Michigan Budget Bills Make Sweeping Tax Changes

On October 7, 2025, Michigan Gov. Gretchen Witmer signed a budget package that updates important state tax rules, including decoupling from portions of the One Big Beautiful Bill Act (OBBBA), updating conformity to the Internal Revenue Code (IRC), and creating the Comprehensive Road Funding Tax Act to divert some tax revenue to road funding.

Transportation Funding Bills

H.B. 4961

While multiple bills are included in the package of bills passed as part of the 2025-2026 budget, H.B. 4961 has the widest applicability to all Michigan taxpayers doing business in the state. 

For all taxpayers, H.B. 4961 decouples the state from the following IRC changes made by the OBBBA, effective for tax years beginning after December 31, 2024, as if they were not in effect:

• Section 174A, immediate deduction of domestic research and experimental (R&E) expenses; and 
• Section 168(n), special depreciation of qualified production property.
  
  

Also, for corporate income taxpayers, Michigan will continue to fully decouple from the Section 168(k) bonus depreciation provisions.

Other IRC provisions will continue to apply to all taxpayers for tax years beginning after December 31, 2024, but H.B. 4961 provides that the IRC in effect as of December 31, 2024, must be used. That IRC conformity date will roll back some of the most taxpayer-friendly OBBBA provisions that would have taken effect, including: 

• Section 163(j), business interest expense deduction limitation – Michigan will continue to disallow depreciation and amortization addbacks to increase interest expense deductibility; 
• Section 179, immediate deductibility for depreciable business assets, including software – Michigan will retain the lower limits in place before passage of the OBBBA; and
• Section 174, R&D expense capitalization and amortization – Michigan will retain the requirement to capitalize and amortize domestic and foreign R&E expenses. 

Also, for individual and FTE taxpayers, Michigan will continue to conform to the Section 168(k) bonus depreciation provisions, with an important caveat. H.B. 4961 provides that the IRC in effect on December 31, 2024, which provides for a phase out of bonus depreciation immediate deductibility (40% for 2025, 20% for 2026, and 0% for 2027), must be used.

Another important provision of H.B. 4961 is updating the general IRC conformity date to January 1, 2025, while keeping the option to use the current IRC. It applies to corporate, individual, estate, trust and FTE tax provisions, all of which before the update had conformity dates of at least four years ago. However, despite the update and the continued ability to choose to apply current IRC provisions, the bill specifically prevents using the current IRC for the above-noted OBBBA provisions by requiring the application of the IRC in effect on December 31, 2024.  

One final provision related to the above conformity updates provides that federal taxable adjusted gross income for tax years beginning after December 31, 2021, must be calculated as if the transition rules under OBBBA (Section 70302 of P.L.119-21) do not apply.

On the individual income tax side, H.B. 4961 conforms to the OBBBA’s taxpayer-friendly treatment of tip and overtime wages, while restricting the eligible deduction for nonresidents to only services performed in Michigan. It also creates a three-tier system to determine the taxation of retirement income. Both provisions apply for tax years beginning on and after January 1, 2026, and before January 1, 2029.

While not part of H.B. 4961, between passage of the OBBBA and enactment of the state’s budget bills, the Michigan Department of Treasury issued a notice that provided limited relief for taxpayers that made FTE tax elections before the OBBBA was enacted. Only taxpayers opting into the first year of the three-year FTE election period that have not yet filed their annual FTE returns for the tax period are eligible. Taxpayers that have made election payments and filed their annual FTE returns for the period are ineligible for relief. Requests must be made before the end of the election window for the applicable tax year (for instance, September 30, 2026, for 2025 calendar-year taxpayers). 

Tie-Barred Bills

H.B. 4961 is tie-barred to three other tax bills: H.B. 4183 and H.B. 4951, which are part of the transportation package, and H.B. 4968.

H.B. 4183 amends the Motor Fuel Tax Act to increase the motor fuel tax from $0.31 to $0.51 per gallon beginning January 1, 2026, and with inflation thereafter. Motor fuel includes gasoline, diesel fuel, and kerosene. The bill also includes transition provisions to impose on licensed suppliers or importers of motor fuel held in storage or outside the bulk transfer system in excess of 3,000 gallons the motor fuel tax based on the difference in the prior rate of $0.31 per gallon and the new rate of $0.51 per gallon. Taxpayers subject to the transition rules must determine and remit their taxes by February 20, 2026. 

The increase in the gas tax is intended to offset the sales and use tax exemptions in the bills discussed below.

H.B. 4951 creates the Comprehensive Road Funding Tax Act, which, beginning January 1, 2026, imposes a new 24% excise tax on the wholesale price of recreational marijuana sales. Almost all the revenue therefrom is to be distributed to the Neighborhood Roads Fund created by S.B. 578. The act defines wholesale price broadly to include “any tax, fee, or other charge reflected on the invoice.” Because of the potential for tax on tax, legal industry commentators have noted that the effective wholesale excise tax rate would be 32%, not the stated rate of 24%.

Michigan already has a 10% cannabis excise retail tax on recreational marijuana, so the passage of H.B. 4951 will result in a total recreational marijuana excise tax of 34% and an effective rate of 42%. Medical marijuana is not subject to either excise tax. However, both medical and recreational marijuana are subject to the state’s 6% retail sales tax. 

The same day Whitmer signed the new 24% wholesale excise tax into law, the Michigan Cannabis Industry Association filed a lawsuit in the Michigan Court of Claims, asserting that the 24% wholesale excise tax is unconstitutional.

H.B. 4968 allows the state’s Department of Health and Human Services to continue the insurance provider assessment tax structure that was approved December 20, 2024, by the federal Centers for Medicare and Medicaid Services (CMS) and in place July 4, 2025, unless the CMS end-dates the waiver. If the CMS ends the waiver, the Department will have to propose a tax structure in compliance with federal rules.

Sales and Use Tax Relief for Fuel

In contrast to the H.B. 4183 provisions on motor fuel discussed above, H.B. 4180 and H.B. 4182 provide relief for some taxpayers by exempting eligible fuel from sales and use taxes beginning January 1, 2026. Eligible fuel is defined as motor fuel, alternative fuel, and leaded racing fuel; motor fuel is defined as gasoline, diesel fuel, and kerosene. However, H.B. 4180 excludes some types of fuel from the definition of eligible fuel, including liquified petroleum gas and motor or alternative fuel used for aviation, residential, commercial, and industrial heating and cooling. It also eliminates the prepaid sales tax on some fuels after December 31, 2025.  

Effective January 1, 2026, H.B. 4181 amends the Streamlined Sales and Use Tax Revenue Equalization Act to eliminate the sales tax on interstate motor carriers that use motor or alternative fuel in Michigan, as well as credits available to offset any sales tax paid on fuel purchased in Michigan.