Tariff "boomerang" deals a heavy blow to finances! CBO confirms: Trump tariffs cause a $200 billion gap, US deficit to soar to $2.1 trillion in 2026

According to Zhihu Finance App, the windfall from tariffs that the U.S. federal government was counting on to boost revenue is fading much faster than expected. The Congressional Budget Office (CBO) has openly acknowledged that the sharp drop in tariff income has blown a $200 billion hole in this year’s federal finances.

According to the nonpartisan CBO’s monthly budget assessment released on Monday, the agency now projects the fiscal year 2026 deficit will reach $2.1 trillion—higher than its $1.9 trillion forecast from February, at which time the Supreme Court had not yet struck down Trump’s signature tariff policies.

The CBO noted that federal expenditure for this fiscal year is essentially in line with the February baseline, meaning that this round of deficit expansion stems almost entirely from a collapse in revenues.

The CBO estimates that by 2026, tariff and customs revenue will be $250 billion less than previously forecast. This 60% plunge is a direct result of the Supreme Court’s February 20 ruling, which determined the Trump administration had no authority to levy tariffs under the International Emergency Economic Powers Act.

Stronger-than-expected individual and payroll tax receipts (about $75 billion above the baseline) provided some cushion. But the CBO stated that other government revenue channels came in about $25 billion lower than expected, leaving a net income gap of around $200 billion by year’s end—a gap that cannot be explained by expenditures alone.

“We have already borrowed an astonishing $1.8 trillion so far this fiscal year, with $431 billion in July alone—almost $6 billion a day,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “We’re headed for more than $2 trillion in borrowing this year, and this isn’t even during a recession. That’s highly abnormal.”

A Fluctuating Tariff System

To plug the revenue hole left by lost tariff income, the U.S. government scrambled to change its legal basis for taxation, in a largely improvised, makeshift manner. After the Supreme Court rejected tariffs based on the International Emergency Economic Powers Act, the White House first switched to tariffs under Section 122 of the Trade Act of 1974—a temporary authority that expired July 24—then moved again to tariffs based on Section 301 of the same law. The CBO expects that this new tariff system can recover “a substantial portion” of the lost revenues, but not all of them.

Monthly fiscal data vividly illustrates the scale of the income reversal. Until April, monthly net customs revenue consistently exceeded levels from a year prior; but after refunds related to the Supreme Court decision began in May, the figures turned sharply negative.

By July, the amount of tariffs refunded exceeded tariff collections: $36 billion was refunded that month, versus only $26 billion collected, creating a net outflow of $9 billion. According to CBO statistics, the U.S. has already refunded about $100 billion in tariffs previously collected under the now-invalid International Emergency Economic Powers Act.

“It’s incredible that even this enormous volume of borrowing is just the tip of the iceberg for America’s fiscal deterioration,” said MacGuineas. “We’re about to hit the alarming milestone of $40 trillion in total national debt, and the outlook will likely continue to worsen.”

She called on lawmakers to set a reasonable fiscal target—such as keeping the deficit to 3% of GDP—and to establish a bipartisan commission to achieve this goal. “We simply can’t afford the cost of postponing tough decisions any longer. We need to act now.”

Chronic High Deficits

The sharp fall in tariff revenue intensifies the already deteriorating federal fiscal picture. CBO data shows that for the first ten months of fiscal 2026, the U.S. accumulated a $1.8 trillion deficit, up $169 billion from the same period last year. Excluding technical reporting differences (with the August 1 payment deadline falling on the weekend, some spending shifted into July), the cumulative deficit for the year is still $71 billion higher than during the same period in fiscal 2025.

In July alone, the federal deficit reached a whopping $431 billion, up $140 billion year-over-year. Individual and payroll tax receipts for the month rose by $31 billion (an increase of 11%), but due to tariffs swinging from surplus to deficit, overall federal revenue dropped $5 billion (a 1% decline).

Where Does the Money Go?

Expenditures: Benefits and Interest on Debt Lead Federal Spending

Thus far in fiscal 2026, the main drivers of spending growth remain the three mandatory benefit programs: Social Security expenditures increased by $70 billion, a gain of 5%; Medicare expenditures rose $66 billion, up 8%; Medicaid spending grew by $45 billion, up 8%; collectively, these three mandatory welfare programs made up $181 billion in increased spending, a total gain of 7%.

Net interest payments on public debt have become one of the fastest-growing budget items, jumping $117 billion (a 14% increase) due both to rising overall debt and persistently high long-term rates.

In addition, spending by several agencies fluctuated for reasons unrelated to tariffs or welfare programs:

Department of Education spending dropped $79 billion (down 60%), mainly because its net cost estimate for student loans fell by $53 billion in June 2026, compared to a $24 billion increase in July 2025.

Housing and Urban Development spending rose by $17 billion (up 43%) as it did not repeat the downward adjustment in the estimated cost of home loan guarantees seen in 2025.

The Environmental Protection Agency’s spending decreased by $20 billion (down 59%) due to reduced issuance of clean energy grants.

Small Business Administration spending increased by $10 billion—about six times last year’s total—due to a higher estimated cost for outstanding disaster loans.

Department of Defense military spending rose by $39 billion (up 5%) for personnel and R&D; Department of Veterans Affairs spending increased by $34 billion (up 11%) due to a rise in beneficiaries and higher average costs.

Revenue Side: Corporate Taxes Plummet

On the income side, corporate tax receipts dropped by $89 billion for the year (down 23%), which the CBO attributed to a rise in allowable investment deductions—declines that should have been offset by corporate profit growth.