Trump’s tariff reversal leaves $200 billion hole in 2026 budget as deficit climbs to $2.1 trillion and refunds top $100 billion
The federal budget deficit is now projected to reach $2.1 trillion in fiscal 2026, about $200 billion higher than the Congressional Budget Office forecast in February, with much of the deterioration tied to a sharp shortfall in tariff and customs-duty revenue following the Supreme Court’s decision to strike down President Donald Trump’s broad IEEPA tariffs.
At the same time, the government has begun sending billions of dollars back to businesses that paid the invalidated duties. Tariff refunds topped $100 billion after another roughly $33.4 billion was paid in July, highlighting how quickly a revenue stream once promoted as a major source of federal income has turned into a significant fiscal liability.
CBO raises its 2026 deficit forecast to $2.1 trillion
The Congressional Budget Office said in its latest Monthly Budget Review that the federal deficit for fiscal 2026 is expected to reach $2.1 trillion. That is roughly $200 billion more than the $1.9 trillion deficit CBO projected in February.
The increase comes primarily from the revenue side of the federal budget rather than unexpectedly high government spending. CBO said federal outlays are running relatively close to its earlier baseline, while tariff collections have fallen sharply below expectations.
The deterioration illustrates how quickly changes in trade policy and court decisions can affect the federal government’s finances.
Tariff collections are $250 billion below earlier projections
CBO estimates that tariff and customs-duty collections for fiscal 2026 will be about $250 billion below its February projection.
The shortfall is closely connected to the Supreme Court’s Feb. 20 ruling that the Trump administration did not have authority under the International Emergency Economic Powers Act to impose the broad tariffs at issue.
The administration subsequently moved to other legal authorities to maintain tariffs, but the replacement measures are not expected to fully recover the revenue that was originally anticipated.
Other federal revenue sources have helped limit the damage from weaker tariff collections.
CBO said income and payroll tax receipts are running about $75 billion above its February baseline. However, other revenue sources are approximately $25 billion below expectations.
Taken together, the changes leave a net revenue gap of roughly $200 billion, which helps explain why the projected deficit has increased by a similar amount despite spending remaining relatively close to the earlier forecast.
Tariff refunds have pushed monthly collections into negative territory
The reversal is especially visible in the government’s monthly customs-duty figures.
Net customs-duty collections had been running ahead of the previous year’s levels through April. That changed in May as refunds associated with the Supreme Court ruling began flowing back to businesses.
By July, refunds exceeded collections. Treasury data showed about $33.4 billion in tariff refunds during the month compared with roughly $24.8 billion in tariff revenue, making July the third consecutive month in which refunds significantly weighed on the government’s net tariff receipts.
CBO’s figures put the July refund total somewhat higher, at about $36 billion against $26 billion in gross collections. Regardless of the accounting difference between the figures, both sets of data show the same trend: the government was returning more money than it was collecting from the affected tariffs.
The government has now returned more than $100 billion to businesses that paid duties imposed under the invalidated IEEPA tariff regime.
Refunds totaled nearly $22 billion in May and about $49.1 billion in June before accelerating again in July. CBO said roughly $100 billion had been refunded on duties collected under the invalidated authority.
A government-run tariff refund portal opened in late April following the Supreme Court decision.
A total of approximately $166 billion in duties, plus interest, could potentially be eligible for refunds, meaning additional payments could continue to affect federal revenue in the months ahead.
Federal borrowing is approaching $2 trillion for the fiscal year
The tariff shortfall is occurring against a broader backdrop of heavy federal borrowing.
“We’ve borrowed an astounding $1.8 trillion this fiscal year, with $431 billion in the month of July alone, and equating to nearly $6 billion per day,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “We’re on track to surpass $2 trillion in borrowing this fiscal year despite not being in a recession. That is not normal.”
The federal deficit reached approximately $1.8 trillion during the first 10 months of fiscal 2026, according to CBO and Treasury figures. July alone produced a deficit of about $431 billion, roughly $140 billion higher than in July of the previous year.
