By Shawn Fremstad

        A majority of the U.S. House of Representatives recently voted in favor of what the New York Times characterized as “a pre-election lineup of narrow enforcement measures packaged to give voters a false impression of resolve.”[1]  Meanwhile, House leadership has eschewed meaningful reform of the nation’s broken legal immigration system, seeming to reserve particular disdain for the creation of any path to legal status for undocumented workers.  Most Americans, however, support providing new pathways to legal status for such workers.[2] 

        Expanding pathways to legal status for undocumented immigrants has become a core element of what is known as “comprehensive immigration reform.”  One example of a more comprehensive approach, the legislation passed by the Senate earlier this year (S 2611), includes enforcement provisions but would also reduce current family visa backlogs, provide new visas for certain “guest workers,” and allow some currently undocumented people to obtain legal status after paying fines and passing criminal background checks.

        This report draws on government data and estimates to analyze the economic and fiscal effects of proposals to provide new pathways to legal status.  Estimates produced by the nonpartisan Congressional Budget Office (CBO) show that the provisions of the Senate bill that create new pathways to legal immigration would result in increased federal tax revenues and economic growth.  Based on an analysis of the CBO data, a reasonable middle-ground estimate is that the Senate bill would increase the nation’s gross domestic product (GDP) by around $36 billion a year over the next five years and by $134 billion a year in 2012-2016.  The actual benefits could be somewhat higher or lower, but there is little question that there would be net economic benefits.

        Government statistics also reveal that the proposed “enforcement-only” approach would be extremely costly and would provide none of the fiscal and economic benefits of more comprehensive legislation.  For example, the enforcement provisions of the Senate bill would increase federal spending, but would have no economic or fiscal benefits, according to CBO.

        The economic and fiscal benefits of immigration should not be the sole or primary driver of immigration policy.  But these benefits are important to keep in mind, particularly because “some of the fundamental economics of immigration are too often obscured by misguided commentary.”[3]  A lack of understanding about the economic and fiscal benefits of immigration also has led to misguided public policies that discriminate against immigrants, despite their contributions.  For example, ignoring the large economic gains that would result from immigrants’ labor, the Senate bill includes a punitive provision that would prohibit legalizing immigrants from utilizing credits available to all other taxpayers when computing their back taxes.  (Continued below Figure 1.)

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Figure 1

The Economic and Fiscal Benefits of the Senate Immigration Bill

        According to the Congressional Budget Office, the Senate bill would add about 2.5 million employees to the U.S. workforce by 2016.  CBO finds that “the work performed by these additional employees would increase the production of goods and raise the level of gross domestic product (GDP) . . . .”[4]  Based on CBO’s estimate of the impact of S 2611 on economic growth, the bill would add $36 billion a year to GDP on average in 2007-2011 and $134 billion a year in 2012-2016.  At a minimum, S 2611 could add more than $1 trillion to gross domestic product over the next ten years.  (For more information on these estimates, see the Appendix.)

        The provisions of the Senate bill that would provide new pathways to legal status also would have positive fiscal effects.  The provisions would boost federal revenues in two ways.  First, CBO projects that the amount of federal taxes paid by immigrants directly affected by the bill would increase by at least $43.6 billion over the next decade.[5]  Second, CBO projects that the increases in economic growth caused by the bill would increase the incomes of many citizens and immigrants who are not directly affected by the bill.  This increase in income would boost federal tax revenues by about $65.5 billion.  Thus, as a result of these two separate effects, the Senate bill would increase federal revenues by about $109 billion over the next decade.  As the figure titled “The Fiscal Benefits of S. 2611” (above) shows, the net federal fiscal benefits of the Senate bill’s immigrant provisions — the amount by which the increase in revenue as a result of the provisions would exceed the costs — would be around $61 billion over ten years.

      A more comprehensive approach to immigration reform would also have a positive effect on Social Security.  According to the chief actuary of the Social Security Administration, Social Security’s “net cash flow would be expected to improve by about $27 billion” between now and 2016 if the Senate bill were passed.  SSA also notes that, “[i]ncluding interest effects, this change would reduce the federal debt held by the public by an estimated $30 billion.”[6]  The Senate bill also would reduce the projected long-term deficit in the Social Security Trust Fund and extend its projected solvency by two years.

        Two caveats should be noted with regard to these estimates.  First, the CBO and SSA projections do not capture all of the economic and fiscal benefits of immigration.  The CBO projections only capture the estimated increase in revenues and economic growth that would result from the Senate bill.  Thus, federal taxes already paid by immigrants, including many undocumented people, are not included in the projection.  Second, the economic and fiscal estimates of CBO and the SSA chief actuary are subject to considerable uncertainty.  The actual economic and fiscal benefits of comprehensive immigration legislation such as S 2611 may be larger or smaller than the CBO and SSA projections.  However, there can be little doubt about the basic thrust of the projections, namely, that providing new pathways to lawful status would have substantial economic and fiscal benefits and that these benefits would far outweigh the modest costs associated with the public services that are received by some of these immigrants and their descendents over time.  (Continued below Figure 2.)

