Tariffs to Pay for Tax Cuts? Not So Fast, Says GOP in Congress

Republicans in Congress aren’t sold on offsetting some tax breaks with tariffs, a cornerstone of former President Donald Trump’s economic plan.

The Republican candidate for a second term in office has threatened blanket tariffs on imports, generating money to help offset an estimated $4.6 trillion full extension of the 2017 tax law he signed. GOP lawmakers are doubtful that sweeping duties could solve their deficit-spending woes without major economic repercussions.

“I don’t know that we want to just carte blanche go look at adding tariffs as a way to increase revenue, because it’s going to add up and affect that economic growth,” Rep. Ron Estes (R-Kan.) said in a recent interview.

Estes is a member of the tax-writing House Ways and Means Committee and leads one of 10 working groups examining the 2017 tax law’s impact. Lawmakers generally didn’t completely rule out the use of tariffs, but said scrutiny of their potential economic impact is needed.

Trump has vowed to push for a 10% blanket tariff on imports and an additional 60% duty on Chinese goods—though the plan lacks specifics, rates that high haven’t been seen since the Great Depression.

Republican JD Vance and Democrat Tim Walz sparred over the tariff threat during last week’s vice presidential debate.

Walz warned of inflation and a possible recession if Trump were to enact a “consumption or sales tax on everything we bring in.” Vance defended it as the heart of Trump’s economic plan, to pay for tax cuts and programs like a more generous child tax credit.

“We’re going to be taking in a lot of money by penalizing companies for shipping jobs overseas and penalizing countries who employ slave laborers and then ship their products back into our country and undercut the wages of American workers,” Vance said.

Trump’s proposal could bring in at least $2.6 trillion over a decade on a conventional basis, but lead to a 0.8% reduction in long-run GDP, a Tax Foundation analysis found.

Small Revenue Source

Tariffs were once the primary way the US collected revenue, but they haven’t accounted for a meaningful share of federal revenue since the early 1900s, according to the White House.

Many economists suggest that major increases to import and export charges without a firm demand that countries could meet to have them rolled back would boost inflation, antagonize global trade partners, and raise prices for consumers.

Congress is empowered to set tariffs, but has largely delegated the responsibility, relying on the White House to achieve Congress’ goal of negotiating deals that protect domestic industries and resolve trade disputes.

As president, Trump boosted duties on goods from places like China, doubling revenue to $74 billion by fiscal 2020. Biden’s administration maintained some of those policies and even enacted new ones on Chinese-made products like semiconductors and materials used in electric vehicles.

That revenue won’t be included in estimates by the Congressional Budget Office that get added to revenue tables the Joint Committee on Taxation prepares for committee markups as an offset to spending in a tax bill unless Congress enacts the duties in tax legislation, said Kyle Pomerleau, a senior fellow at the American Enterprise Institute.

The revenue would be small if lawmakers included narrow tariffs in a bill, he said. Broad duties would raise more, but lead to questions about who shoulders the cost.

“If you add tariffs into the process, you’re going to see that tariffs in JCT’s model place a larger burden on low-income households than they do high-income households,” Pomerleau said. “So you’d see a very tilted distributional table.”

He suggested lawmakers concerned about tariff repercussions could consider a national tax that most major economies rely on for significant revenue—the value-added tax, a relative of a sales tax that applies to both imports and domestic goods.

“The federal government doesn’t have a VAT, so it would have to be enacting a new tax,” he said. “But the idea here is it’s a policy that kind of scratches that itch.”

The US has seldom, if ever, seriously considered enacting a VAT, which would be a tough sell especially for members of Congress who have pledged not to enact new taxes. Sales taxes on goods have been the domain of state and local governments.

Retaliation Concern

The unknowns that tariffs present also spark lawmaker concerns—counter-tariffs or other devices countries may use to combat US duties wouldn’t be calculated in congressional revenue projections. Those kinds of unknowns make expectations of how much they bring in uncertain, said North Carolina GOP Sen. Thom Tillis in a recent interview.

Tariff retaliation is raising red flags for some constituents, Tillis said, citing an agriculture group with whom he recently met.

“This concept of blanket tariffs worry them,” Tillis said. “They’re the ones who have to deal with the counter-tariffs that almost invariably occur.”

Farmers seeking to export their crops have a minefield of tariff issues to navigate, and sometimes a US response is needed faster than Congress typically can enact a law.

Lawmakers should be pragmatic if they start thinking about enacting permanent tariffs, Sen. Mike Rounds (R-S.D.) said, adding they probably aren’t the best tool to pay for a tax overhaul.

“I believe in free trade, so in some cases tariffs can be good,” Rounds said. “On the other side of it, if you’re doing it to raise funds, I’m not so sure if that’s necessarily a good idea.”