Tonight, President Trump delivers his first official State of the Union address of his second term. While his speech will cover a broad range of issues, his administration’s signature fiscal policies—massive tariffs and the “One Big Beautiful Bill Act” (OBBBA)—will be the focal points.
Here is what you need to know about the current state of U.S. taxes and trade.
1. The Supreme Court Pivot: From IEEPA to Section 122
The tariff landscape shifted dramatically on February 20, 2026, when the Supreme Court ruled that the President cannot use the International Emergency Economic Powers Act (IEEPA) to impose tariffs.
-
The Reaction: Within hours of the ruling, the President pivoted to Section 122 authority, initially announcing a 10% baseline tariff, which he raised to 15% the following day.
-
The Catch: Unlike the struck-down IEEPA tariffs, Section 122 tariffs are legally capped at 15% and expire after 150 days unless Congress votes to extend them.
-
Current Forecast: Between remaining Section 232 duties and the new Section 122 baseline, we estimate these tariffs will still generate $668 billion in tax revenue over the next decade.
2. The “One Big Beautiful Bill Act” (OBBBA)
The OBBBA is the cornerstone of the administration’s domestic agenda. While the name is flashy, the policy is a massive overhaul of the tax code with a projected $4.1 trillion deficit impact over a decade. Key pillars include:
-
Permanent Cuts: Making the 2017 individual tax cuts permanent.
-
New Deductions: Targeted tax breaks for tipped income, overtime pay, and car loan interest.
-
Business Incentives: Permanent full deductibility for domestic R&D and equipment.
-
Social Policy: Expanding work requirements for SNAP and Medicaid while making the Child Tax Credit permanent.
3. Why Tax Refunds are Temporarily Higher
Many Americans are seeing larger tax refunds this season. This isn’t just a quirk of the math—it’s a timing issue with the OBBBA.
-
Withholding Lag: Because the IRS did not update withholding tables immediately after the OBBBA passed in 2025, many workers had more tax taken out of their checks than they actually owed under the new rules.
-
Average Benefit: We estimate the average tax cut for the 2025 tax year was approximately $611 per taxpayer, though those with tipped or overtime income will see much larger shifts.
4. Can Tariffs Pay for the Tax Cuts?
A central claim from the White House is that tariff revenue will offset the cost of the OBBBA. The data, however, tells a different story:
-
The Deficit Gap: The OBBBA is projected to increase the deficit by roughly $3.3 trillion (excluding interest).
-
The Revenue Shortfall: Even before the Supreme Court strike-down, tariffs were only expected to bring in $2.0 trillion. Under the current Section 122 and 232 regime, that number has dropped to $668 billion.
-
The Reality: Tariffs currently cover less than a quarter of the OBBBA’s cost and are insufficient to replace the federal income tax.
5. Long-Term Growth vs. Short-Term Friction
The overall economic impact of these policies is a tug-of-war between tax incentives and trade barriers.
-
GDP Impact: We project the OBBBA will boost long-run GDP by 0.7% due to increased investment. Conversely, existing tariffs act as a 0.2% drag on growth.
-
The Uncertainty Factor: While the net effect is modestly positive on paper, our models cannot fully account for the “chilling effect” of trade uncertainty. Constant shifts in tariff rates make it difficult for businesses to commit to long-term hiring or expansion.