Undocumented Immigrants Pay Billions in State and Local Taxes

Undocumented immigrants contribute to the U.S. economy in many ways. They fill essential jobs, they sustain U.S. businesses through their purchase of goods and services, and—contrary to popular misconceptions—they pay taxes to federal, state, and local governments. Their contributions would be even greater if they had a chance to earn legal status and didn’t have the danger of deportation constantly hanging over their heads. With legal status, they’d be able to change jobs more easily and—as they found better jobs and their wages increased—their economic clout as consumers and taxpayers would rise as well. This is a winning scenario for both the immigrants themselves and the native-born population.

In a recent report titled Undocumented Immigrants’ State & Local Tax Contributions, the Institute on Taxation and Economic Policy (ITEP) explores in depth not only the present tax contributions of undocumented immigrants, but how much those contributions would increase under two different scenarios. One is the temporary reprieve from deportation and the renewable three-year work authorization that the Obama administration would grant to some undocumented immigrants via executive action. The other is the granting of legal permanent resident (LPR) status to all undocumented immigrants—in other words, legalization. Not surprisingly, immigrants with legal status pay more in taxes than those who are undocumented.

Undocumented immigrants, like everyone else in the United States, pay sales taxes. And they also pay property taxes—even if they rent. Plus, as ITEP points out, “the best evidence suggests that at least 50 percent of undocumented immigrant households currently file income tax returns using Individual Tax Identification Numbers (ITINs), and many who do not file income tax returns still have taxes deducted from their paychecks.” In sum, according to ITEP, “undocumented immigrants living in the United States pay billions of dollars each year in state and local taxes. Further, these tax contributions would increase significantly if all undocumented immigrants currently living in the United States were granted a pathway to citizenship as part of a comprehensive immigration reform.”

ITEP estimates the current and possible future tax contributions of undocumented immigrants at the state and local level:

• Current contributions: Undocumented immigrants paid $11.6 billion in state and local taxes 2013. This ranged from roughly $2.2 million in Montana (home to only 4,000 undocumented immigrants) to $3.1 billion in California (with an undocumented population numbering more than 3 million). The average effective state and local tax rate of undocumented immigrants in 2013 was 8 percent (compared to 5.4 percent for the top 1 percent of all taxpayers).
• Executive Action: The Obama administration’s executive actions would grant a reprieve to more than 5 million undocumented immigrants. The state and local tax contributions of this group of immigrants would increase by $805 million per year once the actions were fully in place. This would raise the effective state and local tax rate of this group from 8.1 percent to 8.6 percent.
• Legalization: Granting LPR status to all undocumented immigrants would increase their state and local tax contributions by $2.1 billion per year. Their average effective state and local tax rate would rise to 8.6 percent.