlays | 0 | -33 | -41 | -51 | -62 | -74 | -81 | -88 | -96 | -104 | -187 | -630 | |
Change in revenuesa | 0 | -1 | -1 | -1 | -2 | -2 | -2 | -3 | -3 | -3 | -5 | -18 | |
Decrease (-) in the deficit | 0 | -32 | -40 | -50 | -60 | -72 | -79 | -85 | -93 | -101 | -182 | -612 | |
Data sources: Congressional Budget Office; staff of the Joint Committee on Taxation.
This option would take effect in October 2025.
* = between -$500 million and zero.
a. Estimates include the effects on Social Security payroll tax receipts, which are classified as off-budget.
Medicaid is a joint federal-state program that covers acute and long-term health care for groups of people with low income, chiefly families with dependent children, elderly people (those 65 or older), nonelderly people with disabilities, and—at the discretion of individual states—other nonelderly adults whose family income is up to 138 percent of the federal poverty guidelines. The federal and state governments share in the cost of the program. The federal government reimburses about 63 percent of states' costs, on average, with the rest of the funding coming from the states' general funds or from other state sources. Most states finance a portion of their Medicaid spending through taxes collected from health care providers.
Until 1993, some states had "hold-harmless" arrangements with providers, wherein they taxed providers who received a large amount of Medicaid payments at higher rates than they taxed other providers of the same type (hospitals, for example). The collected taxes were returned to those providers in the form of higher Medicaid payments, thereby leaving them at least no worse off (that is, held harmless). Such arrangements led to large increases in federal Medicaid outlays.
In response, federal lawmakers began to require states that taxed health care providers to collect those taxes at uniform rates from all providers of the same type, regardless of the number of Medicaid patients served. In addition, states generally were no longer allowed to establish hold-harmless arrangements. However, federal law provided for a "safe harbor" exception that allows a state to use hold-harmless arrangements when the taxes it collects do not exceed 6 percent of a provider's net revenues from treating patients.
This option consists of three alternatives. Under the first alternative, the tax threshold for using hold-harmless arrangements would be lowered to 5 percent. Under the second alternative, the threshold would be lowered to 2.5 percent. Under the third alternative, the threshold would be eliminated; that is, states would no longer be allowed to collect revenues under hold-harmless arrangements.
For each alternative, the Congressional Budget Office expects that federal spending would decline because states would reduce some of their Medicaid spending in response to decreases in their collection of taxes paid by providers. Some people would no longer enroll in Medicaid and would instead obtain other federally subsidized health insurance through an employer or the health insurance marketplaces established by the Affordable Care Act, which would lead to both an increase in outlays and a decrease in revenues.