At the tail end of the 2025–2026 legislative session, Michigan lawmakers moved swiftly to reshape the state tax landscape by passing House Bill 4961, a measure that severs state conformity with five federal tax provisions enacted earlier this year under the One Big Beautiful Bill Act (OBBBA). The change removes or sharply reduces the state-level benefit of those federal tax adjustments for Michigan taxpayers while leaving in place a refundable research-and-development credit adopted by the state earlier this year.

Decoupling means Michigan will not automatically accept certain federal tax changes when calculating state taxable income, requiring businesses to add back or otherwise reconcile differences between federal and state filings. For firms that expected layered savings from the OBBBA—federal relief compounded by a parallel state reduction—HB 4961 curtails that outcome and raises effective state tax liabilities relative to full conformity.

The Legislature framed the move as a fiscal corrective measure designed to protect state resources after a year of sweeping federal tax alterations. By narrowing conforming provisions, Michigan preserves more of its tax base and limits the revenue erosion that would accompany automatic adoption of federal changes. That calculation matters for budget planning: states that closely conform to federal tax law can experience sharper swings in revenue in the wake of major federal tax bills; decoupling is a common state-level response to stabilize revenue and control policy choices at the state level.

For Michigan businesses, the practical effects will be immediate. Firms will face more complex compliance obligations as tax preparers reconcile the five decoupled provisions on state returns, potentially raising administrative costs. The net tax burden for many companies that benefited from the OBBBA at the federal level will be higher in Michigan than in states that elected to conform. That could influence decisions about capital spending, corporate structuring and, over time, location choices for activities where state tax treatment is a deciding factor.

Not all business incentives were affected. HB 4961 explicitly preserves the refundable R&D tax credit the Michigan Legislature adopted earlier this year, maintaining a targeted incentive intended to support innovation and keep high-value research activities in-state. Policymakers and business groups are likely to point to that retained credit as evidence of a measured, sector-sensitive approach rather than a wholesale rollback of competitiveness.

The political economy of the decision will be watched closely. Businesses that face increased state tax costs may intensify lobbying for offsets or exemptions, while state officials will argue the change was necessary to safeguard fiscal stability. More broadly, HB 4961 fits into a longer-term pattern of state responses to federal tax reform: when Washington alters incentives, states decide whether to mirror those changes, adjust them, or resist to preserve budgetary autonomy.

For Michigan, the immediate consequence is a redefined tax base that narrows the state benefit of a major federal bill while retaining a key incentive for R&D. Over the medium term, the law will shape corporate tax planning and could influence where investment flows within the region as firms weigh federal advantages against state-level treatments.