Illegal Aliens Who Pay Taxes May Claim Tax Credits

April 2013

The CAP/IPC Campaign to Justify Amnesty

Organizations promoting the adoption of an amnesty for illegal aliens cite their payment of taxes as a justification of granting them legal status. A citation that regularly appears in support of that argument is a paper by the Immigration Policy Center (IPC) titled “Unauthorized Immigrants Pay Taxes, Too.”¹

The IPC paper asserts that the illegal alien population contributes $11.2 billion annually in state and local taxes and provides a breakdown by state. The data presented, however, are not calculations by the IPC, but rather are data taken from another organization, i.e., the Institute for Taxation and Economic Policy (ITEP). That organization apparently has not published any study that led to the estimates of state and local taxes paid by illegal aliens by state, because no such study appears among the listing of publications on its website.²

Nevertheless, the limited information in the IPC paper about assumptions used in generating the cost estimates are sufficient to conclude that the reported estimates of tax collections are unrealistic. We acknowledge that illegal aliens do not pay some state and local taxes. In our 2010 study of the fiscal burden imposed by illegal aliens, we estimated annual state and local tax collection of less than $4 billion.³ The difference between our estimate and the IPC/ITEP estimate, however, leads to the conclusion that the latter organizations either do not understand the economic profile of the illegal alien population or they are engaging in disinformation in their advocacy.

The credibility of the data presented by the IPC is immediately suspect when they include estimated sales tax collections from Delaware, New Hampshire, and Oregon — states that do not have sales taxes. While New Hampshire does provide for tax collection on restaurant meals, hotel rooms and car rentals, those are not expenditures that are likely to be made by illegal aliens. The IPC/ITEP tax collection data do not include detailed tax collection estimates for eight states that have illegal alien populations “…too small to allow and estimate of tax payments.” Those states include another two other states that have no state sales tax: Alaska and Montana.

It also casts doubts on the seriousness of the data presented by IPC to provide estimates such as the one for property taxes collected from illegal aliens amounting to $1,610,599,492. That level of specificity — to the last dollar — is an effort to project the appearance of mathematic accuracy to a system of estimates that has a large margin of error.

The IPC/ITEP Assumptions

 According to the IPC paper, the following are assumptions about the illegal alien population that were used in arriving at their tax receipt estimates:

• They “…pay sales tax at similar rates to U.S. citizens and legal immigrants with similar income levels.”
• They “…pay the same property taxes as others with the same income level.”
• “50 percent … are paying income taxes.”

Each of those assumptions is misleading.

Sales Taxes — Because the ITEP data are not available, the income level used in the computations is not known, but information is provided in the IPC paper that puts the assumption into question. The IPC notes that illegal aliens are assumed to send 10 percent of their earnings out of the country in remittances. That clearly indicates that the illegal alien population has lower disposable income to spend on items subject to sales taxes compared to U.S. citizens with similar earnings. In addition, the illegal alien population, by virtue of living on the margins of the economy with a large share of its members working in the underground economy, is more involved in unregulated transactions such as buying prepared food and other goods from other members of the underground economy who do not collect sales taxes. Their participation in this shadow economy means that their sales tax collections are far from mirroring sales tax collections from U.S. citizens or legal immigrants with similar income levels.

Property Taxes — Illegal aliens do not reflect the same housing profile as others with similar incomes and, therefore, their contributions to the collection of property taxes is dissimilar. The assumption that illegal aliens contribute to property tax collections through paying rent rather than directly as a result of home ownership is the same assumption as used in FAIR’s estimate of property tax collections. However, illegal aliens tend to be more likely to be living with multiple families or individuals sharing living quarters than legal immigrants or U.S. citizens. That is clearly established by survey data collected by the U.S. Census Bureau in the American Community Survey (ACS). That survey estimate presented with 2010 Census findings presents evidence of the different housing practices. It should also be kept in mind that the ACS has in the past underestimated the presence of illegal aliens. That fact suggests that the data it acquires may result in lower estimates of the number of people in a household headed by an illegal alien than is true for legal residents or U.S. citizens.

The Census Bureau estimate for U.S. citizens living in crowded housing — defined as more than one person per habitable room — was 3.4 percent in 2010. For the foreign-born population, the related share in crowded housing was 7.2 percent. When foreign-born naturalized U.S. citizens are eliminated from the foreign-born category, the remaining foreign-born have an estimated crowded housing rate of 19.2 percent. Still, this residual category of the foreign-born includes legal immigrants who do not have the minimum 5 years of residence to apply for U.S. citizenship as well as a large number of nonimmigrant long-term residents such as employer-sponsored high-tech workers. If it were possible to strip out these remaining legal foreign-born residents, the rate of occupancy of crowded housing would be still much higher than the 19.2 percent estimated by the U.S. Census Bureau.

This dissimilarity between illegal alien housing and that of legal residents or U.S. citizens means that illegal aliens will pay much smaller per capita shares of their income on rent.

Income taxes — The estimate that half of the illegal alien population is paying income taxes is based on an a common estimate that half of that population is working in jobs where they are using fake social security numbers to appear as legal workers.⁴ The other half of workers are in the underground economy working for cash wages. This is an estimate also used by FAIR in its 2010 fiscal cost estimate.

However, it is one thing to estimate that half of illegal alien workers are in the above-ground economy and another to jump from that estimate to a conclusion that, therefore, those illegal aliens are paying income taxes. Some of those workers passing themselves off as legal workers are working as independent contractors and are on their own as to whether they make income tax payments. It seems unlikely that paying taxes is common among such workers.

For those working for an employer as if they were legal workers, the employer is required to withhold taxes. But that depends on the earnings level of the worker and the number of dependents. Using the withholding tax calculator of the IRS⁵ and claiming 2 dependent children and two jobs — with total annual earnings of $30,000, the IRS calculates the following;

“Based on the information you previously entered, your anticipated income tax for 2013 is $0. If you do not change your withholding arrangement, your withholding for 2013 will equal your tax and you will have nothing withheld. Your balance due will equal zero and you will not receive a refund.”

Because the illegal alien worker owes no income tax, the employer withholds no income taxes from the workers pay. However, if the worker files an income tax return anyway using an Individual Taxpayer Identity Number rather than the fake or stolen Social Security Number given to the employer, the illegal alien may apply for the Additional Child Tax credit for his children. Therefore, rather than paying income tax, the illegal alien worker is able to receive a check from the U.S. Treasury. Most states base their income tax structure on the federal structure and many of them similarly offer credits to low-income households with children. Under this circumstance, it is misleading to suggest that half of illegal alien workers are paying state income taxes.

For this reason, FAIR’s 2010 estimate of income taxes collected by the states was about one-third of the level reported by the IPC.

Conclusion

It is clear that the illegal alien population that would benefit from the amnesty being advocated by CAP and IPC and others has very different characteristics from the general U.S. population. Those characteristics affect their present and future potential tax contribution profile regardless of whether they were granted amnesty. Rather than being a current or future significant tax revenue source, this population is a source of tax collections that are only a small fraction of the fiscal expenditures it absorbs, and that fiscal deficit would likely grow if an amnesty provided this population access to the social safety net not available to it at present.

Some of the differences between the fiscal profile of illegal aliens and legal immigrants or U.S. citizens are so obvious that it is difficult to imagine they were simply overlooked by the IPC and ITEP. It is more reasonable to assume that in their effort to provide arguments to organizations that are promoting the adoption of an amnesty for illegal aliens that they chose to use assumptions that would produce they highest possible estimates of tax receipts from illegal workers.