FGA Applauds Closure of Massive Medicaid Tax Loophole, End of State Money Laundering Scheme

Loophole closure restores fairness after state payment gimmicks forced federal taxpayers to pay tens of billions of dollars

NAPLES, FL – Today, the Foundation for Government Accountability (FGA) issued the following statement in strong support of the Centers for Medicare & Medicaid Services (CMS)’s closure of a massive Medicaid tax loophole that allowed states to push the cost of their Medicaid programs onto federal taxpayers. President Trump and CMS Administrator Dr. Mehmet Oz deserve tremendous credit for taking steps to end this abuse of taxpayer dollars and reprioritize limited resources on services, not accounting gimmicks that pad state and hospital budgets.

Under the Medicaid financing loophole, states impose a “tax” on managed care companies, hospitals, and other providers, and count the revenue generated as state Medicaid funding, which is matched by federal funding. Then, states use those federal funds to repay the providers they taxed. Because of this, the taxed entity is practically made whole, the state draws in additional revenue to the general fund, and the money is used to finance more Medicaid expansion, even to illegal aliens. This money-laundering cycle is all paid for by federal taxpayers.

Specifically, the Trump administration rule prohibits states from imposing higher tax rates on Medicaid business than on non-Medicaid business, and it closes back-door pathways by blocking vague, opaque, or indirect tax structures intended to disguise disproportionate burdens on Medicaid business. It also implements the restrictions under the Working Families Tax Cut. FGA Action issued a public comment on the rule in July 2025.

“This rule addresses the growing and expensive problem of financing schemes and gimmicks that leave states with no incentive to control the costs of their Medicaid programs. For too long, states have surrendered responsibility for managing their own Medicaid programs and taken the easy route of saddling federal taxpayers with the tab for reckless spending,” said Jonathan Ingram, FGA’s Vice President of Policy and Research. “Americans work hard and deserve to know that their tax dollars are going to important services that benefit the entire country—not to illegal aliens, reckless state spending, and fraudsters. By closing loopholes, ending schemes, encouraging work, and pushing states toward program integrity, the Trump administration is putting Americans first and refocusing Medicaid on real needs.”

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The Foundation for Government Accountability (FGA) is a non-profit, multi-state think tank that promotes public policy solutions to create opportunities for every American to experience the American Dream. To learn more, visit TheFGA.org.