U.S. may have to refund half its tariff revenue as high-stakes court battle threatens to wreak havoc on the deficit and bond market

Jason Ma is the weekend editor at Fortune, where he covers markets, the economy, finance, and housing.

A key

On NBC’s Meet the Press with Kristen Welker on Sunday, Treasury Secretary Scott Bessent expressed confidence that the justices would side with the Trump administration, adding that there “are numerous other avenues that we can take” even if they don’t.

But he acknowledged that if the top court goes against the administration, the U.S. “would have to give a refund on about half the tariffs, which would be terrible for the Treasury.”

Late last month, a federal appeals court upheld an earlier ruling

So far this calendar year, the U.S. has collected $158 billion in total tariff revenue, according to the White House. That includes the IEEPA tariffs that are being challenged in court and those that aren’t.

Trump’s overall tariff regime has emerged as a crucial revenue

In fact, the windfall is so critical that S&P Global cited it when reaffirming the U.S.

While not all of the federal government’s tariff revenue is at risk, losing a huge chunk would still create havoc on the deficit and bond market.

Thomas Ryan, North America economist at Capital Economics, said in a note on Tuesday that losing the IEEPA tariffs would slash the effective tariff rate to about 8% from 17%. As a result, the federal budget deficit would rise close to 7% of GDP, up from about 6%. 

“This alone would raise further concerns about the fiscal outlook and likely push bond yields higher,” he added.

And in a more dire scenario where the Supreme Court takes another six months or so to rule and goes against the tariffs, then the deficit would get close to 8% of GDP, Ryan warned.

But the end of the IEEPA tariffs would provide a lift to the economy, assuming Trump doesn’t replace them with more duties. If that’s the case, then fiscal policy would create a net stimulus effect of about  $200 billion instead of being more neutral, he estimated. The risk that inflation would heat up further would also be reduced.

Meanwhile, the latest jobs report confirmed that the labor market weakened sharply over the spring and summer and that sectors most affected

But in reality, Ryan said it’s likely the administration would expand tariffs that were invoked under a separate legal basis to make up for lost IEEPA tariff revenue, “maintaining an effective rate of at least 10% and limiting the size of any stimulus.”