The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer

Each year, families and individuals pay taxes to the government and receive back a wide variety of services and benefits. A fiscal deficit occurs when the benefits and services received by one group exceed the taxes paid. When such a deficit occurs, other groups must pay for the services and benefits of the group in deficit. Each year, government is involved in a large-scale transfer of resources between different social groups.

Fiscal distribution analysis measures the distribution of total government benefits and taxes in society. It provides an assessment of the magnitude of government transfers between groups. This paper provides a fiscal distribution analysis of households headed by immigrants without a high school diploma. It measures the total benefits and services received by this group and the total taxes paid. The difference between benefits received and taxes paid represents the total resources transferred by government on behalf of this group from the rest of society.

The first step in an analysis of the distribution of benefits and taxes is to count accurately the cost of all benefits and services provided by the government. The size and cost of government is far larger than many people imagine. In fiscal year (FY) 2004, the expenditures of the federal government were $2.3 trillion. In the same year, expenditures of state and local governments were $1.45 trillion. The combined value of federal, state, and local expenditures in FY 2004 was $3.75 trillion.[1]

The sum of $3.75 trillion is so large that it is difficult to comprehend. One way to grasp the size of government more readily is to calculate average expenditures per household. In 2004, there were some 115 million households in the U.S.[2] (This figure includes multi-person families and single persons living alone.) The average cost of government spending thus amounted to $32,707 per household across the U.S. population.[3]

The $3.75 trillion in government expenditure is not free, but must be paid for by taxing or borrowing economic resources from Americans or by borrowing from abroad. In general, government expenditures are funded by taxes and fees. In FY 2004, federal taxes amounted to $1.82 trillion. State and local taxes and related revenues amounted to $1.6 trillion.[4] Together, federal, state, and local taxes amounted to $3.43 trillion. At $3.43 trillion, taxes and related revenues came to 91 percent of the $3.75 trillion in expenditures. The gap between taxes and spending was financed by government borrowing.

Types of Government Expenditure

After the full cost of government benefits and services has been determined, the next step in the analysis of the distribution of benefits and taxes is to determine the beneficiaries of specific government programs. Some programs, such as Social Security, neatly parcel out benefits to specific individuals. With programs such as these, it is relatively easy to determine the identity of the beneficiary and the cost of the benefit provided. At the opposite extreme, other government programs (for example, medical research at the National Institutes of Health) do not neatly parcel out benefits to individuals. Determining the proper allocation of the benefits of that type of program is more difficult.

To ascertain most accurately the distribution of government benefits and services, this study begins by dividing government expenditures into six categories: direct benefits, means-tested benefits, educational services, population-based services, interest and other financial obligations resulting from prior government activity, and pure public goods.

Direct Benefits

Direct benefit programs involve either cash transfers or the purchase of specific services for an individual. Unlike means-tested programs (described below), direct benefit programs are not limited to low-income persons. By far the largest direct benefit programs are Social Security and Medicare. Other substantial direct benefit programs are Unemployment Insurance and Workmen's Compensation.

Direct benefit programs involve a fairly transparent transfer of economic resources. The benefits are parceled out discretely to individuals in the population; both the recipient and the cost of the benefit are relatively easy to determine. In the case of Social Security, the cost of the benefit would equal the value of the Social Security check plus the administrative costs involved in delivering the benefit.

Calculating the cost of Medicare services is more complex. Ordinarily, government does not seek to compute the particular medical services received by an individual. Instead, government counts the cost of Medicare for an individual as equal to the average per capita cost of Medicare services. (This number equals the total cost of Medicare services divided by the total number of recipients.)[5] Overall, government spent $840 billion on direct benefits in FY 2004.

Means-Tested Benefits

Means-tested programs are typically termed welfare programs. Unlike direct benefits, means-tested programs are available only to households below specific income thresholds. Means-tested welfare programs provide cash, food, housing, medical care, and social services to poor and low-income persons.