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Figure 2

Why Legalization Would Have Positive Economic and Fiscal Effects

        The positive economic and fiscal effects of comprehensive legislation would be due to the fact that such legislation would increase the number of workers in the U.S. economy.  As CBO notes, “The work performed by these additional employees would increase the production of goods and services and raise the level of gross domestic product . . . .”[7]  As a result, aggregate wages would increase and thereby “yield increases in receipts from both individual income and payroll taxes.”[8]

        The U.S. Internal Revenue Service determined that undocumented immigrants paid almost $50 billion in federal taxes from 1996 to 2003.[9]  Creating new pathways to legal status would further increase the number of immigrant workers who pay federal taxes and, because it would augment their wages, also increase the amount of taxes they pay.[10]  Research has shown that undocumented immigrants who were legalized after passage of the Immigration Reform and Control Act of 1986 (IRCA) experienced wage gains that were mostly due to their change in status.[11]  Research by University of Michigan economist Sherrie Kossoudji indicates that the gain related to legalization “would be larger today than it was when legal status was granted under IRCA.”[12]  

        The net fiscal gains from comprehensive immigration legislation also are consistent with research showing that, overall, immigration has a positive effect on the economy.  For example, a 1997 study by the National Academy of Sciences found that the net present value of immigrants’ estimated future tax payments exceeded the cost of any services they were expected to use by $80,000 for the average immigrant and his or her descendants.[13]  And in June 2006, more than 500 economists and other social scientists, including five Nobel Prize winners, signed a letter to President Bush and members of Congress reiterating their consensus that immigration is a positive force on the U.S. economy and a net gain to U.S. citizens.[14]

 

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Appendix: Methodology

        The analysis in this paper is based on three documents:

• CBO’s 10-year cost estimate for the S 2611 as passed by the Senate.[15]  The cost estimate covers fiscal years 2007 through 2016 and includes the bill’s projected effects on direct spending and revenues, and an estimate of the amount of appropriations necessary to implement the enforcement provisions of the legislation.  This is an updated version of a cost estimate that CBO produced in May 2006, which was based on the bill as introduced.[16]

• A CBO memorandum — “Additional Information on the Estimated Budgetary and Economic Effects of S. 2611” — based on S 2611 as introduced that discusses the possible macroeconomic effects of the bill and their potential impact on federal revenue.  In this memo, CBO produced estimates using two sets of assumptions for the impact on private saving and capital flows.  Under the high investment assumption, private saving and capital flows were assumed to fully adjust to the additional supply of labor, keeping wage and interest rates at baseline levels.  Under the low investment assumption, investment was assumed to adjust by a smaller amount, so that wage rates fall below, and interest rates rise above, baseline levels.  Under the high investment assumption, CBO estimated that the bill would boost GDP by 0.4 percent, on average, from 2007 to 2011, and by 1.3 percent, on average, between 2012 and 2016.  Under the low investment assumption, CBO estimated that the bill would boost GDP by 0.3 percent, on average, from 2007 to 2011, and by 0.8 percent, on average, between 2012 and 2016.  CBO has yet to update this memorandum to take into account the changes made to the bill before the Senate passed it in July.

• The Aug. 30, 2006, testimony of Paul Cullinan, chief of the Human Resources Cost Estimate Unit at CBO, before the Committee on the Budget of the U.S. Senate.[17]  This testimony reviews both of the above documents.  In his discussion of the macroeconomic impact of the legislation, Cullinan notes that GDP would increase under the Senate-passed immigration bill, but by a smaller amount than CBO had estimated for the bill as introduced.  According to Cullinan, this is because the estimated effects of the Senate-passed bill on the number of additional workers would be “about two-thirds as great as the effects estimated for the bill as introduced.”

        To compute the amount by which the Senate-passed immigration bill would increase GDP, the GDP estimates in the CBO memorandum were reduced by one-third to take into account the lower number of additional workers under that bill.  A single figure — the mid-point of the high and low estimates — is presented in the text.  Table 1, below, provides the range based on the high and low estimates.

        The “official” revenue score of S. 2611 is limited to taxes on wages earned by additional immigrants, as well as the revenue implications of reductions in average wage rates due to additional workers.  This score does not take into account increases in revenues due to the overall economic growth effects of the bill.  In its memorandum, CBO estimated the additional budgetary impact of changes in the capital stock, which would affect wage rates, interest rates, and revenue from taxes on capital income, under the low investment and high investment assumptions described above.  Under the high investment assumption, CBO estimated that those effects would improve the budgetary impact of the bill by about $30 billion over the 2007-2011 period, and by about $130 billion from 2012 through 2016.  Under the low investment assumption, CBO estimated that those effects would improve the budgetary impact of the bill by about $20 billion over the 2007-2011 period, and about $60 billion from 2012 through 2016.

        To compute the overall federal revenue effects of the Senate-passed bill, we added the mid-point of these amounts — reduced by one-third to take into account the lower levels of immigration under the bill as passed by the Senate — to the scored revenue in the CBO projection.  Table 2, below, provides the range using the high and low investment assumptions.