How do tariffs work? A tariff is a tax on imported goods, and an American company writes the check, not a foreign government. That single fact clears up most of the confusion in the tariff debate.
Washington collected $317.8 billion in gross customs duties in fiscal 2026, according to the Monthly Treasury Statement. Then it refunded $144.6 billion, most of it after the Supreme Court threw out the emergency tariffs. Few taxes have had a wilder year. So here is how the system actually works, who pays, and how conservatives should judge it.
How Do Tariffs Work Under U.S. Law?
A tariff, or customs duty, is a tax charged when goods enter the United States. U.S. Customs and Border Protection collects it at the border. The legal obligation falls on the importer of record, the U.S. business or person that brings the goods in and files the entry.
In other words, China does not mail a check to the Treasury. Instead, a U.S. importer, such as a hardware chain or a parts supplier, does. The foreign seller only feels the tariff if it cuts prices to keep the business.
Above all, the Constitution gives this power to Congress. Article I, Section 8 says “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises.” Presidents set tariffs only when Congress has delegated that authority by statute.
How Do Tariffs Work at the Border?
Every product has a 10-digit code in the Harmonized Tariff Schedule of the United States, maintained by the U.S. International Trade Commission. CBP says the HTS is a reference manual “the size of an unabridged dictionary.” The code sets the base rate, also known as the general or normal trade relations rate.
Next comes the type of duty. There are two main kinds. An ad valorem duty is a percentage of the goods’ value. A specific duty is a fixed amount per unit, such as cents per liter or per kilogram. Some products carry both.
On top of the base rate, Chapter 99 of the HTS adds extra duties that presidents impose under trade laws. That is where most of today’s tariff fights live.
A Worked Example
For example, here is a simple case with real HTS rates and made-up shipment values. A passenger car with an engine between 1,500 cc and 3,000 cc falls under HTS 8703.23.01. Its general rate is 2.5%. Heading 9903.94.01, the Section 232 auto tariff, adds 25% on top.
Say an importer brings in a car with a customs value of $40,000 from a country with no special deal. The base duty is $1,000, and the Section 232 duty is $10,000. As a result, $11,000 is owed to CBP before the car reaches a dealer lot. Trading partners with deals pay lower combined rates under separate headings.
Now take a specific duty instead. Still wine in bottles under HTS 2204.21.50 carries 6.3 cents per liter. As an example, a shipment of 9,000 liters, or 1,000 cases, owes $567 in base duty no matter what the wine cost. Federal excise tax is a separate bill, and any added Chapter 99 duties stack on top.
Who Pays Tariffs in the End
The importer pays first. After that, the cost can be split three ways. The foreign exporter can cut its price, the importer can eat a smaller margin, or the customer can pay more.
The best evidence from the 2018-2019 tariffs points mostly at Americans. Economists Mary Amiti, Stephen Redding and David Weinstein found “complete passthrough of the tariffs into domestic prices of imported goods.” Their NBER study estimated that U.S. real income fell by $1.4 billion per month by the end of 2018.
Meanwhile, Federal Reserve economists Aaron Flaaen and Justin Pierce studied factories. They found that manufacturing industries more exposed to the tariffs saw relative job losses. Protection helped some plants. However, higher input costs and foreign retaliation more than offset it, and producer prices rose.
That does not make every tariff a failure. It means the tax is real, and Americans mostly carry it.
The Laws Behind U.S. Tariffs
Congress has handed presidents several tools. Each has its own limits.
- Section 232 of the Trade Expansion Act of 1962 lets the president adjust imports that threaten national security after a Commerce Department investigation. It covers today’s steel, aluminum, auto, copper and lumber tariffs.
- Section 301 of the Trade Act of 1974 targets unfair foreign trade practices after a U.S. Trade Representative investigation. It has carried the China tariffs since 2018.
- Section 122 of the same law allows a temporary surcharge of up to 15% for no more than 150 days unless Congress extends it.
