Replacing Tariff Revenue if the Supreme Court Rules Tariffs Illegal

This November, the Supreme Court will hold oral arguments on whether a large swath of President Trump‘s tariffs are illegal or not, possibly leading to a ruling before the end of the year. The U.S. Trade Court and subsequently a federal appeals court have ruled a majority of the tariffs – those enacted under the International Emergency Economic Powers Act (IEEPA) – illegal. If the Supreme Court upholds this ruling, it will reduce revenue by about $2.2 trillion through Fiscal Year (FY) 2035, before considering dynamic effects.¹ Policymakers should replace this lost revenue to avoid adding to an already unsustainable debt.

There are many options for replacing the over $2 trillion of revenue that could be lost – including numerous ideas that draw from our Budget Offsets Bank. Some ideas to replace the lost revenue include but are not limited to:

1. Enact a Border-Adjusted Cash Flow Tax. A Border-Adjusted or Destination-Based Cash Flow Tax (DBCFT) is a form of business consumption tax. This tax would somewhat resemble tariffs because it includes a “border adjustment” that effectively taxes imports (while making exports deductible). A DBCFT of 8 or 9 percent would be enough to replace the lost tariff revenue. At about 25 percent, it could replace the lost tariffs and corporate income tax. Removing the deduction for wages would essentially turn the DBCFT into a value-added tax (VAT), which could generate the needed revenue with a 3 to 5 percent rate.
2. Cut Tax Breaks. In FY 2025, the federal government lost about $2.3 trillion (7.6 percent of GDP) of revenue from various deductions, credits, exclusions, and other tax breaks. Reducing just one-tenth of these tax breaks could generate enough to replace illegal tariffs over the decade. As an example, policymakers could generate the needed revenue by repealing all itemized deductions for individuals along with related business deductions such as the corporate state and local tax deduction (C-SALT).
3. Scale back OBBBA. The recently enacted One Big Beautiful Bill Act (OBBBA) included almost $6 trillion of tax cuts and spending increases through FY 2034, partially offset by about $2.5 trillion of revenue and spending reductions. Lawmakers could scale back the law’s borrowing in any number of ways. For example, reversing about half of the law’s tax rate and Alternative Minimum Tax (AMT) cuts would generate enough to fully replace the lost tariff revenue. A combination of targeted approaches could accomplish the same goal.
4. Lower health care costs. The federal government will spend almost $2 trillion on health care this year, with a meaningful portion going toward unnecessary payments or treatments. Lawmakers could replace the tariffs with an aggressive set of reforms to lower the cost of Medicare, Medicaid, marketplace subsidies, and overall health care. This could include adopting site-neutral payments in Medicare, reducing excessive payments to Medicare Advantage plans, reforming other types of payments, modernizing cost-sharing rules, further clamping down on state Medicaid financing gimmicks, and changing marketplace subsidies.
5. Reducing other spending. Outside of health care, policymakers could consider a number of additional spending cuts to replace lost tariff revenue. For example, savings could come from capping defense and nondefense appropriations levels, adopting a more accurate measure of inflation to index programs government-wide, reducing farm subsidies, reforming veterans benefits, expanding user fees and premiums, restricting executive spending authority, and other reforms.

Policymakers could also limit the revenue loss from the Supreme Court ruling by Congress codifying some of the tariffs or by the President using other authorities where appropriate. But failing to offset the loss of revenue at all would leave the debt on an even more unsustainable path, rising to 126 percent of GDP by 2035 as opposed to 120 percent under the CRFB Adjusted August 2025 Baseline. Either scenario would result in debt being substantially above current levels and the prior record that resulted from World War II (106 percent of GDP). The higher the debt rises, the more policymakers put our economy and budget at risk.

1  This includes the expectation that the government would pay back any tariffs collected that were ruled illegal.