The ‘alternative scenario’ of an even bigger national debt disaster is in play after the Supreme Court ruled Trump’s tariffs illegal

The national fiscal outlook is already on an unsustainable trajectory. As the Congressional Budget Office projected earlier this month, federal debt is set to reach 120% of GDP by 2036, but that forecast assumes current policies will remain in place. A perfect storm of other factors could align to send debt climbing to even greater heights.

One of those forces is the fate of Trump’s tariffs. The severity of America’s fiscal path has been somewhat “mitigated” in part by tariff-driven revenue, according to a report published Thursday by the nonpartisan Committee for a Responsible Federal Budget (CRFB). Removing this revenue stream would contribute to an “alternative scenario,” one with an even steeper debt burden than the one projected by the CBO. 

Assuming Trump’s tariffs are not replaced, and certain government spending programs are either made permanent or revived, the deficit would reach nearly $4 trillion, debt could climb to 131% of GDP in 2036, and the additional interest burden would hit $820 billion, according to the report. 

The mechanism by which vanishing tariff revenues fuel the deficit is straightforward but massive in scale. Currently, the CBO’s baseline fiscal projections are softened by the assumption that significant revenue from tariffs unilaterally imposed by the Trump administration will continue to flow into the Treasury. But the administration’s legal foundation for these collections crumbled before the court. Most of these tariffs were authorized under the International Emergency Economic Powers Act, a tool that has never before been used to implement tariffs and that the U.S. Court of International Trade already ruled illegal last year. 

If the administration fails to replace the revenue with other taxes or offsets, the CRFB estimates that federal revenue would fall by $1.9 trillion through 2036. This loss represents roughly 0.5% of the nation’s total GDP over the next decade. While the administration could theoretically attempt to use alternative trade maneuvers to replicate the tariffs, there is no guarantee such a transition would be seamless or legally bulletproof.

That lost revenue would presumably be evident immediately. The government is now on the hook to refund $175 billion of its tariff revenue, according to recent analysis by  the University of Pennsylvania’s Penn-Wharton Budget Model. But the costs would be even greater over the long run. Losing $1.9 trillion in expected income does more than just widen the immediate gap between spending and revenue; it triggers a compounding interest effect that worsens the overall debt. 

When the government loses a primary revenue stream like tariffs, it must borrow more to cover its existing obligations. Under the report’s alternative scenario, this loss of revenue, combined with the permanent extension of temporary tax provisions from Trump’s One Big Beautiful Bill Act and a potential revival of enhanced Affordable Care Act subsidies, which expired earlier this year, would raise the deficit by $4.2 trillion over the next decade. This deficit, worsened by higher interest costs, could risk crowding out other forms of essential spending as the federal government becomes increasingly consumed by its own debt burden.

“The alternative scenario does not account for dynamic effects on interest rates and the economy, which could worsen the fiscal outlook by pushing the economy further into a debt spiral,” CRFB researchers wrote in the report.

The report outlines a more upbeat scenario, where debt rises more slowly than in the CBO’s forecast. In this version, lawmakers would either allow temporary tax policies to expire or fully offset their costs, while also ensuring that tariff revenues are either preserved by the courts or replaced by new legislative measures. Coupled with reforms to stabilize trust funds like Social Security, this path could see debt stabilize at a much lower 111% of GDP by 2036. 

For now, however, the nation’s fiscal health remains on a deteriorating path. Removing Trump’s tariffs might be greeted favorably abroad and by most Americans, given that up to 90% of tariff costs are now paid for by American companies and consumers, according to a recent New York Fed report. But striking down the tariffs without replacements could come with hidden costs further down the road, as the alternative scenario of an even greater debt burden gets closer to becoming the new reality.