Connecticut Governor Ned Lamont just got caught with his hand in Uncle Sam’s cookie jar. For the last eight months, he has offered various far-fetched explanations claiming that the One Big Beautiful Bill Act, and its prohibition on hospital tax rate increases, did not apply to Connecticut.
Last summer, he jacked up Connecticut’s tax on hospitals almost 50%. The hospital tax is a shell game enabling states to obtain federal money simply by shifting money around: extracting taxes from hospitals, and, then, immediately returning most of it, with the return triggering matching federal funds. The higher the tax, the more federal dollars obtainable. A month ago he got caught and had to reverse his tax increase.
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Lamont thought he could take one more big beautiful bite out of Uncle Sam before the OBBBA took effect last July 4th. His increase took the hospital tax up to $1.2 billion, or 7.4% of Connecticut hospitals’ most recently reported $15.8 billion of net patient revenue, according to Lamont’s spokesperson.
Hospital taxes are not supposed to exceed 6% of net patient revenue. To go over that level, states need a waiver from Center for Medicare and Medicaid Services (CMS). In this case, CMS would have to have issued a waiver almost instantaneously, since Lamont signed the Connecticut budget with the increase just four days before the OBBBA took effect.
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Surprisingly, Lamont’s spokesperson said “The state has not submitted [applied for] a new waiver. The state has an existing agreement that runs through 7/1/26.”
That “agreement” was a settlement with the state’s hospitals which had sued the state, because, in the hospitals words, “For many years, Connecticut used the tax primarily to bolster the state budget – resulting in revenue gains for the state, and overall net losses for hospitals.”
The hospitals prevailed, with Lamont agreeing to reduce the hospital tax from $890 million in fiscal 2020 to $820 million in fiscal 2026 ending this coming June 30th. Apparently, CMS had issued a waiver blessing the 2020 settlement. Yet, how could a waiver approving an annual tax between $820 million and $890 million be construed as approving a tax of $1.2 billion?
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Later in September, the spokesperson elaborated, saying “we expect to receive approval from CMS.” Wait. How could the state receive approval of a waiver application that it had not submitted? Moreover, how could CMS approve a tax rate increase in September or thereafter if the OBBBA banned any tax rate increases after its July 4th effective date?
The spokesperson asserted that Connecticut was below the 6% threshold on hospital inpatient revenue; and, while the tax on outpatient revenue exceeded 6%, it was compliant under a different rule, the “75/75 test,” a rule not previously part of the public discourse, at least in Connecticut.
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Months passed. In November and again last January, the state’s Consensus Revenue Forecast reflected $1.3 billion in expected health care provider tax revenue (the extra $100 million reflects that Connecticut taxes other health care providers, mainly nursing homes).
Maybe Lamont got away with it.
Well, he didn’t. The summary of his new budget proposal reflects a $275 million reduction in total provider tax revenue to $920 million for fiscal 2027. Lamont will have to replace the $275 million and the expected associated federal matching funds with Connecticut’s own-source revenue… or cut spending.
The public budget document stated the change “will support the hospital industry in Connecticut while also ensuring that the state complies with revisions to Medicaid policy under P.L. 119-221 [the OBBBA] by reducing the inpatient tax rate from 6.0% to 4.1%.” Lamont’s spokesperson elaborated “The inpatient rate was reduced to 4.1% to meet the safe harbor under OBBBA,” based on “the effective tax rate in effect on 7/4/25 based upon the most recent year’s inpatient revenue.” Reality bites.
The budget document does not mention outpatient revenue or the tax thereon. However, a separate document, the Governor’s revenue proposals, reveals that the tax rate on outpatient revenue was an eye-popping 12.3% in 2018 and has scaled down only slightly to 10.5% this current FY 2026.
Lamont’s spokesperson confirmed that the outpatient tax rate remains well above 6% but remains compliant under the 75/75 test and also because it is below its effective rate as of last July 4th when the OBBBA took effect; the effective rate is declining as outpatient revenue increases.
Ignoring this saga’s myriad numbers and arcane rules and all the bobbing and weaving by the Lamont administration, the real takeaway is elementally simple. When you tax any operation – in this case hospital operations, you increase the cost of operation. In turn, higher-cost hospital operations inflate the hospital bills that hospitals have to charge Americans, either directly or indirectly in the form of higher health insurance premiums.
On top of this, one wonders why non-profit hospitals are being taxed at all? Most non-profits are not taxed. And why are for-profit hospitals being taxed a second time on top of the corporate income tax they already pay?
The hospital tax, and all other health care provider taxes, should be eliminated. The OBBBA goes halfway there. It scales down the “safe harbor,” i.e. the allowable tax rate, from 6% to 3.5% over five years. We need new legislation scrapping the remaining 3.5% – and immediately eliminating the infamous “75/75 rule.”
Red Jahncke is a nationally recognized columnist, who writes about politics and policy. His columns appear in numerous national publications, such as The Wall Street Journal, Bloomberg, USA Today, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.