WASHINGTON -- Here's one tax cut that business doesn't like.

Gary Bauer fears that his New Jersey nursing home could be devastated by a Bush administration proposal to halve the provider tax that states can charge patients.

It turns out that money collected through the tax is returned to nursing homes -- along with matching federal dollars -- in the form of higher reimbursements. The extra dollars mean additional staff and resources for patients.

By cutting in half the allowable tax, the administration estimates it will save $3.1 billion over five years.

In New Jersey, the cut would cost the state's Medicaid program about $45 million a year, according to an analysis conducted for the nursing home industry.

Cutting the tax would cost Montana about $8 million to $9 million, the state Department of Public Health and Human Services said.

For about 180 patients at Bauer's Cooper River West nursing home, that would mean fewer staff to care for their needs, fewer renovations to keep their residence in good condition and fewer comforts like televisions and couches. "The nursing home cannot function with this type of monetary cutback," he said.

Thirty-two states and the District of Columbia have a so-called provider tax for nursing homes. Most have the legally allowed maximum tax of 6 percent. Montana's tax is at 4 percent. Sixteen states also have provider taxes for hospitals, the American Hospital Association says.

The Bush administration believes states are taking advantage of a loophole that improperly increases federal spending, and wants to cut the maximum tax to 3 percent.

Mark McClellan, administrator for the Centers for Medicare and Medicaid Services, said the provider tax is an incentive for states to put more people in nursing homes.

He would rather see the federal government spend its money on care that keeps the elderly at home or in assisted living centers, which help seniors to meet daily needs, but not at the level nursing homes provide.

"If we're creating an incentive through the provider taxes to deliver institution-based care, less coordinated care, less person-focused care, then we're in fact adding to the cost of the overall Medicaid program and that hurts states as well," McClellan said.

"This is really about moving toward a more efficient way of providing health care, with more personal involvement and more emphasis on primary care and prevention," he said.

But some states argue that cutting the tax will lead to worse care for the most vulnerable, not better. In Arkansas, a provider tax established in 2001 helped many nursing homes survive as well as beef up staffing levels and training, said Gov. Mike Huckabee, a Republican.

"What this provided was the revenues to improve the quality of care those patients were getting," Huckabee said.

A report from a national accounting firm, BDO Seidman, predicts Arkansas will lose $66 million a year in federal funding if the provider tax is halved.

Huckabee, who is considering a presidential bid, said he questions the sanity of the proposal to halve the tax. He and other governors wrote Health and Human Services Secretary Mike Leavitt in June asking the administration to reconsider the proposed change.

"It's just another way in which there seems to be complete tone deafness in Washington to policies that are having a dramatic effect on the lives of the most vulnerable people we've got. It just never ceases to amaze me," Huckabee said.

Many lawmakers from both parties on Capitol Hill also have asked the administration to reconsider.

"I am concerned these cuts could shut down many nursing homes in rural areas. Congress already rejected these cuts as unacceptable," said Sen. Max Baucus of Montana, the top Democrat on the Senate Finance Committee. "The administration shouldn't do an end run around the Congress now."

Medicaid is funded by the federal government and the states. On average, the split is 57 percent federal and 43 percent states. Overall, the federal government spends nearly $200 billion a year on Medicaid, so the decrease in federal funding being proposed amounts to a cut of less than one half of 1 percent.

However, the impact would be much more severe on certain industries, namely nursing homes, and to a lesser extent, hospitals.

"Implementation of this budget proposal would have a catastrophic impact on the financial viability of the industry," says the Seidman firm's report.

The states with provider taxes for nursing homes are: Alabama, 4.5 percent; Arkansas, 6 percent; California, 6 percent; Connecticut, 6 percent; District of Columbia, 6 percent; Georgia, 4 percent; Illinois, 1.4 percent; Indiana, 6 percent; Kentucky, 6 percent; Louisiana, 5 percent; Maine, 6 percent; Massachusetts, 6 percent; Michigan, 6 percent; Minnesota, 6 percent; Mississippi, 6 percent; Missouri, 6 percent; Montana, 4 percent; Nevada, 6 percent; New Hampshire, 6 percent; New Jersey, 6 percent; New York, 4.2 percent; North Carolina, 4.5 percent; Ohio, 4 percent; Oklahoma, 6 percent; Oregon, 6 percent; Pennsylvania, 6 percent; Rhode Island, 6 percent; Tennessee, 4 percent; Utah, 3.2 percent; Vermont, 6 percent; Washington, 4 percent; West Virginia, 6 percent, and Wisconsin, 1.5 percent.