The Fiscal Impact of Immigration Reform: The Real Story

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One frequently heard criticism of comprehensive immigrationreform is that it will prove too costly to taxpayers. The mostlylow‐​skilled workers who would be admitted and legalized under theleading reform plan now being considered by the U.S. Congress wouldtypically pay fewer taxes than native‐​born Americans and presumablyconsume more meanstested welfare services. Critics of reform arguethat legalizing several million undocumented workers and allowinghundreds of thousands of new workers to enter legally each yearwill ultimately cost American taxpayers billions of dollars.

One recent study from the Heritage Foundation, for example,claims that each “low‐​skilled household” (one headed by ahigh‐​school dropout) costs federal taxpayers $22,000 a year. Spreadout over 50 years of expected work, the lifetime cost of such afamily balloons to $1.1 million. If immigration reform increasesthe number of such households in the United States, it willallegedly cost U.S. taxpayers several billion dollars ayear.1

It is certainly true that low‐​skilled workers do, on average,consume more in government services than they pay in taxes,especially at the state and local levels. But some of the estimatesof that cost have been grossly exaggerated. Moreover, the value ofan immigrant to American society should not be judged solely on hisor her fiscal impact.

The Real Fiscal Impact of Immigration

The wilder estimates of the fiscal impact of low‐​skilledimmigrants are contradicted by more credible estimates. In May 2006the Congressional Budget Office calculated that the 2006Comprehensive Immigration Reform Act (S. 2611) then before the U.S.Senate would have a positive impact of $12 billion on the federalbudget during the decade after passage. The 2006 legislation, likecurrent proposals, would have allowed low‐​skilled foreign‐​bornworkers to enter the United States through a temporary workerprogram, and it would have allowed several million undocumentedworkers in the United States to obtain legal status.

Specifically, the CBO estimated that federal spending wouldincrease $53.6 billion during the period 2007 – 16 if the legislationbecame law, primarily because of increases in refundable taxcredits and Medicaid spending.2 The additional spending would be more than offsetin the same period by an even greater increase in federal revenuesof $65.7 billion, mostly due to higher collections of income andSocial Security taxes but also because of increased visafees.3

One frequently cited figure on the cost of low‐​skilledimmigrants comes from the authoritative 1997 National ResearchCouncil study, The New Americans: Economic, Demographic, andFiscal Effects of Immigration. The study calculated thelifetime fiscal impact of immigrants with different educationallevels. The study expressed the impact in terms of net presentvalue (NPV), that is, the cumulative impact in future yearsexpressed in today’s dollars. The study estimated the lifetimefiscal impact of a typical immigrant without a high schooleducation to be a negative NPV of $89,000.4 That figure is often cited by skepticsof immigration reform.

What is less often considered is that the NRC study alsomeasured the fiscal impact of the descendants of immigrants. Thatgives a much more accurate picture of the fiscal impact oflow‐​skilled immigrants. It would be misleading, for example, tocount the costs of educating the children of an immigrant withoutconsidering the future taxes paid by the educated children oncethey have grown and entered the workforce. The children ofimmigrants typically outperform their parents in terms ofeducational achievement and income. As a result, the NRC calculatedthat the descendants of a typical lowskilled immigrant have apositive $76,000 fiscal impact, reducing the net present value ofthe fiscal impact of a lowskilled immigrant and descendants to$13,000.5

Even that figure does not give the full picture. As the NRCstudy was being written, Congress passed the 1996 PersonalResponsibility and Work Opportunity Reconciliation Act, otherwiseknow as the 1996 Welfare Reform Act. The act contains an entiretitle devoted to restricting immigrant access to means‐​testedwelfare, limiting access of noncitizens to such public benefitprograms as food stamps and Medicaid. When the NRC study accountedfor the impact of the 1996 Welfare Reform Act, the fiscal impact ofa single low‐​skilled immigrant and descendants was further reducedto $5,000 in terms of net present value.6

If we accept the NRC estimates, then allowing an additional400,000 low‐​skilled immigrants to enter the United States each yearwould have a one‐​time NPV impact on federal taxpayers of $2billion. That cost, while not trivial, would need to be compared tothe efficiency gains to the U.S. economy from a larger and morediverse supply of workers and a wider range of more affordablegoods and services for native‐​born Americans. In a post‐​September11 security environment, comprehensive immigration reform couldalso reduce federal spending now dedicated to apprehending illegaleconomic immigrants.

Accessing the Impact on Roads, Schools, Hospitals, andCrime

Increased immigration has also been blamed for crowded roads,hospitals, public schools, and prisons. In all four of those cases,the negative impact of immigration has been exaggerated.

