In a ruling released today, the Supreme Court held that the International Emergency Economic Powers Act does not authorize the U.S. president to impose tariffs, invalidating the government’s argument that the inflow of illegal drugs and the presence of reciprocal tariffs constituted an emergency under that statute.
The majority opinion, written by Chief Justice John Roberts, emphasized that tariffs are a core exercise of Congress’ Article I taxing power and that the president has no inherent peacetime authority to impose them. The court did not address the question of how or when refunds for previously collected tariffs would be given.
Who ultimately pays for a tariff?
Tariffs are a form of taxation on imported goods from abroad. An American importer pays this tax at a port of entry so that the officers at the U.S. Customs and Border Protection will release the product.
As with any tax (be it sales, income or corporate), an important economic question is which party — foreign producers, importers or end purchasers — will have to bear the cost of paying the tax. This game of economic hot potato is what economists call “tax incidence.”
One possibility is that the burden of the tariff will fall on the American importer. Another possibility is that the foreign exporter may offer discounts to the American firm to help cover the tariff cost. This scenario is most likely in a situation where the foreign country’s economy is much smaller or the United States is less dependent on that individual source for goods. This strategy only works when the United States has the strongest negotiating power.
There are three common strategies that firms can employ in response. American firms may choose to “eat the tariff” by reducing their own profits, they may pass this cost along to the consumer, or they may choose to cut wages and lay off workers. A customer at a grocery store wouldn’t see a line item for the tariff on their receipt like a sales tax, but they do pay the tariff via higher prices, lower quantities or reduced variety. All of these combine to lower the standard of living for American households, especially those with lower income.
Unintended consequences
Tariffs are particularly pernicious when levied on input goods. The higher prices on input goods then infect the rest of the supply chain. Tariffs on steel and aluminum, for example, usually come with the promise that they will reshore the middle-class jobs that our parents and grandparents enjoyed.
However, the only way that it becomes profitable for an American steel manufacturer to increase their production is for the price of steel to increase. Costly steel increases prices of all other goods downstream, including cars, homes or driveway basketball hoops.
We have seen this movie before and know how it ends. New research examines when former President George W. Bush leveraged steel tariffs in 2002 to prop up the struggling industry. Compared to industries that were unaffected by the policy, these tariffs did little to increase employment in steel, but caused mass layoffs in industries that required steel as a key input. This loss in employment persisted for years after Congress reversed the tariffs.
Recent analysis by the Federal Reserve Bank of New York estimates that American businesses and consumers bore around 90% of the cost of these most recent tariffs. These estimates illustrate that foreign businesses and governments did not bear the cost of the tariffs as some in the administration have hoped. Instead, households that are already suffering from the recent bout of inflation following the COVID-19 pandemic paid most of the cost. Disturbingly, Kevin Hassett, chair of the White House’s National Economic Council, called for the authors of this study to be “disciplined” for publishing these findings.
Our take
While the abandonment of tariffs could be good for the economy, important questions remain. One big concern is how and when refunds will be given for previously collected tariffs. As of Feb. 18, the Yale Budget Lab estimates that the U.S. Customs and Border Protection has collected approximately $194.8 billion in tariffs since their imposition in April 2025. The system for distributing these refunds has not been determined, but has the potential to be a lengthy and costly legal battle.
Additionally, the Trump administration has other avenues for imposing tariffs on countries. The administration can use trade legislation in sections 232, 301 and 201 to impose tariffs.
Unlike the Liberation Day tariffs, each of these methods involve a longer investigation — and end up being more targeted and often with a built-in expiration date. If the administration wants to implement broader tariffs, it will need Congress.
Tariffs can have strategic value, but this power needs restraint and deliberation. Given the high cost to consumers, it is imperative that elected representatives use their Article I powers invested by the Constitution to set tariff policy. Today’s ruling was a win for both the economy and the Constitution.