We Could Not Determine Whether West Virginia's Severance and Business Privilege Tax on Behavioral Health Services Is a Permissible Health-Care-Related Tax

We could not determine whether West Virginia's Severance and Business Privilege Tax (Severance Tax) is a permissible health-care-related tax. The Severance Tax does not place at least 85 percent of the tax burden on behavioral health services. We could not determine if the Severance Tax treats behavioral health services differently than the other items it taxes because the tax rates are not consistent and the proceeds from the tax on behavioral health services are placed in a fund different from the proceeds from the other items taxed. Citing privacy restrictions in its tax laws, West Virginia would not provide all the documents we needed to complete our analysis. We did not subpoena those records. Without this information, we could not identify the taxpayers or validate the services being taxed. As a result, we could not determine if the Severance Tax is a health-care-related tax and, if it is, whether it is a permissible health-care-related tax.

We did determine that the West Virginia State Tax Department collected Severance Taxes totaling $65.7 million from behavioral health centers for State fiscal years 2009 through 2013 and that this revenue was deposited into a restricted fund to pay State Medicaid expenses. By using its $65.7 million in tax revenue as the State share of Medicaid, West Virginia was able to draw $233.8 million in Federal funds to pay for $299.5 million in State Medicaid expenditures. Under Medicaid rules, revenues from an impermissible health-care-related tax may not be used to finance the State's share of Medicaid expenditures.

We recommend that CMS (1) work with West Virginia to determine whether the Severance Tax is a permissible health-care-related tax and (2) deduct the total amount of related tax revenues used to pay State Medicaid expenditures ($65.7 million) and recalculate the Federal share, which we estimate to have been overpaid by $50.6 million, if the Severance Tax is an impermissible health-care-related tax.

CMS agreed with our first recommendation and in June 2015 informed West Virginia that it believed the Severance Tax on behavioral health services appeared to be health-care-related and may not be permissible under Federal statute and regulations. West Virginia responded to CMS's concerns by announcing that it planned to introduce legislation to discontinue the Severance Tax on behavioral health services effective June 30, 2016.

CMS did not concur with our second recommendation because it made no official decision that the Severance Tax on behavioral health services was an impermissible health-care-related tax. CMS will not devote further resources to investigate this issue and will not pursue any financial recoveries for periods before June 30, 2016.

West Virginia believes that the Severance Tax is a not a health-care-related tax but intends to introduce legislation to discontinue the Severance Tax on behavioral health services.

If West Virginia has not rescinded its Severance Tax on behavioral health services or modified it to confirm to Federal statute and regulation by June 30, 2016, CMS should make decide whether the Severance Tax an impermissible health-care-related tax and make any required financial recoveries.