Misleading Claim of a State and Local Tax Benefit From an Amnesty

The Institute on Taxation and Economic Policy (ITEP), which identifies itself as a non-profit, non-partisan research organization, has issued a new report on what it describes as a tax revenue boost to state and local governments if an amnesty for illegal aliens is adopted. ITEP claims that the revenue collection from illegal workers at the state and local level is currently $10.4 billion, and enactment of an amnesty would boost that amount by $2 billion. ITEPs fallacy is that the assumptions used to reach its estimate are wrong.

ITEP assumes that illegal alien workers pay direct and indirect taxes similar to those paid by legal workers at the same earnings level. That is demonstrably false. The simple fact that illegal aliens have more family members outside the U.S. than do legal workers is one of the differences. The illegal workers often send money (remittances) to those family members and that means they have less disposable income than legal workers for purchases that generate sales tax collections. Illegal alien workers are more likely to share housing than legal workers, so indirect property tax collection is less. Illegal alien workers are more likely to make purchases in the underground economy – such as from unlicensed lunch wagons and bodegas – than legal workers.

For these and other differences in spending patterns between illegal and legal workers, we came to the conclusion in our study of the fiscal effects of illegal immigration that state and local collection of tax revenue from the illegal alien population was much less than the ITEP estimate – about $4 billion. And that tax collection was vastly outweighed by the annual fiscal costs generated by the illegal alien population – about $84 billion. (See FAIR’s Cost Study here)

Another false ITEP assumption is that 11.5 million illegal aliens would qualify for and obtain legal status. That assumption is contrary to the assumption of the Congressional Budget Office and the SSA. Their assumption is that there would be about 8 or 8.5 million obtaining legal residence.

ITEP asserts that an amnesty would generate new revenue at the state and local level because formerly illegal workers would be paying more taxes if they were made legal. That sounds logical but it ignores two facts. The employers of a large share of illegal workers know their workers are illegal and employ them because they can be exploited at low wages. There is no incentive for an employer to reward that employee for becoming legal. The result would likely be that many of the legalized workers would find themselves becoming off-the-books workers at the same wages as before or as rehired as independent contractors. Secondly, the adoption of an amnesty would likely usher in a new wave of illegal immigration – as happened after the 1986 amnesty – attracted by the prospect of what would be seen as a continuing series of amnesties to reward illegal immigration. That new wave, like the current illegal alien population – would create a major new fiscal burden on already stressed state and local budgets.