The federal government operates over 60 means-tested aid programs.[6] The largest of these are Medicaid; the Earned Income Tax Credit (EITC); food stamps; Supplemental Security Income (SSI); Section 8 housing; public housing; Temporary Assistance to Needy Families (TANF); the school lunch and breakfast programs; the WIC (Women, Infants, and Children) nutrition program; and the Social Services Block Grant (SSBG). Many means-tested programs, such as SSI and the EITC, provide cash to recipients. Others, such as public housing or SSBG, pay for services that are provided to recipients.

The value of Medicaid benefits is usually counted in a manner similar to Medicare benefits. Government does not attempt to itemize the specific medical services given to an individual; instead, it computes an average per capita cost of services to individuals in different beneficiary categories such as children, elderly persons, and disabled adults. (The average per capita cost for a particular group is determined by dividing the total expenditures on the group by the total number of beneficiaries in the group.) Overall, the U.S. spent $564 billion on means-tested aid in FY 2004.[7]

Public education

Government provides primary, secondary, post-secondary, and vocational education to individuals. In most cases, the government pays directly for the cost of educational services provided. In other cases, such as the Pell Grant program, the government in effect provides money to an eligible individual who then spends it on educational services.

education is the single largest component of state and local government spending, absorbing roughly a third of all state and local expenditures. The average per pupil cost of public primary and secondary education is now around $9,600 per year. Overall, federal, state, and local governments spent $590 billion on education in FY 2004.

Population-Based Services

Whereas direct benefits, means-tested benefits, and education services provide discrete benefits and services to particular individuals, population-based programs generally provide services to a whole group or community. Population-based expenditures include police and fire protection, courts, parks, sanitation, and food safety and health inspections. Another important population-based expenditure is Transportation, especially roads and highways.

A key feature of population-based expenditures is that such programs generally need to expand as the population of a community expands. (This quality separates them from pure public goods, described below.) For example, as the population of a community increases, the number of police and firemen will generally need to expand in proportion.

In its study of the fiscal costs ofimmigration, The New Americans, the National Academy of Sciences argued that if service remains fixed while the population increases, a program will become "congested," and the quality of service for users will deteriorate. Thus, the NAS uses the term "congestible goods" to describe population-based services.[8] Highways are an obvious example of this point. In general, the cost of population-based services can be allocated according to an individual's estimated utilization of the service or at a flat per capita cost across the relevant population.

A sub-category of population-based services is government administrative support functions such as tax collections and legislative activities. Few taxpayers view tax collection as a government benefit; therefore, assigning the cost of this "benefit" appears problematic.

The solution to this dilemma is to conceptualize government activities into two categories: primary functions and secondary functions. Primary functions provide benefits directly to the public; they include direct and means-tested benefits, education, ordinary population-based services such as police and parks and public goods. By contrast, secondary or support functions do not provide direct benefits to the public but do provide necessary support services that enable the government to perform primary functions. For example, no one can receive food stamp benefits unless the government first collects taxes to fund the program. Secondary functions can thus be considered an inherent part of the "cost of production" of primary functions, and the benefits of secondary support functions can be allocated among the population in proportion to the allocation of benefits from government primary functions.

Government spent $662 billion on population-based services in FY 2004. Of this amount, some $546 billion went for ordinary services such as police and parks, and $116 billion went for administrative support functions.

Appendix A
General Methodology

Introduction

This appendix documents the methods used to calculate the spending and tax figures presented in the paper. Throughout, the term "low-skill immigrant households" is used as a synonym for households headed by immigrants without a high school degree.

