The Congressional Budget Office’s (CBO) latest Monthly Budget Review confirms what taxpayers should have expected from a tariff policy built on shaky legal ground. When the legal authority underlying a major revenue source collapses, the revenue projections built on it can collapse too.

In the first 10 months of Fiscal Year 2026, the federal budget deficit totaled $1.8 trillion, $169 billion more than during the same period in Fiscal Year 2025. The CBO now estimates that the deficit will reach $2.1 trillion by the end of FY2026, $200 billion more than the $1.9 trillion it projected in February. While expected outlays remain close to CBO’s February estimate, projected revenues have fallen by roughly $200 billion. The main reason is lower-than-expected tariff collections following a Supreme Court ruling that struck down the administration’s primary authority for imposing them.

In February, the Supreme Court ruled that the Trump Administration lacked authority to impose tariffs under the International Emergency Economic Powers Act (IEEPA). Rather than accepting the ruling as a stop, the administration treated it as a detour. It temporarily imposed new tariffs under Section 122 of the Trade Act of 1974. When those tariffs expired on July 24, the Administration imposed another round under Section 301 of the Trade Act.

The result is a fiscal moving target. Tariff rates have changed, the legal authorities supporting them have changed, and billions of dollars already collected have had to be returned.

The Numbers Tell the Story

• CBO estimates that tariff and customs duty collections in 2026 will be about $250 billion, or 60 percent, below its February projection.
• The federal government has already issued roughly $100 billion in refunds for tariffs collected under the overturned IEEPA authority.
• In July alone, tariff refunds totaled $36 billion while new collections totaled just $26 billion, producing a net outflow from customs duties.

Larger-than-expected collections of individual income and payroll taxes have partially offset the tariff shortfall. CBO now expects those collections to run about $75 billion above its February estimate.

The scramble to replace lost tariff revenue highlights the problem with the administration’s patchwork approach. Moving from IEEPA to different sections of the Trade Act has made tariff revenue difficult to predict and left the government refunding tens of billions of dollars already collected. Revenue collected under a legally vulnerable authority is not revenue the government can reliably count on, particularly when reversing course carries its own administrative costs. The result is a less predictable revenue stream that makes honest budgeting and fiscal planning more difficult. In just six months, CBO has had to revise its revenue projections downward by roughly $200 billion, largely because the legal authority underpinning a major source of expected tariff revenue did not hold up.

The Bottom Line

CBO’s August report is a useful reminder that revenue estimates are only as durable as the policies and legal authorities behind them. When those policies change or fail to withstand legal scrutiny, projected revenue can quickly disappear, making the deficit harder to predict. As taxpayers head toward Fiscal Year 2027, the experience of the past six months should raise questions about how much policymakers can rely on tariff revenue to improve the nation’s fiscal outlook.