Line of immigrants at a border crossing
Photo: Sam Hodgson/Bloomberg

Public debates over immigration reform often suffer from scarce and erroneous information about the tax contributions of undocumented immigrants, particularly at the state level.

Experts believe that legalizing 11 million undocumented immigrants would not only improve the quality of life for those families living in the dark but also benefit states seeking additional revenue to fund projects that help millions of average Americans.

Immigration reform impact on state tax revenues

The National Association of State Budget Officers, a professional membership organization for state budget and finance officers, issued two reports this year on states that sought to increase their tax revenue amid slow growth to offset spending increases in fiscal year 2017. A survey conducted by NASBO in the spring of 2016 cited 13 states seeking net tax increases of $5.4 billion, with 15 of them proposing net tax decreases of $2.1 billion, resulting in a net tax increase of $3.2 billion.

However, a later survey by NASBO last fall on the state budgets enacted into law for fiscal 2017 indicated the number of states seeking net tax increases jumped to 20, resulting in a net tax increase of just $1.3 billion, or $1.9 billion less than the amount originally proposed in the spring of 2016, a result of the decline in tax revenue due to slower growth.

According to the original spring 2016 survey, a total of 43 states had called for increases in general spending in their fiscal 2017 budget recommendations, compared to their fiscal 2016 estimated levels. Governors in these states highlighted the need to spend the majority of the proposed increase in spending to boost funding for K-12 education and Medicaid programs.

Pennsylvania remained on top among those states seeking net tax increases. Governor Tom Wolf originally proposed $2.7 billion in new taxes before dropping the plan. However the state’s enacted budget for fiscal 2017 showed a revenue increase of just $727.4 million.

The fall survey projected that revenue collections in states’ enacted budgets would total $808.6 billion in fiscal 2017, reflecting an increase of just 3.6 percent over 2016.

The earlier survey conducted in the spring listed 18 states that were forced to impose mid-year budget cuts in fiscal 2016, with 18 states making net mid-year budget cuts totaling $2.2 billion. Total state fund balances, which include ending balances and “rainy day” funds, were estimated to have declined to $68.9 billion in fiscal 2016 from their all-time high levels of $77.7 billion in fiscal 2015. Governors predicted further declines of $3.2 billion in fiscal 2017.

Amid the shortfall in revenue collections, experts are wondering whether legalizing undocumented immigrants could help foster tax collection at the state and local levels.

The Institute on Taxation and Economic Policy, a nonprofit, nonpartisan think tank, proposed that state and local governments could significantly increase revenue collection by legalizing undocumented immigrants. A report released in February by ITEP noted that undocumented immigrants collectively pay an estimated $11.64 billion a year. The state of California, home to more than 3 million undocumented immigrants, collects $3.1 billion annually in state and local taxes.

It’s worth mentioning that undocumented immigrants nationwide pay an estimated 8 percent effective tax rate (combining state and local taxes), compared to the top 1 percent of taxpayers, whose average tax rate is just 5.4 percent nationwide.

“The state and local tax contributions of the undocumented immigrants who could be directly impacted by President Obama’s 2012 and 2014 executive actions would increase by an estimated $805 million a year once fully in place,” said the report. The report suggested the effective state and local tax rate for the undocumented immigrant population could increase from 8.1 to 8.6 percent as a result of Obama’s executive actions. [Many of the president’s executive actions on immigration reform have been blocked by federal courts, however, and the incoming Trump administration has pledged to undo them.]

The ITEP report estimated that granting legal status to all illegal immigrants would boost their current state and local tax contributions by more than $2.1 billion a year. The most significant boost would come from personal income tax contributions. Various studies have suggested that illegal immigrants have lower wages than legal immigrants. Thus, granting legal status could lead to a boost in wages. The wage boost in part would come from better job opportunities that would be made available to workers with legal status.

Hence, granting legal status would not only benefit 11 million undocumented immigrants, it could also benefit states seeking additional revenue to fund health and educational projects for hundreds of millions of Americans.