Op-Ed
CBO: One Big Beautiful Bill Grows the Economy, Cuts Taxes & Slows Welfare Spending
February 12, 2026 · David Ditch
The OBBB Catches a Big Problem
The One Big Beautiful Bill (OBBB) includes a consequential reform eliminating the ability of states to abuse a financing loophole and give illegal immigrants Medicaid. This loophole allows states to cover the costs of enrolling illegal immigrants on Medicaid using federal taxpayer dollars. The OBBB’s reform will prompt states such as California to disenroll millions of illegal immigrants that have been added to Medicaid, preserving resources for the program’s rightful beneficiaries and sending a signal that Medicaid is not a magnet for future illegal immigration. There are several provisions in the bill that will significantly limit this scheme. Section 71117, which tightens the “uniform and broad-based” standard for provider taxes, restricts the loophole that has allowed states to launder federal dollars through their Medicaid programs. The new statutory guardrail acts as a backstop to a new Centers for Medicare & Medicaid Services rule on “Preserving Medicaid Funding for Vulnerable Populations—Closing a Health Care-Related Tax Loophole.” This rule abolishes the waiver process California and others have been exploiting. The statute and the rule work together, cutting off the loophole that has pushed the federal share of Medicaid far beyond Congressional intent.Stopping California’s Shell Game
This shell game has widened for years, but California’s recent scheme has exposed the extent to which states have gone to abuse provider taxes. As I exposed in a March joint paper with the Paragon Health Institute: California tripled the provider tax it imposes on Medicaid managed-care plans beginning in 2023, then recycled every penny through higher capitation payments to those same plans. Because the inflated payments looked like legitimate Medicaid spending, Washington reimbursed about sixty cents of every dollar, leaving the state with a multibillion-dollar windfall it could spend on providing Medicaid to illegal immigrants and eliminating the asset test for Medicaid, thus providing access to wealthy Californians. Across the four fiscal years that run from April 2023 through December 2026, the maneuver will pour more than $19 billion from the federal government into California coffers without a dime of real state contribution.
This enticement of free money has been too empowering. California used the windfall to extend full Medicaid benefits to illegal immigrants in the prime working-age bracket of 26 to 49 (a group that now accounts for roughly three-quarters of the nation’s unauthorized population), and to abolish the asset test for long-term care. Those expansions would have been much more difficult if California had needed to raise taxes openly or cut other spending to pay for them. Instead, federal taxpayers covered the entire bill without even knowing it, even though federal law explicitly bars Medicaid funding for illegal immigrants.
The mechanics of the provider tax are complex; this has only facilitated its abuse. California levies a fee of roughly $187 dollars per Medicaid managed care enrollee each month while charging a tax of only $2 on commercial plans. Because the state raises capitation payments by the same amount, Medicaid insurers face no net burden. In fact, they pocket an extra $4.3 billion dollars in “plan augmentations” set aside to sweeten their side of the arrangement. Meanwhile, the federal government matches the inflated payments, having sent $9.5 billion to the state general fund in the first two years alone. This allowed California to cover the full cost of the expansion using federal dollars.