MacGuineas also warned about the broader debt trajectory.
“Incredibly, such an enormous level of borrowing barely scratches the surface of our fiscal deterioration,” MacGuineas said. “We are about to hit the sobering milestone of $40 trillion in gross national debt, and things are only likely to get worse.”
Social Security, Medicare and Medicaid are driving spending higher
Although tariffs are affecting federal receipts, major entitlement programs continue to put upward pressure on spending.
For the fiscal year to date, Social Security outlays increased $70 billion, or 5%. Medicare spending rose $66 billion, or 8%, while Medicaid spending increased $45 billion, also 8%.
Combined, the three programs accounted for a $181 billion, or 7%, increase in spending compared with the same period of the previous fiscal year.
Net interest on the national debt is also becoming an increasingly significant budget pressure. Interest costs increased $117 billion, or 14%, reflecting both the government’s larger debt burden and higher long-term interest rates.
Spending changes were not limited to entitlement programs.
Department of Education outlays fell $79 billion, or 60%, largely because of a $53 billion reduction in estimated student loan costs recorded in June 2026. That compared with a $24 billion increase recorded in July 2025.
Department of Housing and Urban Development spending rose $17 billion, or 43%, while Environmental Protection Agency outlays declined $20 billion, or 59%, largely because of lower clean-energy grant disbursements.
Small Business Administration spending increased by $10 billion, roughly six times the previous year’s total, after the agency increased its estimate for the cost of outstanding disaster loans.
Defense Department military spending rose $39 billion, or 5%, primarily because of personnel and research and development costs. Veterans Affairs spending increased $34 billion, or 11%, as the number of beneficiaries and per-person costs increased.
Tariffs are not the only source of weakness on the revenue side.
Corporate income tax receipts declined $89 billion, or 23%, during the fiscal year to date. CBO attributed the decline to expanded deductions for corporate investment, which outweighed an increase in underlying corporate income.
The decline adds another challenge to a federal budget already facing higher spending and weaker-than-expected tariff collections.
Trump’s replacement tariffs may recover some lost revenue
The administration has continued looking for ways to preserve tariff revenue after the Supreme Court ruling.
After the IEEPA tariffs were struck down, the administration shifted temporarily to Section 122 of the Trade Act of 1974. That authority expired July 24. The administration then moved toward tariffs imposed under Section 301 of the same law.
CBO expects the replacement tariff regime to recover “a substantial share” of the revenue lost from the invalidated tariffs, but not all of it.
The outlook is also complicated by exemptions and reductions in some tariff rates. The administration has recently created exemptions in areas including Moroccan fertilizer and lowered duties on certain farm equipment amid concerns about price pressures.
Tariffs are no longer the reliable budget offset they once appeared to be. The latest budget figures underscore the fiscal risks surrounding tariff policy.
Monthly tariff revenue peaked at about $31.35 billion last October and has generally declined since then, with recent monthly collections mostly falling between $20 billion and $25 billion. Since Oct. 1, 2025, about $154 billion in net tariff revenue has entered federal coffers, only modestly above the $135.6 billion collected during the comparable period of fiscal 2025.
That revenue stream now faces both legal and political uncertainty. The Supreme Court ruling eliminated the legal foundation for a major portion of the administration’s original tariff program, while exemptions and replacement tariffs have changed the amount the government can expect to collect.
MacGuineas said lawmakers should establish a more sustainable fiscal target.
“We can no longer afford to put off the difficult decisions. The time to act is now.”
She has advocated targeting deficits of about 3% of GDP and establishing a bipartisan commission to help lawmakers reach that goal.
With the deficit projected at $2.1 trillion, tariff refunds already exceeding $100 billion and gross national debt approaching $40 trillion, the latest CBO figures show how dramatically the federal budget outlook has shifted since the beginning of the year.
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John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
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