Deficit on track for $2.1T as tariff refunds outrun collections

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(The Center Square) – The federal government paid out more tariff money in July than it collected, a reversal that has driven this year's deficit $200 billion above what budget forecasters projected six months ago.

The Congressional Budget Office now estimates the deficit will reach $2.1 trillion in fiscal year 2026, $200 billion above the agency's own February projection, according to its monthly budget review released this week.

Treasury's own books point the same direction. The department's monthly statement, released Wednesday, projects full-year receipts of $5.48 trillion against $7.54 trillion in outlays, a gap of about $2.06 trillion.

Customs collections are running about 60% below what CBO projected. In July, Treasury refunded $33 billion in tariff duties against $25 billion collected, paying out $8 billion more than it took in.

The widening gap pushes the deficit further from a target the administration has embraced. Treasury Secretary Scott Bessent has repeatedly pledged to bring the deficit down to 3% of gross domestic product; at $2.1 trillion, the 2026 shortfall would equal about 6.6% of GDP, based on CBO's economic projections, up from the 5.8% the agency forecast in February and more than double Bessent's goal.

The government is on track to spend more than $1 trillion servicing its debt this year, according to CBO.

The revenue shortfall undercuts a prediction Bessent made the day the tariffs fell. Speaking at the Economic Club of Dallas on Feb. 20, shortly after the Supreme Court ruling, he said the administration would replace the struck-down duties with other authorities.

"Treasury's estimates show that the use of Section 122 authority, combined with potentially enhanced Section 232 and Section 301 tariffs, will result in virtually unchanged tariff revenue in 2026," Bessent said.

Six months later, tariff revenue is falling. CBO estimates customs collections for 2026 will come in about $250 billion below its earlier projection. The shortfall persists even though CBO's estimate already accounts for the new Section 301 tariffs meant to replace the lost revenue.

The reversal traces to the February ruling. The U.S. Supreme Court found the administration could not impose tariffs under IEEPA, the authority behind most of Trump's first round of import duties. The government has since refunded about $100 billion of the about $150 billion collected under that authority, according to CBO, and shifted the remaining tariffs to other federal laws, a 10% duty under Section 122, then, when that expired July 24, a new round under Section 301.

Tariffs are the main driver of the miss. Against its February forecast, CBO now expects about $250 billion less in tariffs and customs duties, partly offset by about $75 billion more in individual income and payroll taxes. Corporate income tax receipts are also down from last year, a decline CBO ties in part to the 2025 reconciliation act's larger investment deductions, although the report does not quantify how much that added to the revision.

Alex Durante, a senior economist at the Tax Foundation, a nonpartisan tax-policy nonprofit, said tariffs make an unreliable long-term revenue source, and less reliable still right now.

"Both the Section 122s and Section 301s are under the scrutiny of the courts and may not survive their challenges," he told The Center Square.

The administration has argued that stronger economic growth will narrow the gap; in his Dallas remarks, Bessent credited the administration's policies with driving "trillions in new investment" into American manufacturing and strategic sectors.

Durante was skeptical: "It cannot be a long-term solution because the debt is on an unsustainable path."

The administration has not said what its current tariffs cost U.S. households or what share of imports they cover. Independent analysts have tried to fill that gap: the Tax Foundation estimates the tariffs will cost the average household about $900 this year, and Yale's Budget Lab puts the figure near $1,100.

Treasury's monthly statement projects a shortfall of the same magnitude but did not address whether the department stands by Bessent's February prediction. Neither Treasury nor the White House responded to questions.

Whether the Section 301 tariffs hold up, and generate the revenue the administration is counting on, now rests with the same courts that struck down the first two rounds.