- The International Emergency Economic Powers Act, or IEEPA, was used in 2025 for the fentanyl tariffs on Canada, Mexico and China and for the “reciprocal” tariffs.
What the Supreme Court Decided
On Feb. 20, 2026, the Supreme Court ruled 6-3 in Learning Resources v. Trump that IEEPA does not authorize tariffs. Chief Justice Roberts’s opinion stressed that the Constitution gives the taxing power, including the power to set tariffs, to Congress.
After that, the administration moved quickly. It imposed a 10% global surcharge under Section 122, which expired July 24. On July 23, it imposed Section 301 tariffs of 10% or 12.5% on 60 economies, based on a forced-labor investigation, according to the Federal Register and a Congressional Research Service fact sheet. More Section 232 and 301 investigations are still open.
Meanwhile, refunds are still in court. As of Oct. 2, CBP said in a court filing that it had sent about $126 billion in refunds and interest to Treasury for payment, Supply Chain Dive reported. The government is appealing a trade court order that would extend refunds to importers who never sued.
Where Tariff Revenue Goes
Customs duties go into the Treasury’s general fund, just like income tax. Congress does not earmark them for any program.
Net customs receipts were $77.0 billion in fiscal 2024. They jumped to $194.9 billion in fiscal 2025 as the new tariffs hit. In fiscal 2026, net receipts fell to $173.2 billion after refunds, about 3.2% of total federal receipts. In fact, net customs receipts dipped below zero from May through July 2026, when refunds topped collections.
The new fiscal year opened with $19.2 billion in net customs receipts in October 2026. That compares with $31.4 billion in October 2025. For context on the full budget, see our guide to where your tax dollars go and our explainer on the difference between deficit and debt.
Retaliation Is Part of the Price
Other countries also tax our exports in response. Farmers know this better than anyone. China still keeps a 10% levy on American goods even after pausing a 24% rate, as we covered in our look at the China trade truce.
Retaliation is also part of why the Fed study found tariffs hurt more factory jobs than they protected. It also explains why trade wars rarely stay as narrow as they start.
The Best Case for Tariffs
The strongest pro-tariff arguments deserve a fair hearing. First, tariffs can be leverage. The threat of them helped bring Audi’s first U.S. plant to Georgia, as we noted in our Audi Georgia plant analysis.
Second, some industries matter for national security. A country that cannot make its own steel, chips or drugs in a crisis is vulnerable. Third, China has broken trade promises for decades, and free trade with a cheater is not free.
Those are serious points. Still, they are also limited. They argue for targeted tariffs with clear goals, not a permanent tax wall.
How Conservatives Should Judge Tariffs
Start with the fact the Supreme Court restated. Tariffs are taxes, and taxing is Congress’s job. Conservatives who would never let a president raise the income tax by decree should apply the same rule to customs duties.
Therefore, every tariff should pass three tests. Does it have a clear goal, such as a plant, a supply chain or a concession? Does it have an end date or a way to measure success? And did Congress vote for it, or at least get a chance to?
So how do tariffs work in practice? They are not free money from foreigners. Americans pay most of the bill, and the refund mess shows what happens when the legal footing is weak. Used as a scalpel, a tariff can win real concessions. Used as a budget plug, it is just another tax on families.
Sources
- U.S. Customs and Border Protection: Determining Duty Rates
- U.S. International Trade Commission: Harmonized Tariff Schedule of the United States (HTS 8703.23.01, 2204.21.50, 9903.94.01)
- U.S. Treasury Fiscal Data: Monthly Treasury Statement, Receipts of the U.S. Government (Table 4, Customs Duties, through October 2026)
- Supreme Court of the United States: Learning Resources, Inc. v. Trump, No. 24-1287 (Feb. 20, 2026)
- Federal Register: USTR Notice of Actions in Section 301 Forced Labor Investigations, 91 FR 47318 (July 28, 2026)
- NBER: Amiti, Redding and Weinstein, The Impact of the 2018 Trade War on U.S. Prices and Welfare (Working Paper 25672)
