In the Face of a Legal Threat, Trump's Deficit Plan is at Risk Because of Tariffs

President Donald Trump’s most aggressive move to tackle soaring U.S. budget deficits sweeping tariff hikes is now under legal threat, raising concerns that the nation’s already fragile fiscal outlook could worsen.

‍

Trump and key advisers, including Treasury Secretary Scott Bessent, argue that tax cuts, deregulation, and fresh waves of corporate and foreign investment will eventually reduce the government’s borrowing needs by boosting economic growth and revenues. Many economists remain skeptical of those claims, but few dispute that tariffs have created a steady stream of cash for the Treasury.

‍

Customs duties, which are largely paid by American importers, have already totaled $165 billion in fiscal 2025 with a month still left about $95 billion more than last year, according to Treasury data released Thursday. Most of that surge stems from tariffs Trump imposed under the International Emergency Economic Powers Act (IEEPA), Bloomberg Economics found.

‍

But a federal appeals court ruling on August 29 cast doubt on the legality of using IEEPA for that purpose. The Supreme Court has agreed to review the case, and if it rules against the administration, the government could be forced to refund massive sums, Bessent warned. He remains confident, however, that the White House will prevail.

‍

The tariff revenue equates to roughly 1% of U.S. GDP. At a time when deficits are running above 6% of GDP, those funds are critical to advancing Bessent’s long-term goal of trimming shortfalls toward 3%. If the revenue disappears, investors would be left relying on optimistic projections for economic growth and productivity to offset America’s rising borrowing needs.

‍

“This is a wild card policymakers will have to confront if it comes,” said Lou Crandall, chief economist at Wrightson ICAP, who has studied U.S. debt dynamics since the 1980s. “If the case goes against the Treasury and they want to keep deficits from ballooning, they’ll need some other policy response though it’s unclear what that might be.”

‍

For now, bond traders are paying more attention to prospects for Federal Reserve rate cuts, which have pushed yields lower across maturities this month. There’s also speculation Trump’s team could reestablish much of the tariff structure through other executive powers, such as Sections 232 and 301.

‍

“We expect bond markets to look past the one-time cost of tariff refunds,” wrote Tobin Marcus, head of U.S. policy at Wolfe Research. He added that if Trump loses in court, he would likely reintroduce the tariffs under other authorities.

‍

Still, Bessent acknowledged this “fallback” plan would be more cumbersome and would limit Trump’s flexibility. Constant changes in duties already create headaches for businesses, adding costs and uncertainty. If growth slows and jobs weaken, federal revenues could fall further, deepening the deficit challenge.

‍

For companies, the shifting tariff environment has been maddening. “It’s the most infuriating thing,” said Elana Ruffman, marketing executive at Illinois-based hand2mind Inc., a maker of educational toys.

‍

After Trump slapped tariffs above 100% on China in April, Ruffman’s company shifted a new product line to India, believing it would soon secure a trade deal with Washington. The firm rushed to get yoga and mindfulness toys ready for the holiday season, only to be hit with a surprise 50% tariff on Indian imports. Meanwhile, levies on Chinese goods were reduced to 30%.

‍

So far in 2025, the company has paid more than $5.5 million in tariffs, up from $2.3 million in 2024. The burden would have been far greater if the firm hadn’t halted production on several items to avoid steep price increases, Ruffman said. Her company is also among those suing the Trump administration over its IEEPA-based tariffs, a case now awaiting Supreme Court review.

‍

The Yale Budget Lab estimates that invalidating the IEEPA tariffs would erase about $1.5 trillion in projected revenue over the next decade, leaving only $496 billion from remaining levies. While many economists now anticipate stronger revenue collections in the long run, a court-ordered wave of refunds could remind investors how fragile the fiscal outlook really is.

‍

The Congressional Budget Office has already warned that U.S. debt is on track to surpass the record levels set after World War II by 2029 even assuming Trump’s 2017 tax cuts expire at the end of 2025. Trump’s most recent tax package, signed in July, added further breaks, making tariffs even more essential to containing borrowing.

‍

S&P Global Ratings highlighted the tariff-driven revenue boost when it reaffirmed the U.S. AA+ credit rating last month. But a reversal could reignite fiscal worries.

‍

“Markets could grow uneasy if a major refund significantly weakens Treasury’s finances,” wrote TD Securities strategists led by Gennadiy Goldberg in a September 4 note. “That’s especially true given rating agencies have explicitly pointed to tariff revenues as supporting the long-term U.S. debt trajectory.”

‍