U.S. would have to refund half its tariff revenue if IEEPA duties invalidated

On NBC’s Meet the Press with Kristen Welker on Sunday, Treasury Secretary Scott Bessent expressed confidence that the justices would side with the Trump administration, adding that there “are numerous other avenues that we can take” even if they don’t.

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.”

Late last month, a federal appeals court upheld an earlier ruling by the Court of International Trade that found the tariffs’ legal basis under the International Emergency Economic Powers Act (IEEPA) wasn’t valid. The 7-4 decision won’t take effect until Oct. 14 to give the administration time to appeal to the Supreme Court. It doesn’t affect sectoral tariffs, such as those on autos, aluminum and steel, that were imposed under a separate legal basis.

So far this calendar year, the U.S. has collected $158 billion in total tariff revenue, according to the White House. That includes the IEEPA tariffs that are being challenged in court and those that aren’t.

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.

In fact, the windfall is so critical that S&P Global cited it when reaffirming the U.S. credit rating and outlook. In addition, the Congressional Budget Office has estimated that tariffs would shave trillions of dollars off the federal budget deficit. 

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.

Meanwhile, the latest jobs report confirmed that the labor market weakened sharply over the spring and summer and that sectors most affected by tariffs have seen the biggest losses.

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.”