Data Sources

Data on federal expenditures were taken from Historical Tables, Budget of the United States Government, Fiscal Year 2006.[42] Data on federal taxes and revenues were taken from Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006.[43]

State and local aggregate expenditures and revenue data were taken from the U.S. Bureau of Census survey of government finances and employment.[44] Added information on state and local spending categories was taken from U.S. Census Bureau, Federal State and Local Governments: 1992 Government Finance and Employment Classification Manual.[45]

Detailed information on means-tested spending was taken from Congressional Research Service, Cash and Noncash Benefits for Persons with Limited Income: Eligibility Rules, Recipient and Expenditure Data, FY 2002-FY 2004. This report provides important information on state and local means-tested expenditures from states' and localities' own financial resources as distinct from expenditures funded by federal grants in aid.[46]

Data on Medicaid expenditures for different recipient categories were taken from the Medicaid Statistical Information System (MSIS) as published in Medicare & Medicaid Statistical Supplement, 2006.[47] Data on the distribution of benefits and distribution of some taxes were taken from the U.S. Census Bureau's Current Population Survey (CPS)of March 2005 (which covers the year 2004).[48] Additional data on public school attendance were taken from the October 2004 Current Population Survey.[49] Data on household expenditure were taken from the Bureau of labor Statistics Consumer Expenditure Survey(CEX) for 2004.[50]

Data on Medicaid expenditures in institutional long-term care facilities were taken from Medicare & Medicaid Statistical Supplement, 2006.[51] Data on the education levels of elderly persons in institutional long-term care facilities were taken from the National Long Term Care Survey (NLTCS).[52] Data on the number of individuals residing in nursing homes in the average month and the number of Medicaid recipients in nursing homes were taken from the 2004 National Nursing Home Survey (NNHS). Data on the number of individuals in other types of institutions were taken from Census 2000 Summary File 1.[53] Information on illegal immigrants was taken primarily from The Size and Characteristics of the Unauthorized Migrant Population in the U.S.: Estimates Based on the March 2005 Current Population Survey, prepared by the Pew Hispanic Center.[54]

Count of Households

The Current Population Survey (CPS) reports some 113.15 million households in the U.S. in 2004. In addition, in the average month in 2004, 1.65 million persons resided in long-term care institutions:[55] 1.49 million were in nursing facilities, and 155,000 were in intermediate care facilities for the mentally retarded (ICF-MR).[56] These long-term care residents were not included in the population reported in the CPS; however, because these individuals are the beneficiaries of a substantial share of Medicaid expenditure, it is important that they be included in any accounting of fiscal balances and distribution. Consequently, the 1.65 million persons in long-term care facilities were included in the present analysis; each individual in such a facility was counted as a separate household, swelling the overall count of households from 113.15 million to 114.8 million.

There are no direct data available on the share of persons in institutional care facilities who were immigrants; therefore, the low-skill immigrant share of this population was estimated in the following way. The share of adults aged 18 to 64 in nursing facilities who were low-skill immigrants was assumed to equal the low-skill immigrant share of all adults in this age range in the general population in the CPS (4.9 percent). The share of children from low-skill immigrant families residing in nursing facilities and ICF-MR was assumed to equal the share of children from low-skill immigrant families among all children in the general population in the CPS (7 percent). The share of elderly persons in nursing facilities who were low-skill immigrants was estimated by multiplying the share of elderly persons in nursing homes who lacked a high school degree (48 percent)[57] by the share of elderly persons without a high school degree in the general population in the CPS who were immigrants (17.4 percent). This yielded an estimated low-skill immigrant share of elderly persons in nursing facilities of 8.4 percent.

Altogether, 120,00 low-skill immigrants or minor children of low-skill immigrant families were estimated to reside in long-term care facilities in FY 2004; over 90 percent of these individuals were elderly. (The calculations are shown in Appendix Table 7.) Each of these individuals was counted as a separate household, raising the number of low-skill immigrant households from 4.4 million to 4.5 million.[58]

The 120,000 low-skill immigrants or minor children from low-skill immigrant households constituted 7.2 percent of persons in institutional care; this was higher than the share of persons in low-skill immigrant households in the general population (5.4 percent). The disproportionate number of low-skill immigrants in institutional care is due to the disproportionate number of elderly immigrant dropouts estimated to be in institutional care; the estimated high number of poorly educated elderly immigrants in institutional care is consistent with the fact that the CPS shows that a disproportionate share of Medicaid expenditures on the elderly in the general population (9.6 percent) goes to low-skill immigrant households.

