Undocumented Immigrants as Taxpayers

Undocumented immigrants in the United States have long been a hot political topic. The vast majority of these immigrants are not “criminals, drug dealers, and rapists,” but instead are “integral to the nation’s economic growth” and have little to no negative impact on native-born workers in the long term, according to a recent report from the National Academies of Science, Engineering, and Medicine. To the list of general economic impacts that undocumented immigrants have, we can add a specific fiscal impact: they pay taxes.

A new report from Institute on Taxation & Economic Policy (ITEP) estimates state and local taxes paid in all fifty states and the District of Columbia by undocumented immigrants. While the incomes, spending patterns, and taxes paid by these immigrants are not as well documented as they are for the citizen population, the ITEP report approximates the taxes they pay based on estimated immigrant populations in each state, the average size of immigrant families, the range of undocumented immigrant family income, the estimated number of undocumented immigrants who are homeowners, and the estimated effective tax rates (i.e., state and local taxes as a percent of income) paid by low- and moderate-income families. The report focuses specifically on state and local income, sales & excise, and property taxes paid by undocumented immigrants.

The chart below shows the annual estimated state and local taxes paid by undocumented immigrants in each state and the District of Columbia. The blue portion of each bar shows the taxes collected under current law. While Minnesota ranks 23rd among states in terms of the total state and local taxes paid by undocumented immigrants, in reality less than one percent of total state and local taxes paid by these immigrants nationwide is collected in the Gopher State. Under current law, two-thirds of the state and local taxes paid by undocumented immigrants is collected in just six states (California, Texas, New York, Illinois, Florida, and New Jersey), which have 63.3 percent of the 11 million nationwide undocumented immigrant population, based on American Community Survey data. Minnesota’s undocumented immigrant population is 85,000, which is 0.8 percent of the nationwide total.

Granting legal status to all undocumented immigrants as part of comprehensive immigration reform—thereby allowing them to work in the U.S. legally—would increase the state and local taxes they pay, according to the ITEP report. Granting legal status to undocumented workers would not only increase tax compliance, but would also boost the wages they earn; as a result, the most significant revenue gain by providing legal status to undocumented immigrants is through the individual income tax. The red portion of the bar in the above graph shows the estimated additional state and local tax revenue that would be generated by granting legal status to undocumented immigrants. Nationwide, state and local taxes paid by these immigrants would increase by 18.5 percent—from $11.7 billion to $13.9 billion—as a result of granting full legal status.

Under current law, the estimated state and local taxes paid by undocumented immigrants in Minnesota is $83.2 million annually. By granting legal status to these immigrants, the estimated Minnesota state and local taxes they pay would increase by 23.4 percent, to $102.6 million. The chart below shows the estimated taxes paid by undocumented immigrants in Minnesota under current law and assuming full legal status.

Estimated property taxes and sales & excise taxes collected from undocumented immigrants each increase by ten percent as the result of granting full legal status. Meanwhile, individual income tax collections increase by 85.2 percent. States that rely more heavily on revenue from the individual income tax—such as Minnesota—typically see larger percentage increases in state and local taxes paid by undocumented immigrants as the result of granting legal status, for reasons noted above.

The ITEP report also provides estimates of the state and local effective tax rates (ETRs) paid by undocumented immigrants. Under current law, the estimated state and local ETR of undocumented immigrants in Minnesota (7.3 percent) is less than the ETR of undocumented immigrants nationally (8.0 percent); the lower ETR in Minnesota is likely due to a lower degree of tax regressivity in Minnesota relative to other states, which has the effect of lowering the ETR of low-income households—including undocumented immigrant households. Providing legal status to undocumented immigrants, however, gives a larger bump in the undocumented immigrant ETR in Minnesota than nationally. As a result, the estimated ETR of undocumented immigrants in Minnesota assuming full legal status (8.2 percent) is only modestly below that of undocumented immigrants nationally (8.6 percent).

For comparison purposes, the ITEP report provides the ETR of the top one percent by income of all households. Nationally, the estimated ETR of undocumented immigrants is significantly greater than that of the top one percent, both under current law and after the granting of legal status. In Minnesota, the ETR of undocumented workers in Minnesota is slightly below that of the top one percent under current law—an outcome due in large part to Minnesota’s relatively less regressive state and local tax system; however, full legal status would increase the ETR of Minnesota undocumented immigrants to the point where it is modestly greater than that of the top one percent.

There are reasons to believe that the ITEP report understates the contributions that undocumented immigrants are currently making toward the funding of state and local government services. For example:

  • The ITEP report estimates the incomes of undocumented immigrants using 2014 data. As with most households, the nominal income of the typical undocumented immigrant has probably increased over the last three years.
  • The ITEP report focuses on individual income, property, and sales & excise taxes. Other taxes paid by undocumented immigrants are not included. For example, as noted in the 2017 Minnesota Tax Incidence Study, a portion of corporate income taxes are effectively exported to workers in the form of reduced wages, with low-income households—including undocumented immigrant households—bearing a disproportionate share of the final incidence of this tax.
  • The ITEP report does not analyze the incidence of various fees and service charges imposed by state and local governments. These charges are known to be regressive and thus fall more heavily on with low-income households—including undocumented immigrant households.

The ITEP report concludes that:

Undocumented immigrants make considerable tax contributions. Like other immigrants and U.S. citizens they purchase goods and services, work, and live across the country. Proposals to remove immigrants ignore their many contributions. In a time when most states are facing revenue shortages, the potential budgetary impacts of mass deportation merits careful consideration. States could lose an estimated $11.74 billion in revenue if all undocumented immigrants were removed.

In addition to moral arguments for the humane treatment of undocumented immigrants and for establishing a pathway to legal citizenship, there is a more hard-nosed fiscal rationale to consider: the taxes that these immigrants pay to state and local governments—revenue that would be lost if these households were removed en masse from Minnesota and the U.S.