State Taxes on Medicaid Workers Risk Pushing Low-Income Americans Further into Poverty

New Jersey has become the first state to impose annual fees on employers for hiring workers enrolled in Medicaid. Under legislation signed by Governor Mikie Sherrill (D-N.J.) on June 30, companies with at least 50 employees must pay between $325 and $725 per worker or dependent covered under Medicaid.

California lawmakers have approved similar measures directing the state to develop options for New Jersey-style taxes. Democratic representatives in Washington and Connecticut have also considered comparable proposals.

Supporters argue that profitable employers should not shift the cost of covering their workers onto taxpayers. However, such taxes alter business behavior. Employers may respond by avoiding hiring low-income workers—now numbering more than 74 million across the nation, representing over one-fifth of all Americans.

Medicaid covers approximately one-third of state expenditures and costs taxpayers $931 billion annually. Nearly 20 million individuals gained coverage through the Affordable Care Act’s expansion for able-bodied adults earning up to 138% of the federal poverty line ($29,863 for a couple).

States initially embraced this expansion because Washington promised to cover 90% of costs indefinitely. In contrast, many legacy Medicaid enrollees—including disabled individuals and children—receive less federal support.

To finance their share of Medicaid, states have historically employed strategies that maximize federal matching dollars. For example, they tax healthcare providers and then return much of the money through higher Medicaid reimbursements to attract additional federal funding. These practices may end next year under a Republican-led tax-and-spending law enacted last summer.

Consequently, some states are seeking new revenue sources for Medicaid. New Jersey’s law explicitly prohibits employers from considering Medicaid enrollment when making hiring decisions. However, lawmakers cannot eliminate incentives that encourage businesses to avoid the costs associated with employing such workers.

If hiring Medicaid recipients becomes more expensive than other employees, companies may automate entry-level positions using AI tools, reduce hiring, cut hours, or favor applicants less likely to trigger new fees. The most vulnerable are low-income Americans attempting to secure their first jobs, return to work after a break, or advance economically.

In contrast, the Trump administration and congressional Republicans have implemented work requirements designed to help more able-bodied adults enter and remain in the workforce. According to the Congressional Budget Office, these policies could reduce federal Medicaid spending by $326 billion over the next decade while increasing average family incomes by about $12,000 and lifting up to 2.9 million Americans out of poverty.

The underlying premise is that a stronger labor market serves as the best long-term solution for reducing Medicaid costs. State policymakers should recognize that policies discouraging low-income workers from entering employment counteract efforts to reduce Medicaid dependence.

By Sally Pipes