A key source of revenue for the federal government could be drastically slashed if the Supreme Court upholds a ruling that President Donald Trump’s reciprocal tariffs are illegal.
But he acknowledged that if the top court goes against the administration, the U.S. “would have to give a refund on about half the tariffs, which would be terrible for the Treasury.”
Trump’s overall tariff regime has emerged as a crucial revenue source, especially after lawmakers cut taxes, and was expected to generate $300 billion-$400 billion a year.
While not all of the federal government’s tariff revenue is at risk, losing a huge chunk would still create havoc on the deficit and bond market.
Thomas Ryan, North America economist at Capital Economics, said in a note on Tuesday that losing the IEEPA tariffs would slash the effective tariff rate to about 8% from 17%. As a result, the federal budget deficit would rise close to 7% of GDP, up from about 6%.
“This alone would raise further concerns about the fiscal outlook and likely push bond yields higher,” he added.
And in a more dire scenario where the Supreme Court takes another six months or so to rule and goes against the tariffs, then the deficit would get close to 8% of GDP, Ryan warned.
But the end of the IEEPA tariffs would provide a lift to the economy, assuming Trump doesn’t replace them with more duties. If that’s the case, then fiscal policy would create a net stimulus effect of about $200 billion instead of being more neutral, he estimated. The risk that inflation would heat up further would also be reduced.
But in reality, Ryan said it’s likely the administration would expand tariffs that were invoked under a separate legal basis to make up for lost IEEPA tariff revenue, “maintaining an effective rate of at least 10% and limiting the size of any stimulus.”
