So if there is nothing to do aside from allow MIL to run everyone's lives, why ask for advice or comments (what the OP asked for)? I think the OP and her DH can expect the same results they've always gotten when they continue to take the same actions (or inactions) when it comes to his family of origin. So if that is the route they are going to take, then accept it will be frustrating and just laugh about it. Personally, I don't think it makes sense to take that route, but if that is the only option the OP and her DH are willing to consider, then there is no chance of any different result other than "MIL did something that upset me again." So the OP and her DH can expect to be regularly upset by MIL unless they cut her off.
Actually, even when the OP posted, they had already cancelled. Per the original post, I believe her initial questions were as follows (sorry I haven't mastered the double quoting):
"DH wants to tell them he is too busy to go because of work and that head in the sand routine is getting old. I told him I understand a white lie to grandma because why upset her further (she's in the 100+category), but he needs to tell his mother the real reason we're not going and discuss it with her.
Any advise appreciated...or commentary. Sigh. DH has yet to tell them we're not coming (he wanted to wait until their holiday celebration was over as he didn't trust his mom not to blow a gasget and let onto GMIL that she was angry/upset/disappointed, etc). "
So it seems to me that her original question was actually about how to broach their decision with MIL, not the decision itself.
As often happens in life, things morph and change and so at this point they have told the GMIL that they aren't coming but not the mother.
I get that you seem to think that the best thing would be to still throw the party. But since the MIL and AIL were, as I understand it, the people who were going to do the inviting of the family originally, and since MIL basically decided to chuck that whole idea and do her own and it would appear that AIL is going along with it, I'm confused as to how exactly the party would continue. I guess the OP could get all of the contact info from the AIL, call everyone and tell them "I realize that MIL is throwing a party for GMIL, but we are also going to throw one on a later date. Please come to ours too." But, of course, family dynamics being what they are, who knows if anyone would even come to the second party. Perhaps they don't want to risk annoying MIL - who they live closer to/deal with more. Perhaps, since the OP has stated she doesn't really know the people very well, they will decide not to come anyway. Who knows what will happen in that regard. But we do know that it will be a big huge hassle for the OP. And might even cause GMIL stress if she finds out all of the drama involved with celebrating HER birthday.
Your point that the OP's DH needs to not give his mother so much power is a good one. But I just don't see that still throwing their party too is the best way to start down that path. Now how they deal with the MIL's current actions of being upset that she wasn't told first? THAT is a good place to start the new way of dealing with her.