It appears there could be some political compromise on additional tax revenues after all. In April 2013, the Senate passed the Border Security, Economic Opportunity, and Immigration Modernization Act, which most notably would increase the number of people who are granted legal status. If enacted into law, this bill is estimated to save the federal government nearly $900 billion over the next two decades and also generate an additional $2 billion a year in state revenues.
No matter which side of immigration policy you stand on, the recently released Institute on Taxation and Economic Policy’s (ITEP) Undocumented Immigrants’ State and Local Tax Contributions and the Joint Committee on Taxation/Congressional Budget Office’s (JCT/CBO) Immigration Bill Expected to Boost Tax Collections helps clarify the budgetary impact of this proposed legislation.
It was widely held that overarching reform would have a great impact on our nation’s economy, as undocumented immigrants currently number 11.2 million and comprise 5 percent of our labor force.
From a dollars-and-cents perspective, the question has been: Is this good or bad change? Will its isolated effects put us in the black or the red? More specifically, will the population’s boost in direct spending for federal benefits (i.e., Social Security, Medicare, Medicaid, refundable tax credits [Earned Income Tax Credit and Child Tax Credit], health care, etc.) outweigh the revenues generated from additional income and payroll taxes?
Although we may not know the answer until such change has occurred, we now have some figures to go on.
Federal Revenue Impact
The report from the JCT/CBO estimates the Senate’s bill would decrease the deficit by $197 billion over the next decade and then balloon to an additional $700 billion in savings over the following decade. Although the second decade will see more of the previously undocumented immigrants qualifying for health care and retirement benefits at that point, the projected population rise and related increased revenues will far outweigh them. The JCT/CBO did not provide any projections for years after 2033 (their standard practice is to only go out 10 years but made an exception due to this bill’s magnitude on these future years).
North and South Carolina Revenue Impact
The ITEP’s report extends the proposed immigration reform projections onto the local and state governments. The report projects that states, in aggregate, will generate an additional $2 billion in revenues annually. States that assess individual income taxes, like North and South Carolina, will clearly benefit the most.
Before we proceed, it is important to keep in mind that undocumented immigrants in the United States already pay taxes—$10.6 billion in 2010 alone. This tax revenue is comprised of: sales and excise taxes (just over $8 billion) on goods and services like clothing, utilities and gasoline; property taxes ($1.2 billion) either directly as homeowners or indirectly as renters; and income taxes ($1.2 billion—half of undocumented immigrants are already compliant with income taxes).
What do these findings mean to our states? In North Carolina, undocumented immigrants paid an estimated $253,127,000 in state and local taxes for 2010. Under the Senate bill, this figure is projected to become $336,607,000 (a 33 percent increase). In South Carolina, undocumented immigrants paid an estimated $33,445,000 for 2010 and are projected to pay $40,717,000 (a 22 percent increase) as a result of the proposed reform.
It is necessary to highlight that unlike the JCT/CBO’s federal report, ITEP’s state report focuses on revenues without netting them against additional costs. However, much of state and local government’s costs associated with these undocumented immigrants are already being incurred through public education and population-based services such as police, fire, highways, parks, etc.
A final note is that the ITEP’s reported figures have already taken into account the partial offset by immigrants who would now be eligible for states who have permanent Earned Income tax Credits (EITC) in place. The EITC is a refundable tax credit for working taxpayers with low income. As North Carolina’s EITC expires in 2013 and South Carolina does not provide for such a credit, their revenues are shown at gross proceeds.
At the time of publication, it is uncertain what provisions will become law, if any. However, based on these two reports, it appears that proposed immigration reform’s feared prognosis of becoming a system ‘drain’ is in error. In fact, reform as currently proposed, would shrink deficits and provide additional resources to governmental units. Skeptics caution how accurate these figures are, whether there will be compliance problems, and how these changes will ripple 20 years down the road. Time will tell.
Content contributed by Potter & Company, a local certified public accounting firm offering core services of audit, tax, business consulting and financial analysis. Content written by Dan Huskes, CPA. For more information, contact him or John Kapelar, CPA, Partner, at 704-283-8189 or visit www.GoToPotter.com.