Updates About Budget

Tensions reached a boiling point in the Michigan House last week after Rep. Alabas Farhat (D-Dearborn) was abruptly removed from his post as minority vice chair of the House Appropriations Committee by Speaker Matt Hall (R-Richland Twp). The move followed Farhat’s no vote on HB 4506, a Republican-backed bill that would allow life without parole for 19- and 20-year-olds convicted of particularly violent crimes, and HB 4141, which proposed banning cell phone use by students in schools.

Farhat defended his vote, arguing the policy deserved further debate and that Democrats were given little time to review final language. Speaker Hall, however, claimed Farhat failed to uphold a commitment and pointed to his resistance during budget talks as further justification. The session, which lasted more than seven hours, ended with no bills passed and deepened uncertainty over who will now represent House Democrats in ongoing—and already strained—budget negotiations.

The House Fiscal Agency’s June 2025 Revenue Report brought positive short-term news, with major tax revenues and lottery earnings totaling $3.3 billion—an 8.3% increase from June 2024 and $64 million above the May 2025 Consensus Revenue Estimating Conference (CREC) projections. General Fund revenues were bolstered by stronger-than-expected individual income and corporate tax collections, contributing to a $71.8 million surplus above forecasts. Individual income tax revenue alone totaled $1.5 billion (up 15.5% year-over-year), and corporate income tax revenue exceeded estimates by more than $30 million. However, revenues dedicated to the School Aid Fund missed projections by $17 million, with an additional $9.2 million redirected to other earmarked funds.

Looking ahead, however, the recently enacted federal One Big Beautiful Bill Act of 2025 (OBBBA) may substantially alter Michigan’s fiscal landscape over the next decade. The act introduces sweeping federal tax changes that are expected to reduce Michigan’s business tax base and, consequently, state revenue. The House Fiscal Agency now anticipates Michigan could lose $677 million in FY 2025-26, $613 million in FY 2026-27, and $444 million in FY 2027-28 due to provisions such as expensing for research and experimental costs, Section 179 expansion, and limitations on business interest deductions. While some of these losses will taper off by FY 2030-31, Michigan is expected to forgo billions in revenue over the long term unless it decouples from the affected federal tax provisions.

As lawmakers head into the next phase of FY 2026 budget negotiations, they will need to balance the strong performance of current revenues with the looming structural changes driven by OBBBA. These federal changes, combined with upcoming reductions in Medicaid and SNAP cost-sharing adjustments, will likely place additional pressure on the state’s General Fund in the years to come.

Review previous revenue estimates and CREC reports here.

State Attorney General Dana Nessel recently joined 16 other state attorney generals in filing a lawsuit against the U.S. Department of Education over its decision to halt funding for mental health services in K–12 schools. The legal challenge asserts that the Department’s action to discontinue congressionally allocated grants violates federal law, including the Administrative Procedure Act and constitutional protections. These funds were initially approved to support the hiring of school-based mental health professionals in response to growing student needs.

The lawsuit highlights the significant impact of these grants, which helped serve hundreds of thousands of students and expand access to school counselors, social workers, and psychologists. In Michigan, the Department of Education, Grand Valley State University, and Lansing School District were among those affected. Attorney General Nessel emphasized that revoking these resources could worsen the mental health crisis facing schools and deprive students of essential support. The suit seeks to restore the funding and prevent further disruptions to these critical services.