2026 State of the Union: Trump Tariffs & Tax Cuts

President Trump is scheduled to deliver the annual State of the Union address to Congress. The speech is bound to address a multitude of topics, but taxes and (especially) tariffs will certainly feature prominently.

It’s worth keeping a few facts in mind going in.

1. The State of the Union’s Tariffs

Tariffs have dominated the news for the past year. They are substantial taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases and they have changed frequently. For a more comprehensive look at the timing of tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. changes in the second Trump administration, consider checking out Tax Foundation’s tariff tracker.

Where are we today? On Friday, February 20, the Supreme Court ruled the tariffs imposed under the supposed authority of IEEPA (the International Emergency Economic Powers Act) are unconstitutional, striking down nearly three-fourths of the new expected revenue from the tariffs. The president responded by announcing a 10 percent baseline tariff ostensibly under Section 122 authority, subject to significant exemptions. A day later, the president raised this new baseline tariff rate to 15 percent. This new tariff is scheduled to expire after 150 days.

As of now, with Section 232 and Section 122 tariffs, we estimate the new tariffs will generate $668 billion of new taxes over the next decade and that imports will face a 12.1 percent weighted average applied tax rate. That rate is lower than the 13.8 percent rate under IEEPA and Section 232. Once the Section 122 tariffs expire, we expect the weighted average applied tariff rate would fall to 6.7 percent.

Exactly how the economic burden of tariffs is split between foreign firms, domestic firms, and consumers varies. According to recent empirical evidence, almost the entire burden is borne by individuals and firms in the United States, not by foreign exporters. The burden can fall on US households without overall inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin rising. And the tariff is not the only additional price consumers pay: domestic suppliers also often raise prices to take advantage of the tax on international competition.

2. What Was in the One Big Beautiful Bill Act (OBBBA)

The other fiscal policy topic sure to come up in the State of the Union is the One Big Beautiful Bill Act, or OBBBA.

The law’s name is not particularly descriptive, but it was a big bill. On the tax side, one can split the law into a few categories of changes.

It made a series of changes to the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source (such as lower rates, a higher standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative., and limits to itemized deductions) that were scheduled to expire at the end of 2025 permanent, with some tweaks.
It introduced a series of temporary tax deductions for certain types of income or consumption, such as tipped income, overtime pay, car loan interest, as well as a new deduction for senior citizens.
It permanently restored the full deductibility of capital investment in several broad categories, such as domestic R&D and machinery and equipment.
It made several other changes to business taxation, such as making the 20 percent pass-through deduction permanent, repealing or limiting many tax credits targeting clean energy, and reforming the international side of the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax..

According to Tax Foundation’s comprehensive analysis, OBBBA will reduce federal revenue by $5.2 trillion between 2025 and 2034 on a static basis. After accounting for long-run economic effects of the tax cuts, the spending cuts also included in the bill, and the higher interest costs driven by the need to cover higher deficits, the total cost of the package comes to around $4.1 trillion over a decade.

3. Why Tax Refunds are Higher

The president and members of the administration have championed larger tax refunds for the 2025 tax year. Tax filers receive refunds when they withheld more income than they ultimately owe.

Tax refunds should, on average, be higher this year. Several OBBBA provisions, such as the new deductions for some tipped and overtime income, apply to some or all of tax year 2025, but the IRS did not update withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests. tables for 2025 once the law passed.

We estimate the average tax cut for the 2025 tax year was around $611 per taxpayer. However, the size of the change in refund will vary wildly by taxpayer circumstance. Taxpayers that benefit from one of the targeted tax provisions, like the tipped or overtime income deductions, should see more significant benefits than, say, a salaried worker that only benefits from the retroactively boosted standard deduction.

Going forward, the direct benefits of these tax changes should be reflected in lower withholding and ergo higher take-home pay, rather than in larger tax refunds.

4. How do the Tariffs and OBBBA Compare Deficit-Wise?

Defenders of OBBBA sometimes argue tariffs will offset the cost of OBBBA. The president has gone even further, claiming tariffs will raise enough revenue to allow for the wholesale repeal of the income tax as well as cover the cost of many other new spending ideas.

Tariffs do not have the revenue-generating capacity to replace the federal income tax. And the tariffs imposed to date will not generate enough revenue to offset the deficit impact of OBBBA.

As mentioned, OBBBA’s deficit impact totals around $4.1 trillion. Setting dynamic interest costs aside to allow for an apples-to-apples comparison, that number falls to a $3.3 trillion deficit increase. Meanwhile, before the Supreme Court ruling that nullified the IEEPA tariffs, the cumulative dynamic revenue from the IEEPA tariffs and the Section 232 tariffs was around $2.0 trillion over a decade. Without IEEPA tariffs and with the new Section 122 baseline tariff scheduled for 150 days, those tariffs are projected to raise $668 billion over a decade.

Ultimately, the president’s tariffs are insufficient to offset the tax cuts from OBBBA, let alone pay for other spending priorities or addressing the underlying deficit problem.

5. How Will These Changes Shape the Economy?

Our analysis of the OBBBA shows long-run GDP rising by 0.7 percent. Meanwhile, we estimate the existing tariffs will reduce long-run GDP by 0.2 percent. Overall, this suggests a modestly positive effect on the economy in the long run.

However, the effects in the short term are more complicated, particularly in the case of the tariffs. On one hand, some of the tariffs may prove temporary (as, of course, many have been). On the other hand, our model does not account for the uncertainty from constantly changing trade policy. The threat of a tariff may reduce investment even if it ultimately collects no revenue.

At this point, we can theorize on how these policies have shaped short-run economic indicators like GDP growth, unemployment, or productivity. Over time, more data will come out, and it will be easier to untangle those effects. Short-run data is noisy, but the tariffs clearly disincentive economic growth while the better tax treatment of work and investment incentivize it.