Michigan finalizes FY 2025–26 Budget: Permanent tax changes and deep cuts raise business competitiveness concerns

Advocacy News – Oct. 3, 2025

What’s happening: After weeks of tense negotiations and a missed constitutional deadline, the Michigan Legislature has officially passed the state’s FY 2025–26 budget.

• While the budget avoids a government shutdown and adds over $1 billion in new road funding, it also includes permanent tax increases on Michigan businesses, which could have long-term consequences for our state’s competitiveness.

Decoupling from federal tax law — A first-in-the-nation move: Included in the final budget deal is House Bill 4961, which “decouples” Michigan’s tax code from key provisions of the federal One Big Beautiful Bill Act (OBBBA). This means Michigan businesses will no longer benefit from federal tax deductions and credits — such as those for equipment expensing, depreciation, and R&D — when filing their state taxes.

This move makes Michigan the first state to take such broad sweeping action blocking multiple tax reforms provided under OBBBA, a law championed by President Trump and Congress to enhance U.S. business competitiveness, and instead now forcing Michigan businesses to pay higher state taxes.

• The Michigan Chamber of Commerce fought to include a sunset provision on the decoupling bill to allow for future review and reconsideration. However, the amendment failed in the Senate on a party-line vote of 17-19, with all Republicans present voting “yes.” As a result, the decoupling provision is now permanent and Michigan employers will face ongoing tax increases and administrative burdens.

Budget cuts: $8 billion in reductions, mostly federal
The final budget totals approximately $80 billion, down from last year’s $84 billion. Much of the reduction — about $8 billion — comes from federal funding cuts, particularly in Medicaid and other health-related programs tied to changes in OBBBA.

In addition, the Legislature made $700 million in cuts to the Department of Labor and Economic Opportunity (LEO).

• The most noteworthy is a cut to the Going PRO Talent Fund. The Legislature reduced funding to $32 million, down from $54 million, despite an estimated $100 million in statewide need.

These cuts come at a time when Michigan is already struggling to attract and retain talent and investment.

Waste, fraud and abuse: House Republicans claim victory
House Republicans led a campaign to eliminate what they called “ghost” or “phantom” workers — unfilled positions that were still funded in departmental budgets. The final budget eliminates roughly 2,000 of these positions, representing about 40% of the total identified.

Speaker Matt Hall (R-Richland Township) and Appropriations Chair Ann Bollin (R-Brighton Township) hailed this as a major win for transparency and fiscal responsibility.

“We reset our priorities to meet needs across Michigan,” Bollin said. “We don’t have to gut it — we just need to cut it.”

Road funding — The clear winner: The budget includes $1.1 billion in new road funding, with additional revenue expected from two key tax bills:

• HB 4961: Decoupling from federal tax law (estimated $677 million in the first year)
• HB 4951: 24% wholesale marijuana tax (estimated $420 million annually)

These measures are expected to generate nearly $2 billion annually for infrastructure improvements.

The bottom line: While the budget delivers on infrastructure and transparency goals, it also raises serious concerns for Michigan’s business climate. The permanent decoupling from federal tax law, combined with cuts to workforce and economic development programs, could hinder growth and investment for years to come.

The Michigan Chamber will continue to advocate for policies that support a competitive, pro-growth environment and push for future reconsideration of the decoupling provision.

Read our full media statement outlining our concerns.

👉 Questions? Contact our advocacy team — we’re here to help.