Supreme Court Tariff Ruling May Sink U.S. Budget Outlook

The Supreme Court will take center stage on Friday morning when it may hand down its ruling on the legality of about half of Trump tariffs put in place last year. The outcome of the case has important implications for the fiscal deficit, interest rates, President Donald Trump’s legislative agenda and potentially the midterm elections.

Oral arguments on Nov. 5 seemed to indicate that a majority of justices thought the White House lacked authority to impose tariffs on a country-by-country basis under the International Emergency Economic Powers Act (IEEPA). Current odds on prediction market site Polymarket show a 27% chance that Trump will prevail.

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The Supreme Court is expected to announce one or more rulings starting at 10 a.m. ET tomorrow. Additional rulings are expected Feb. 24 and 25. However, there’s no certainty that the tariff ruling will be among them.

Will Supreme Court Order Refunds?

Costco (COST) is among a host of companies that already filed suit to receive refunds if the court rules the tariffs illegal. Census data through Dec. 14 indicates that $81.7 billion in revenue had been collected from tariffs imposed under the IEEPA.

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IEEPA-based tariffs include country-specific tariffs, including 20% duties on China and Vietnam. Trump’s authority to impose tariffs on specific types of imports, such as autos and metals, isn’t being challenged. But close to half of the Trump tariffs implemented last year could be thrown out.

Plan B For Trump Tariffs

Tariffs of 15% can be implemented quickly under Section 122 of the Trade Act of 1974 but only for a six-month period. Further, imports from countries such as China and Vietnam currently face 20% tariffs, so there could be a loss of revenue.

Section 338 of the Tariff Act of 1930 allows up to 50% tariffs, but the authority has never been invoked. To apply, Trump would have to show discriminatory trade practices that “uniquely disadvantage U.S. exporters” and don’t affect other global trading partners, Atlantic Council Associate Director Sophia Busch wrote.

Tariffs imposed under Section 301 of the Trade Act of 1974 have previously been put in place by Trump. But Busch notes that the process “has usually taken at least nine months,” involving public hearings and other steps.

Federal Budget Picture

The Congressional Budget Office’s new 10-year budget outlook is already worrisome, with the federal deficit rising to $3.1 trillion in 2036 as federal debt rises to 120% of GDP. Yet it could be much worse without the projected tariff revenue.

Deutsche Bank’s U.S. economics team says that CBO projections imply tariff revenue will offset 70% of the revenue losses from the One Big Beautiful Bill Act, raising $3.5 trillion over a decade. “Tariffs keep fiscal ship afloat in latest CBO outlook,” Deutsche Bank says.

But there are two potential issues. The first is that Deutsche Bank and other forecasters think CBO is overestimating tariff revenue. “Our own fiscal forecasts assume an effective tariff rate well below the CBO’s — a key reason we expect notably wider deficits.”

If the Supreme Court strikes down the IEEPA tariffs, the suboptimal options for replacing them might further drag down the total.

Resulting budget pressure could dent Trump’s goal of boosting defense spending by $500 billion a year or taking other action, such as tariff rebate, ahead of the midterm elections.

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