Updates About Budget

Attorney General Dana Nessel has joined 21 other states in a legal challenge against the Trump Administration over its abrupt freeze of $6.8 billion in federal education funds. The lawsuit argues the freeze violates federal laws and constitutional provisions by halting already-approved funding for six key programs that support students with the greatest needs—such as English learners, migratory children, and adult learners. In Michigan alone, approximately $171 million is at stake, funding programs overseen by the Departments of Education (MDE), Lifelong Education (MiLEAP), and Labor and Economic Opportunity (LEO). These programs help support summer learning, teacher training, community enrichment, and adult education—many of which are already being disrupted.

Nessel and state education leaders are calling the move both illegal and harmful. Local schools had already made hiring decisions, signed contracts, and planned programming based on funds Congress appropriated and the Department of Education previously approved. Without intervention, school districts and adult education providers will be forced to scale back or cancel vital services just weeks before the school year begins. The lawsuit seeks immediate court action to restore the funding and prevent further disruption to educational programs that serve vulnerable student populations.

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.