Instead of an income tax replacement, as Trump has repeatedly described them, the data suggests the costs of tariffs have been primarily shouldered by U.S. companies and consumers. For American small businesses in particular, the backbone of the economy, there is less flexibility to diversify their operations or absorb costs and tariffs have completely rewritten the script, with massive implications for the national economy.

Almost half of U.S. small businesses, 42%, have experienced rising costs due to tariffs over the past year, calling it a primary financial challenge, according to a Federal Reserve survey published this week. In some critical sectors, that figure surges well past the halfway mark, with 69% of retail firms, 62% of manufacturers, 61% of leisure and hospitality firms, and 56% of healthcare and education firms reporting that tariffs have squeezed their bottom lines.

There are more than 36 million small businesses operating in the U.S., accounting for 46% of all private sector employment, according to the U.S. Small Business Administration. That’s over 62 million people. In the three years after the pandemic, small firms led the U.S. in hiring, accounting for 53% of new job creation during that time. In 2025, it looks like the money they were reserving for hiring new workers has gone to paying the cost of Trump’s tariffs instead.

The Fed survey, which tracked more than 6,500 responses from businesses with fewer than 500 employees nationwide, found that 76% of companies experiencing higher foreign input costs have passed at least some of those increases directly to consumers.

The survey adds to a growing pile of evidence that the Trump administration’s tariffs have so far amounted to a giant tax on the U.S. economy, one that first mostly affected businesses, and when they were no longer able to absorb costs, passed on to consumers themselves. Another Fed report, released last month by the Federal Reserve Bank of New York, found that throughout 2025 Americans paid for nearly 90% of Trump’s tariffs.

Small businesses on the front lines

At the beginning of Trump’s new trade regime, consumers were spared large cost increases as businesses stockpiled their inventories and accepted thinner profit margins to avoid raising prices and alienating customers. 

This was always a harder task for small businesses, which tend to operate on razor-thin margins anyway. By the end of 2024, less than half of small businesses surveyed by the Fed were profitable, meaning the capacity to absorb costs was low. And because 48% of all small employer firms sourced at least some of their inputs from outside the U.S., many found they had little choice but to adjust their pricing. 

Most small businesses—60%—also absorbed some of the tariff costs internally. But in a rebuke to the Trump administration’s goal of reviving American industry, few were able to pivot to alternative suppliers or buy local. Only 13% of firms that reported price increases said they had switched to domestic suppliers, according to the survey. And a mere 3% of small businesses said they had successfully relocated their production or services back to the U.S. 

The timing of these price hikes coincides with a significant dip in business confidence. Small business expectations for future revenue and employment growth have fallen to their lowest levels since 2020, according to the Fed. Also lower were year-on-year revenue and hiring expectations. 

Declining small business confidence and performance is a bad omen for the economy at large. Small businesses have historically acted as a bellwether for the U.S. economy. Because smaller firms have less flexibility to navigate economic turbulence, noises in small business circles can anticipate shocks to the wider economy. Historically, declines in small business earnings and optimism can sometimes precede economic cooling or even recessions.

Small businesses were granted a reprieve last month when the Supreme Court ruled the bulk of Trump’s tariffs unconstitutional. In a response, the Chamber of Commerce hailed the ruling as an “opportunity to reset overall tariff policy in a manner that will lead to greater economic growth, larger wage gains for workers, and lower costs.”

Many firms reported in the Fed survey expressed optimism for their domestic sales, and a rising share are even turning to artificial intelligence tools to increase productivity. But with the Trump administration signaling it is exploring avenues to raise and extend the provisional tariffs currently in place, small business sentiment is likely to stay under pressure in 2026.