Four Takes on Tariffs and Taxes

We’re fielding a growing number of questions about tariff impacts on tax policymaking, as well as broader aspects of business planning and the overall economy. These questions are essential to ask and address, given that the tariffs the current U.S. administration has enacted under the International Emergency Economic Powers Act (IEEPA) are significant and are likely to have profound implications across numerous realms, including indirect tax.

As tariffs can significantly influence global trade, here are four important points to remember:

1. Tariffs are taxes on imported goods (and services potentially): These levies make foreign imports more expensive to purchase, which have the effect to protect domestic industries and jobs. That said, tax departments typically do not handle tariff reporting, rather it is a function of trade or procurement groups. Proponents of tariffs argue that tariffs make domestically produced goods more competitive in price compared to imported goods, which have tariffs applied to them. Additionally in the U.S., national and economic security are part of the rationale the White House has provided for the significant tariffs targeting multiple countries that have been issued this year (particularly in the areas of technology manufacturing and pharmaceuticals).

   The current administration’s policy of these reciprocal tariffs is designed to address a more than $1 trillion trade deficit which has persisted for years. China, Mexico and Vietnam are major trading partners which contribute to this deficit. Opponents of these tariffs (and trade protectionism in general) argue that such measures result in higher consumer prices and retaliatory trade restrictions. Critics of tariffs also tend to hold up the Smoot-Hawley Tariff Act of 1930 as an example of how tariffs contribute to global economic instability. Research conducted by the Tax Foundation indicates that U.S. tariffs as currently configured would increase federal tax revenue by $2.1 trillion over the coming decade; this would equate to an average tax increase of more than $1,190 in 2025, and $1,462 per U.S. household in 2026.

2. Tariffs can trigger higher prices and inflation rates: Tariffs often lead to higher consumer prices, as companies frequently pass the full cost of tariffs directly to customers. For example, a major retailer recently announced plans to raise prices on many products in response to tariff pressures. While some retailers attempt to work with foreign supply chain providers to offer partial relief, these efforts are typically limited in the short-term. In the long run, many companies are exploring reshoring strategies—bringing production back to the U.S.—to reduce exposure to future tariffs. However, reconfiguring global supply chains is a complex and costly process, especially for industries like apparel and durable goods, where manufacturing involves intricate logistics and specialized capabilities. Reflecting this uncertainty, the University of Michigan’s consumer-sentiment index dropped for the fifth consecutive month, reaching its second-lowest level on record. According to the May report, “Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy.”
3. Tariffs also can affect indirect tax rates and rules over time: Higher prices—whether from inflation or tariffs—can lead consumers and businesses to reduce their spending. When spending drops, state and local governments generate less revenue from sales and use taxes. Tariffs, in particular, can suppress consumer demand and reduce company profitability, which in turn affects the income tax base that states rely on. To address these revenue declines, state and local tax jurisdictions often turn to raising sales and use tax rates and/or expanding the tax base to additional goods and services.
4. Current tariffs face legal challenges: More than a dozen states, along with a growing number of small businesses, are challenging the Trump administration’s authority to impose tariffs. These lawsuits focus on whether the IEEPA can legally be used to justify such measures—specifically questioning the existence of a national emergency and the scope of presidential power under the statute. The resolution of this issue in the U.S. federal courts is expected to culminate in a U.S. Supreme Court decision, likely in late winter or early spring of 2026.

This qualifies as a very high-level summary of the current global trade situation. The landscape today is all but guaranteed to evolve—rapidly and in unexpected ways. Ultimate resolution of the current tariff policy depends on several factors: decisions through the U.S. courts; significant non-trade issues particularly as it relates to China, Mexico and Canada; businesses deciding to shift their supply chains; and lower tariff rates (typically 10%) negotiated by U.S. trade representatives with foreign countries.