Trump's Fiscal Plan Faces $2 Trillion Hole After Tariff Ruling

A recent court ruling that struck down much of former President Donald Trump’s broad-based tariff regime could have major fiscal consequences for the United States. If the decision is upheld, economists say it could leave a $2 trillion hole in the country’s finances over the next decade, raising new hurdles for Republican lawmakers as they try to push through a tax cut package worth around $4 trillion.

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The ruling jeopardizes a crucial source of funding Republicans hoped to use to counterbalance the cost of their proposed tax cuts. Douglas Elmendorf, a professor at Harvard’s Kennedy School and former director of the Congressional Budget Office, emphasized that the judgment, if it holds, would wipe out billions in annual tariff revenue that had been projected to fund federal initiatives.

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The White House, however, is not backing down. On Thursday, a federal appeals court temporarily blocked the lower court’s decision, buying time for the administration to prepare an appeal to the Supreme Court, which it intends to file as early as Friday.

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But if the ruling by the Court of International Trade (CIT) stands, economists at Goldman Sachs and Citigroup estimate that nearly $200 billion in yearly duties would be erased. That revenue had become essential to gaining Republican support for Trump’s expansive tax legislation, often described by the former president as a “big beautiful bill.”

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The anticipated $2 trillion in tariff collections over a decade was designed to offset at least a portion of the cost of the tax bill. The Joint Committee on Taxation has noted that proposed spending reductions won’t be enough to fully cover the bill, making the tariff revenue all the more vital.

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Should the courts ultimately reject Trump’s original tariff structure, his administration would likely be forced to reconstruct a new framework for duties using alternative executive powers. But that process could take months, and any new tariffs might still be vulnerable to legal scrutiny. Treasury Secretary Scott Bessent, speaking on Fox News, warned that the court’s intervention harms Americans by undermining both trade strategies and the inflow of critical tariff revenue.

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A reduction in revenue, even temporarily, could create challenges for the federal government. With current legal restrictions in place against increasing net new debt, the Treasury Department has been relying on unconventional accounting measures to meet its financial obligations. Monthly customs collections recently hit a record high of over $16 billion, bolstering Treasury cash flow during a tight fiscal environment.

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Barclays analysts cautioned that the court’s decision might accelerate the timeline by which the Treasury runs out of available funds and emergency fiscal tools. This would place added pressure on congressional Republicans to finalize the tax legislation, especially since the bill includes provisions to raise the debt ceiling.

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Ernie Tedeschi, head of Yale University’s Budget Lab and a former Biden economic official, noted that the ruling has significantly darkened the fiscal outlook. He added that the probability of maintaining very high tariffs has diminished. Research by his team estimates that government revenues could fall by $2 trillion over ten years if the court’s decision holds and existing tariff levels remain unchanged. Instead of collecting $2.7 trillion, revenue could dip to around $700 billion.

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The legal dispute centers on Trump’s use of the International Emergency Economic Powers Act (IEEPA), which he invoked to justify historically high tariffs. On April 2, his administration introduced what was dubbed “Liberation Day” tariffs, including a universal baseline rate of 10% and higher levies for certain nations. Though these tariffs were paused ahead of the ruling, the average U.S. tariff rate briefly climbed to nearly 27%, according to Bloomberg Economics. The court ruling would reduce that rate to under 6%.

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Other legal mechanisms remain available to Trump’s team, such as Section 232 of the Trade Expansion Act, which allows the imposition of tariffs for national security reasons. This tool has already been used to target sectors like steel, autos, smartphones, and semiconductors. Wolfe Research’s chief economist, Stephanie Roth, estimates that the court decision could slash annual tariff revenues by around $180 billion.

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Despite the setback, experts at Citigroup, Goldman Sachs, and Morgan Stanley believe the administration may still be able to generate sufficient tariff income through alternative channels.

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The Trump administration has contested outside forecasts that claim its tax plan will deepen the budget deficit. White House Council of Economic Advisers Chair Stephen Miran recently argued that tariffs will raise hundreds of billions annually, countering worries about fiscal shortfalls. White House Press Secretary Karoline Leavitt dismissed deficit concerns as baseless, blaming them on outdated assumptions from government scorekeepers like the Congressional Budget Office.

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After the House approved its version of the tax bill, the proposal is now under review in the Senate. Some Republicans might attempt to include new tariffs in the final package to help reduce its financial burden. However, support for such a move remains uncertain.

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Alex Durante, a senior economist at the Tax Foundation, noted that while a narrower tariff addition might be considered, there’s little appetite for the sweeping measures seen under Trump. Even Trump himself expressed frustration with the legislative process in a Truth Social post, criticizing the slow pace and inefficiency of congressional negotiations on tariffs.

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