Tariff "boomerang" severely impacts finances! CBO confirms: Trump's tariffs create a $200 billion gap, and the U.S. deficit is expected to soar to $2.1 trillion by 2026.

The U.S. federal governments initial expectation of relying on the revenue boost from tariffs is diminishing at an unexpectedly rapid pace. The Congressional Budget Office (CBO) has admitted that a sharp decline in tariff revenue has opened a $200 billion funding gap for this fiscal year. According to the nonpartisan CBO's monthly budget assessment released on Monday, the agency currently projects a deficit of $2.1 trillion for fiscal year 2026higher than its February forecast of $1.9 trillion, at which point the Supreme Court had yet to reject Trump's signature tariff plan. The CBO pointed out that federal spending this year is largely in line with the baseline set in February, indicating that this round of deficits is almost entirely due to a contraction in revenue. The CBO estimates that tariff and customs revenue in 2026 will be reduced by $250 billion from previous expectations. This 60% plunge is directly attributed to the Supreme Courts ruling on February 20, which determined that the Trump administration lacked the authority to levy tariffs under the International Emergency Economic Powers Act. Better-than-expected personal income and payroll tax revenues (about $75 billion higher than the February baseline) have somewhat cushioned the impact. However, the CBO stated that other government revenue sources have fallen short by about $25 billion, resulting in a net revenue shortfall of approximately $200 billion, which cannot be explained solely by expenditures. "We have already borrowed an astonishing $1.8 trillion this fiscal year, with $431 billion in just July alone, equivalent to nearly $60 billion a day," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "We are on track to borrow over $2 trillion this fiscal year, and all this is happening not during a recession. This is highly abnormal." An Inconsistent Tariff System To fill the fiscal hole created by the decline in tariffs, the U.S. government has hurriedly changed its tax basis, piecing things together in an almost makeshift manner. After the Supreme Court struck down tariffs imposed under the International Emergency Economic Powers Act, the White House first shifted to levying tariffs under Section 122 of the Trade Act of 1974this temporary authorization expires on July 24before reverting to Section 301 of the same act to impose tariffs again. The CBO expects this new tariff system to recover "a significant portion" of the losses, but it will not make up the full amount. Monthly fiscal data vividly illustrates the extent of the reversal in revenue. Earlier monthly net customs tariff revenues had exceeded the same period last year until April; however, as refunds related to the Supreme Court ruling started to be issued in May, the data abruptly turned negative. By July, the government had refunded more in tariffs than it had collected: refunds reached $36 billion that month while total collections were only $26 billion, leading to a net outflow of $9 billion for the month. The CBO reports that the U.S. has refunded approximately $100 billion in tariffs collected under the now-invalid International Emergency Economic Powers Act. "It is incredible that such massive borrowing is merely the tip of the iceberg for the deterioration of U.S. finances," MacGuineas stated. "We are approaching the alarming milestone of a total national debt of $40 trillion, and the situation is likely to worsen further." She urged lawmakers to set a reasonable fiscal target, such as capping the deficit at 3% of GDP, and to form a bipartisan committee to achieve that goal. "We can no longer afford the cost of delaying tough choices. Action must be taken now." Fiscal Deficits Have Long Remained High The significant shrinkage in tariff revenue further exacerbates the already worsening fiscal situation in the U.S. According to the CBO, during the first ten months of fiscal year 2026, the cumulative federal deficit reached $1.8 trillion, a widening of $169 billion compared to the same period last year; even after removing technical statistical anomalies (the August 1 payment deadline coincided with a weekend, leading some expenses to be recorded in July), the cumulative deficit remains $71 billion higher than at the same point in fiscal year 2025. In just July, the U.S. fiscal deficit soared to $431 billion, a year-on-year increase of $140 billion. While individual income and payroll tax revenues saw a slight increase of $31 billion (an 11% rise), overall federal revenue dipped by $5 billion (a 1% decline) due to the reversal of tariff income. Where the Money Is Going Expenditures: Welfare and Debt Interest as Major Expenses Since the beginning of fiscal year 2026, the primary drivers of U.S. fiscal spending have continued to be three major mandatory welfare programs: Social Security expenditures increased by $70 billion, a rise of 5%; Medicare spending increased by $66 billion, an 8% rise; and Medicaid spending rose by $45 billion, also an 8% increase. The three main mandatory welfare programs accounted for a total additional spending of $181 billion, an overall increase of 7%. Net interest on public debt has now become one of the fastest-growing categories in the federal budget, surging by $117 billion this year, a 14% increase, driven both by the continuing rise in total debt and by persistently high long-term interest rates. In addition, various agencies experienced fluctuations in spending for reasons unrelated to tariffs or welfare programs: The Department of Education saw expenditures decrease by $79 billion, a 60% drop, primarily because the agency confirmed a net reduction in estimated student loan costs of $53 billion in June 2026, while in July 2025, there had been a $24 billion increase. The Department of Housing and Urban Development's spending rose by $17 billion, a 43% increase, due to not repeating the downward adjustment of estimated costs for housing loan guarantees made in 2025. Expenditures by the Environmental Protection Agency decreased by $20 billion, a 59% decline, as the distribution of clean energy grants decreased. Spending by the Small Business Administration increased by $10 billionabout six times last year's totalbecause the agency raised its estimated costs for unpaid disaster loans. Military spending by the Department of Defense increased by $39 billion, a 5% rise, for personnel and research and development; spending by the Department of Veterans Affairs increased by $34 billion, an 11% rise, benefiting from an increase in the number of beneficiaries and rising per capita costs. Revenue Side: Corporate Taxes Down Sharply On the revenue side, corporate income tax revenue decreased by $89 billion for the year, a 23% drop, which the CBO attributes to an expansion of corporate investment deductionsthis drop would have been offset by corporate profit growth.