As for congestion of roads, immigration has played a secondaryrole in population growth nationally and at a more local level.Nationally, net international migration accounts for 43 percent ofAmerica’s annual population growth, with natural growth stillaccounting for a majority of the growth. On a local level, ananalysis of U.S. Census data shows that, for a typical U.S. county,net international migration accounted for 28 percent of populationgrowth between 2000 and 2006. Natural growth from births overdeaths accounted for 38 percent of growth on a county level andmigration from other counties 34 percent.7 One‐​third of U.S. counties actuallylost population between 2000 and 2006 as birthrates continue tofall and Americans migrate internally to the most economicallydynamic metropolitan areas. If local roads seem more crowded, it isnot typically immigration but natural growth and internal migrationthat are mostly responsible.

As for alleged overcrowding at public schools, lowskilledimmigrants cannot be singled out for blame. Enrollment in thepublic school system has actually been declining relative to thesize of America’s overall population. The share of our populationin K‑12 public schools has fallen sharply in recent decades, from22 percent of the U.S. population in 1970 to 16 percenttoday.8 As withroads, overcrowding in certain school districts is more likely tobe driven by new births and internal migration than by newlyarrived immigrants.

As for crime and the inmate population, again, immigration isnot the major driver. Indeed, the violent crime rate in the UnitedStates has actually been trending down in recent years asimmigration has been increasing. After rising steadily from the1960s through the early 1990s, the rate of violent crime in theUnited States dropped from 758 offenses per 100,000 population in1991 to 469 offenses in 2005. As a recent study by the ImmigrationPolicy Center concluded, “Even as the undocumented population hasdoubled since 1994, the violent crime rate in the United States hasdeclined 34.2 percent and the property crime rate has fallen 26.4percent.“9

Immigrants are less likely to be jailed than are theirnative‐​born counterparts with similar education and ethnicbackground. The same IPC study found that “for every ethnic groupwithout exception, incarceration rates among young men are lowestfor immigrants, even those who are least educated.“10 Other studies reveal thatimmigrants are less prone to crime, not because they feardeportation, but because of more complex socialfactors.11 Allthe available evidence contradicts the misplaced fear that allowingadditional low‐​skilled immigrants to enter the United States willsomehow increase crime and incarceration rates.

As for hospitals, especially emergency rooms, the presence ofuninsured, low‐​skilled workers in a particular area does imposeadditional costs on hospitals in the form of uncompensated care.There is no evidence, however, that illegal immigration is theprincipal cause of such costs nationwide. Indeed, low‐​skilledimmigrants tend to underuse health care because they are typicallyyoung and relatively healthy.

A recent report from the Rand Corporation found that immigrantsto the United States use relatively few health services. The reportestimates that all levels of government in the United States spend$1.1 billion a year on health care for undocumented workers aged 18to 64. That compares to a total of $88 billion in government fundsspent on health care for all adults in the same age group. In otherwords, while illegal immigrants account for about 5 percent of theworkforce, they account for 1.2 percent of spending on publichealth care for all working‐​age Americans.12

Impact on State and Local Governments

Although the fiscal impact of low‐​skilled immigrants has beenexaggerated by opponents of reform, it can impose real burdens at alocal level, particularly where immigration inflows are especiallyheavy. The 1997 National Research Council study found that,although the fiscal impact of a typical immigrant and his or herdescendants is strongly positive at the federal level, it isnegative at the state and local level.13

State and local fiscal costs, while real, must be weighedagainst the equally real and positive effect of immigration on theoverall economy. Low‐​skilled immigrants allow important sectors ofthe U.S. economy, such as retail, cleaning, food preparation,construction, and other services, to expand to meet the needs oftheir customers. They help the economy produce a wider array ofmore affordably priced goods and services, raising the real wagesof most Americans. By filling gaps in the U.S. labor market, suchimmigrants create investment opportunities and employment fornative‐​born Americans. Immigrants are also consumers, increasingdemand for American‐​made goods and services.

Several state‐​level studies have found that the increasedeconomic activity created by lower‐​skilled, mostly Hispanicimmigrants far exceeds the costs to state and local governments. A2006 study by the Kenan Institute of Private Enterprise at theUniversity of North Carolina at Chapel Hill found that the rapidlygrowing population of Hispanics in the state, many of themundocumented immigrants, had indeed imposed a net cost on the stategovernment of $61 million, but the study also found that those sameresidents had increased the state’s economy by $9billion.14

A 2006 study by the Texas comptroller of public accounts reacheda similar conclusion. Examining the specific fiscal impact of thestate’s 1.4 million undocumented immigrants, the study found thatthey imposed a net fiscal cost on Texas state and local governmentsof $504 million in 2005. The fiscal cost, however, was dwarfed bythe estimated positive impact on the state’s economy of $17.7billion.15

The Right Policy Response

The right policy response to the fiscal concerns aboutimmigration is not to artificially suppress labor migration but tocontrol and reallocate government spending. The 1996 Welfare ReformAct was a step in the right direction. It recognized that welfarespending was undermining the longterm interests of low‐​incomehouseholds in the United States, whether native‐​born or immigrant,by discouraging productive activity. The law led to a dramaticdecrease in the use of several major means‐​tested welfare programsby native‐​born and immigrant households alike. Further restrictionson access to welfare for temporary and newly legalized foreign‐​bornworkers would be appropriate.

