The State and Local Tax Contributions of Undocumented Immigrants

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Tax Policy

Undocumented immigrants pay 8 percent of their income in state and local taxes, while the wealthiest 1 percent of American's pay just 5.4 percent. In this article, Lisa Christensen Gee of the Institute on Taxation and Economic Policy discusses the state and local tax contributions made by undocumented immigrants, and how a pathway to citizenship could increase their contributions.

Lisa Christensen Gee

By Lisa Christensen Gee

Lisa Christensen Gee is a senior policy analyst at the Institute on Taxation and Economic Policy.

Undocumented immigrants living in the United States contribute to our national and state economies in many ways including through the payment of taxes. To better inform debates that often overlook if not misconstrue this latter point, Undocumented Immigrants' State and Local Tax Contributions is a report by the Institute on Taxation and Economic Policy (ITEP) that provides state-by-state and national estimates on the current state and local tax contributions of the 11 million undocumented immigrants living in the United States. The ITEP report also includes estimated increases in contributions if all these taxpayers were granted legal status as part of comprehensive reform.

State and Local Tax Contributions Now and With Legal Status

Undocumented immigrants contribute significantly to state and local taxes, collectively paying an estimated $11.74 billion a year. Like other people living and working in the United States, undocumented immigrants pay property taxes on their homes or through a portion of the rent they pay. They pay sales taxes when they purchase clothing or school supplies, fill up their cars with gas, or purchase celebratory drinks for a special occasion. Many also pay income taxes, with at least 50 percent of undocumented immigrant households filing income tax returns using Individual Tax Identification Numbers (ITINs).

Undocumented immigrants not only pay taxes, they do so at a rate much higher than the wealthiest taxpayers in our nation. As a group, the effective state and local tax rate of undocumented immigrants (total amount of taxes paid divided by their income) is equal to 8% nationwide. To put this in perspective, the average taxpayer in the top 1 % of income in the U.S. pays only 5.4 percent of their income in state and local taxes.

If the 11 million undocumented immigrants living in the United States were granted a pathway to citizenship and could work here legally, their state and local tax contributions can be expected to increase by more than $2.1 billion a year, their average effective tax rates increasing to 8.6 percent. Legal status paves the way to better training, skills, and job opportunities, which is correlated with higher wages; with higher wages comes more taxable income and more purchases subject to sales and other taxes. Legal status also would increase incentives for full compliance with income tax filing, thereby boosting tax receipts.

Conclusion

The question of federal immigration policy of course exceeds the concerns that can be addressed in a fiscal note, but at a time when most states are facing revenue shortages, there are also very real fiscal consequences to the fate of undocumented immigrants in this country that states and localities would be remiss to ignore—billions of dollars in state and local revenue.

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