President Obama would love to have immigration reform as part of his legacy. Republican leaders in Congress want their party to be competitive in the 2016 presidential election and to show they can get things done. So although the odds are steep -- especially if the president sparks the indignation of conservative lawmakers and follows through on his promise to take executive action to remove the threat of deportation for millions of undocumented immigrants -- our leaders are likely to at least make a serious attempt at putting together a bipartisan, bicameral deal on immigration in 2015. Their starting point will be S.744, the sweeping overhaul of the immigration system approved by the Senate on a 68-32 vote on June 27, 2013.
This wide-ranging reform bill is known mostly for its heightened border security, increased requirements for employers to verify the legal status of employees, and the complete revision of pathways to legal status for both currently undocumented and aspiring future immigrants, particularly those who are highly skilled. With all its focus on hot-button issues, sometimes it is forgotten that S.744 is also major deficit reduction legislation. According to the estimates jointly produced by the Congressional Budget Office and the Joint Committee on Taxation, the bill would generate $158 billion in deficit reduction over 10 years.
Most of the money in the CBO-JCT immigration reform estimate is tax related. The net $158 billion of deficit reduction is a combination of a $456 billion revenue increase offset by $298 billion of increased discretionary spending. (See the figure below.) Refunds of earned income credits, child credits, and premium assistance credits— officially scored as discretionary spending -- account for nearly four-fifths of the estimated spending increase.
S. 744 is not so much a tax increase as it is an increase in the number of taxpayers. According to the official estimates, the legislation will make the U.S. population larger by 9.6 million in 2023. The number of residents with legal status will increase by a total of 16.1 million by 2023.
Three broad shifts in population drive these estimates, as shown in the figure below. The first and the largest is the 12.1 million increase in legal immigrants into the United States. The second is the change of 6.5 million currently unauthorized residents to new legal status that would allow them to work in the United States. The third major shift is a 2.4 million reduction in the net annual inflow of future unauthorized residents.
The vast majority of new revenues come from the first category--new entrants into the United States. Not only would there be more new immigrants than newly legalized current residents, but new entrants have higher incomes than currently unauthorized residents. Also, many current unauthorized residents —about 44 percent, according to the Social Security Administration -- already pay tax, so from a fiscal perspective there is little gain from their new legal status.
In a new article appearing in the latest issue of Tax Notes, I use two different methods to estimate this distribution of revenue changes attributable to new legal residents and revenue changes attributable to the change in status of unauthorized residents.
The table below summarizes the estimates derived using the two different methods. Using the first method, 86 percent of revenue raised by S.744—excluding the effect of refundable credits--is attributable to new immigrants entering the United States. Using the second method, 94 percent of revenue raised, excluding credit refunds, is from new legal immigrants.
Including the effect of refundable credits in the revenue estimate skews the distribution even further toward new immigrants. Under the first method, they account for 94 percent of the revenue net of refundable credits. Under the second method, they account for more than 100 percent because the increase in currently unauthorized residents filing returns actually reduces revenue.
In their efforts to shrug off arguments that granting legal status to unauthorized immigrants is amnesty, proponents of immigration reform stress that the attainment of legal status would be accompanied by the payment of penalties and back taxes. While the payment of fees and back taxes gets a lot of attention in the political debate, it is not significant for the overall fiscal picture.
The vast majority of fees would be collected from currently unauthorized residents obtaining registered provisional immigrant status (RPI) under S.744. To gain this new legal status, currently unauthorized residents would be required to pay a $1,000 penalty when they apply. In total, this would raise $4.9 billion over 10 years. In addition, RPI applicants would be charged a processing fee of about $750. In the aggregate, these processing fees would raise $3 billion over 10 years. Only $500 million of the new fees and penalties under the bill will not be paid by currently unauthorized residents.
The imposition of $1,750 in penalties and fees per person on a family of low-income unauthorized workers is a large financial burden. It could cause some not to seek legal status even though they meet RPI requirements. And increasing those fees would further reduce the incentive to use the pathways to legal immigration under the bill. But as significant as they may be to the affected individuals, the fees and penalties in S.744 are a small part of the overall fiscal impact of the bill on the federal government. Compared with new taxes generated by S. 744 -— over $45 billion net of tax credits in 2023 -- aggregate new fees and penalties from the bill are relatively small, at less than $1 billion. And even though these fees are mostly paid by currently unauthorized residents gaining legal status, they do not significantly change the estimates of the distribution of the government receipts under the bill, as shown in the table above.
The payment of back taxes has an even smaller fiscal impact than the payment of fees. Under S.744, an unauthorized resident may not file an application for RPI status unless the applicant has satisfied all federal tax liabilities assessed by the IRS. The critical factor here is that the RPI applicant is not required to pay all taxes legally owed, just delinquent taxes that are on the IRS radar. These assessed liabilities are amounts shown as due on a tax return and amounts assessed under a deficiency notice.
It would be very difficult for the IRS to collect back taxes from millions of currently unauthorized immigrants who worked in the underground economy or who worked in the aboveground economy with phony or stolen Social Security numbers. A CBO-JCT explanation of its estimates states that only unauthorized residents who filed tax returns using individual tax identification numbers (ITINs) could be matched to make assessments. ITINs are issued by the IRS to those who have filing obligations but are not eligible to receive Social Security numbers.
If their employers withheld income tax and they subsequently filed returns, not only would many of these RPI applicants have no further income tax obligation, they might also be due refunds. Given low audit rates generally, the chances of any unauthorized immigrant with tax due being assessed are low. And as a CBO-JCT explanation points out, “those with unpaid assessments—and particularly those with large unpaid assessments—would be less likely to apply [for RPI status].” Given all this, it seems that congressional scorekeepers expect the IRS to collect next to nothing extra from unauthorized residents as a result of the back taxes provision of the bill.
As Congress struggles to fix our broken immigration system, it is likely to consider many variations of S.744 and its components. Those proposals that allow a large influx of new legal immigrants—particularly immigrants with high skills—will significantly increase tax revenue. Providing new legal status for current unauthorized immigrants will not.