California politicians and interest groups have been working overtime to figure out a way to fix an illegal Medicaid provider tax—the subject of my recent Mercatus Center study. These taxes are problematic because they are generally accompanied with the guarantee of increased Medicaid payments to the providers paying the tax—payments largely financed with federal matching funds. As a result, provider taxes, which reek of government favoritism because of how the benefits often target select providers, raise Medicaid spending.
California’s tax is illegal under federal law because the state was holding numerous insurers harmless from the tax that should not have been. The state has recently come up with a revised tax plan that it is submitting for federal approval.
