Immigration Reform and Tax Revenues: What the Numbers Tell Us

The already overheated battle over immigration reform is becoming more intense after President Obama yesterday announced executive action to give legal status to many undocumented residents.  

But will the impending debate shed any light on the important question of how immigration reform would affect our tax revenues? The good news is that for policymakers who choose to notice them, there are sensible estimates showing that at both the federal and state level, tax revenues are likely to go up as a result of legalizing our undocumented population. A 2013 Congressional Budget Office (CBO) report found that while immigration reform involves both costs (in the form of health, education and other services provided to legalized immigrants) and benefits (in the form of federal taxes paid by newly legal immigrants), in the long run, the benefits to the U.S. Treasury from immigration reform are likely to exceed the costs.

The news is good at the state level too: a 2013 report from the Institute on Taxation and Economic Policy (ITEP) shows that state and local budgets also will receive a new jolt of needed tax revenues as a result of immigration reform—and that undocumented taxpayers are already paying a substantial amount of state and local taxes across the nation. The report estimates that these families pay $10.6 billion a year in state and local sales, excise, income and property taxes, and would pay an additional $2 billion if they were, as part of immigration reform, allowed to fully participate in state tax systems.

While it is not yet clear what percentage of the undocumented workforce would be affected by this plan, it likely would bring in a substantial part of the potential $2 billion in state and local tax.

The $2 billion in new tax revenues ITEP estimates as a result of legalization is the product of two factors. Most importantly, legalization would bring all undocumented workers into the income tax system. The best estimates are that about half of undocumented workers are currently “off the books.” But legalization would also likely bring a substantial wage boost for these currently undocumented workers, further boosting state and local income tax collections as well.

To be sure, undocumented workers are already paying billions of dollars a year to support state and local services from which they benefit: far from simply consuming basic public services, these workers also are making an important contribution to funding their cost. But legalization could, if fully implemented, bring in billions of new revenues to help states dig out of their recent fiscal woes. The president’s plan is an important first step.