Tax Foundation: Tariffs Increase Retail Prices 4.9 Percentage Points

By Katherine Zehnder
Carolina Journal

A new report from the Tax Foundation shows that tariffs have raised retail prices by approximately 4.9 percentage points. The report warns that consumers can expect to see this number rise in the coming months if the Supreme Court upholds President Donald Trump’s use of the International Emergency Economic Powers Act (IEEPA).

The Supreme Court is expected to hear arguments on Nov. 5 to determine whether or not the presidential emergency powers include the power to impose tariffs.

The Tax Foundation report demonstrates that tariffs not only drive up the cost of imported goods but also produce spillover effects that elevate prices for domestically produced goods in the same industries, according to Joseph Harris, fiscal policy analyst for the John Locke Foundation. Citing research from academic economists, the article reports that tariffs have raised the prices of retail imports by an average of 6 percentage points and domestic retail goods by 4.3 percentage points compared with pre-tariff trends.

“For imported goods, the mechanism is relatively straightforward: the tariff is levied on the foreign producer, passed along to the domestic business, and ultimately paid by consumers,” said Harris. “Although the tax is imposed on the foreign side of the transaction, most of the burden falls on American businesses and households. Tariffs also indirectly drive up the prices of domestic goods by incentivizing US producers to raise their prices — often just below the now higher, tariff-burdened import prices.”

Alex Durante, author of the report from the Tax Foundation, analyzed the direct vs indirect impact of tariffs on retail prices.

The direct impact is on the import price itself, explained Durante in the report. When the 2018 tariffs were implemented, the importer carried the majority of the tariff; this means that the import price increased by the exact amount of the applied tariff. In most cases, the importer is a business that has the independence to decide how much of the additional tariff cost to pass on to the consumer. This means that the increase in retail prices observed is likely less than the actual tariff rate applied if the business absorbs a certain amount of the incurred tariff cost. However, this does not mean that consumers would be entirely shielded from tariff costs. The cost of the tariff would be shared by investors, business owners, and their workers, including consumers.

Tariffs can also indirectly raise retail prices, but the increase would likely be less significant if consumers and firms move to substitutes that are available domestically, according to the report. The 50% tariffs on steel and aluminum are an example. The high tariffs make domestic steel and aluminum more feasible for domestic manufacturers, as prices would be significantly lower than those of products subjected to high import tariffs.

“The latest data through early October show that tariffs have raised retail prices on average by about 4.9 percentage points relative to the pre-tariff trend, 6.0 percentage points for imported goods and 4.3 percentage points for domestic goods,” writes Durante.

According to the report, other commodities have incurred significant price increases, including apparel (8.99 percentage points), coffee and tea (7.5 percentage points), cameras (7.5 percentage points), household textiles (6.2 percentage points), and furniture (6.5 percentage points).

While these impacts are not insignificant, they are more moderate than the overall rate increases, according to Durante. There are several reasons for this. One reason is the overall uncertainty surrounding Trump’s overall tariff regime. Due to the Trump administration’s ever-shifting tariffs, many companies may hold off in making adjustments to their pricing plan.

“This is consistent with the survey evidence from this summer, which generally found that US businesses in the short run were more likely to absorb some of the tariffs,” said the report.

Another reason, according to Durante, is that many operations run on a contract basis and have prices already locked in for the year. A notable example of this is farm equipment, which is typically leased on an annual basis.

This year, major manufacturers of farm equipment, including John Deere, have shown this trend. The company has already reported $300 million in tariff-related costs and predicts another $300 million by the end of the year.

Additionally, many companies braced for the anticipated tariffs by stockpiling inventory and have been able to draw on existing stock, “so their retail goods on the market were stocked prior to the tariffs taking effect,” according to the report.

The Trump administration insists that consumers are not bearing any of the weight of the tariffs, but the report says the data incidcates the exact opposite.

“As retailers enter the holiday season and crucial fourth quarter, tariffs and rising import costs are adding pressure at a time when every dollar counts,” Andy Ellen, president and general counsel of the North Carolina Retail Merchants Association (NCRMA), told Carolina Journal. “Still, retailers are responding proactively by adjusting sourcing, securing inventory earlier, and fine-tuning pricing and promotions. Shoppers can expect holiday deals to remain strong, but likely more strategic, so getting a head start may pay off.”

Durante predicts that if the Supreme Court rules that the tariffs can remain in place under IEEPA, more price increases can be expected as we head into the holiday season and 2026.