New Report Models Immigration Reform’s Effect on State and Local Taxes

July 10, 2013. This morning, the Institute on Economic and Tax Policy (ITEP) released a report that estimates that unauthorized immigrants currently pay $744 million in state and local taxes in New York State, a number that would increase to $968 million if these same immigrants were granted legal status. The share of family income paid in state and local taxes would increase from 7.1 percent to 8.4 percent.

In this new report, ITEP takes an analysis it first did for the Fiscal Policy Institute’s recent report, Three Ways Immigration Reform Would Make the Economy More Productive, and extends it to all 50 states. At the same time, ITEP refines the methodology used in the FPI report, giving more accurate estimates for the taxes paid by unauthorized immigrants in New York State today, and those that would be paid if those same people gained legal status under immigration reform.

Reasons for the higher tax revenues are straightforward.

First, legal immigrants earn more money than unauthorized immigrants. They can less readily be taken advantage of by employers, allowing them to demand fair pay for the work they do. They can more readily move from job to job, finding the most productive employment fit. And, they are more likely to invest in their own education and English language skills, allowing them to advance in their careers. Studies of immigrants who gained legal status after the 1986 immigration reform bill, as well as more recent econometric studies, allow us to gauge that wage increase at about 10 percent. (Details of this analysis are in FPI’s report, Three Ways Immigration Reform Would Make the Economy More Productive.) Higher earnings translate into higher taxes paid on sales taxes, property taxes (whether paid directly or through rent), and income taxes.

Second, immigrants with legal status will pay the same income taxes as everyone else. Currently, about half of unauthorized immigrants file income tax returns. Under immigration reform, newly legalized immigrants would have the same tax compliance rates as other New Yorkers.

Third, for newly legalized immigrants, income taxes paid will more than offset the Earned Income Tax Credit. The estimated cost of legalization to New York State’s Earned Income Tax Credit system would be $30 million, an amount that is easily offset by the $224 million in added tax revenues. (Unauthorized immigrants are not eligible for the Earned Income Tax Credit, but ITEP and FPI assume that newly legalized immigrants will be.)

The picture is similar around the country: legalization of unauthorized immigrants would be a benefit to state and local tax revenues. Referring to numbers from around the United States, Matthew Gardner, ITEP’s executive director, said: “We know that undocumented immigrants already pay six or seven percent of their income in state and local taxes, simply because they buy things and they rent or own homes, and sales and property taxes are paid automatically. With legalization, both wages and tax compliance will go up, resulting in substantial new revenues for states, especially from the income tax.”

David Dyssegaard Kallick, director of the Fiscal Policy Institute’s Immigration Research Initiative, added: “There are many important reasons to pass immigration reform—it would improve productivity in the economy and address some serious problems in the low-wage labor market. It’s reassuring to see that it would also provide a modest boost to state and local tax revenues—and, more importantly, would improve tax compliance so that all families are paying their fair share.”

The report released today improves on the methodology of the analysis in the Fiscal Policy Institute’s June 4 report in three ways. Most significantly, today’s report accounts for the state-by-state variation in wages for unauthorized immigrants; the FPI report used a national median. Today’s report also uses the average family income rather than the median family income, a more appropriate basis for estimating tax revenues. Finally, the report incorporates an estimate, developed by the Pew Hispanic Center, that about 20 percent of unauthorized immigrants live in families that own their homes. This affects the calculation of property taxes paid, since the ITEP tax model assumes that 50 percent of property taxes are passed through to renters, while property owners bear 100 percent of the property tax.