Another appropriate policy response would be some form ofrevenue sharing from the federal to state and local governments.The federal government could compensate state and local governmentsthat are bearing especially heavy up‐​front costs due to theincrease in low‐​skilled immigration. The transfers could offsetadditional costs for emergencyroom health care services andadditional public school enrollment. Such a program would notcreate any new programs or additional government spending; it wouldsimply reallocate government revenues in a way that more closelymatched related spending.

Misplaced apprehensions about the fiscal impact of immigrationdo not negate the compelling arguments for comprehensiveimmigration reform,16 nor do they justify calls for more spending onfailed efforts to enforce our current dysfunctional immigrationlaw. If the primary goal is to control the size of governmentspending, then Congress and the president should seek to wall offthe welfare state, not our country.

1 Robert E.Rector, Christine Kim, and Shanea Watkins, “The Fiscal Cost ofLow‐​Skill Households to the U.S. Taxpayer,” Heritage FoundationSpecial Report no. 12, April 4, 2007.

2 CongressionalBudget Office, “S. 2611: Comprehensive Immigration Reform Act of2006,” Congressional Budget Office Cost Estimate, May 16, 2006, p.7, www​.cbo​.gov/​f​t​p​d​o​c​s​/​7​2​x​x/doc 7208/s2611.pdf.

3 Ibid., p.27.

4 James P. Smithand Barry Edmonston, eds, The New Americans: Economic,Demographic, and Fiscal Effects of Immigration (Washington:National Academies Press, 1997), p. 334.

5Although theNRC considered the fiscal impact of multiple generations, its studynotes that “much of the impact of descendants is actuallyexperienced during the lifetime of the immigrant.” Ibid.

6 Ibid., p.339.

7 U.S. CensusBureau, “Cumulative Estimates of the Components of PopulationChange for Counties: April 1, 2000 to July 1, 2006,” PopulationDivision, 2007, http://​www​.cen​sus​.gov/​p​o​p​e​s​t​/​c​o​u​n​t​i​e​s​/​C​O​-​E​S​T​2​0​0​6​-​0​4​.html, accessed May 10, 2007.

8 For U.S.population figures, see Statistical Abstract of the UnitedStates: 2007 (Washington: U.S. Census Bureau), Tables 1 and 2;for public school K‑12 enrollment, see U.S. Department ofEducation, National Center for Educational Statistics, “Digest ofEducational Statistics: 2005,” www​.nces​.ed​.gov/​p​r​o​g​r​a​m​s​/​d​i​g​e​s​t​/​d​0​5​/​t​a​b​l​e​s​/​d​t​0​5​_​0​3​7.asp.

9 RubénG. Rumbaut and Walter A. Ewing, “The Myth of Immigrant Criminaltyand the Paradox of Assimilation: Incarceration Rates among Nativeand Foreign‐​Born Men,” Immigration Policy Center Special Report,Spring 2007, p. 1.

10 Ibid.

11 Ibid., pp.12 – 14.

12 RandCorporation, “Rand Study Shows Relatively Little Public Money SpentProviding Health Care to Undocumented Immigrants,” news release,November 14, 2006, www​.rand​.org/ news/press.06/11.14.html.

13 NationalResearch Council, p. 351.

14 John D.Kasarda and James H. Johnson Jr., “The Economic Impact of theHispanic Population on the State of North Carolina,” University ofNorth Carolina at Chapel Hill, Kenan Institute of PrivateEnterprise, January 2006, p. ix, www​.kenan​fla​gler​.unc​.edu/​a​s​s​e​t​s​/​d​o​c​u​m​e​n​t​s​/​2​0​0​6​_​K​e​n​a​n​I​n​s​t​i​t​u​t​e​_​H​i​s​p​anicS….

15 CaroleKeeton Strayhorn, “Undocumented Immigrants in Texas: A FinancialAnalysis of the Impact to the State Budget and Economy,” Office ofthe Comptroller, Texas, Special Report, December 2006, p. 20.

16 For a moredetailed analysis of comprehensive immigration reform, see DanielGriswold, “Comprehensive Immigration Reform:Finally Getting It Right,” Cato Institute Free Trade Bulletinno. 29, May 16, 2007; Douglas S. Massey, “Backfire at the Border: Why Enforcement withoutLegalization Cannot Stop Illegal Immigration,” Cato InstituteTrade Policy Analysis no. 29, June 13, 2005; and Daniel Griswold,“Willing Workers: Fixing the Problem of IllegalMexican Migration to the United States,” Cato Institute TradePolicy Analysis no. 19, October 15, 2002.