The share of Medicaid expenditures going to low-skill immigrants in institutional care settings was calculated separately for eight specific sub-categories. These calculations are described in Appendices B and C.

Calculating Aggregate Federal, State, and Local Spending

Aggregate federal expenditures at the sub-function level were taken from Historical Tables, Budget of the United States Government, FY 2007. These data are presented in Appendix Table 1. State and local aggregate expenditures were based on data from the U.S. Bureau of Census survey of government.[59]

Two modifications were necessary to yield an estimate of the overall combined spending for federal, state, and local government. First, some $408 billion in state and local spending is financed by grants in aid from the federal government. Since these funds are counted as federal expenditures, recording them again as state and local expenditure would constitute a double count. Consequently, federal grants in aid were deducted from the appropriate categories of state and local spending.

A second modification involves the treatment of market-like user fees and charges at the state and local levels. These transactions involve direct payment of a fee in exchange for a government service: for example, payment of an entry fee at a park. User fees are described in the federal budget in the following manner:

[I]n addition to collecting taxes…the Federal Government collects income from the public from market-oriented activities and the financing of regulatory expenses. These collections are classified as user charges, and they include the sale of postage stamps and electricity, charges for admittance to national parks, premiums for deposit insurance, and proceeds from the sale of assets such rents and royalties for the right to extract oil from the Outer Continental Shelf.[60]

In the federal budget, user fees are not counted as revenue, and the government services financed by user fees are not included in the count of government expenditures. As the Office of Management and Budget states:

[User charges] are subtracted from gross outlays rather than added to taxes on the receipts side of the budget. The purpose of this treatment is to produce budget totals for receipts, outlays, and budget authority in terms of the amount of resources allocated governmentally, through collective political choice, rather than through the market.[61]

In contrast, Census tabulations of state and local government finances include user fees as revenue and also include the cost of the service provided for the fee as an expenditure.[62] The most prominent user fees treated in this manner in the Census state and local government financial data are household payments to public utilities for water, power, and sanitation services.

But market-like, user fee payments of this type do not involve a transfer of resources from one group to another or from one household to another. In addition, government user fee transactions do not alter the net fiscal deficit or surplus of any household (defined as the cost of total government benefits and services received minus total taxes and revenues paid) because each dollar in services received will be matched by one dollar of fees paid. Finally, determining who has paid a user fee and received the corresponding service is very difficult.

For these reasons, this paper has applied the federal accounting principle of excluding most user fees from revenue tallies and excluding the services funded by the fees from the count of expenditures to state and local government finances. This means that user charges and fees were removed from both the revenue and expenditure tallies for state and local government. As noted, the inclusion or exclusion of these user fees has no effect on the fiscal deficit figures for low-skill immigrant households presented in this paper.

Appendix Tables 2A, 2B, and 2C show the deductions of federal grant in aid and user fee expenditures that yielded the state and local expenditure totals used in this analysis.

Estimating the Allocation of Direct and Means-Tested Benefits

In most cases, the dollar cost of direct benefits and means-tested benefits received by low-skill immigrant households was estimated by the dollar cost of benefits received as reported in the Census Bureau's Current Population Survey (CPS). One problem with this approach is that the CPS underreports receipt of most government benefits. This means that the aggregate dollar cost of benefits for a particular program as reported in the CPS is generally less than the actual program expenditures according to government budgetary data.

To be accurate, any fiscal analysis must adjust for benefit underreporting. This has been done in prior studies; for example, the National Academy of Sciences study of the fiscal costs ofimmigration, The New Americans, made an adjustment for such underreporting.[63]

The current analysis adjusts for underreporting in the CPS with a simple mathematical procedure that increases overall spending on any given program to equal actual aggregate spending levels and increases expenditures on low-skill immigrant households in an equal proportion. Let:

Etx = total expenditures for program x reported in the CPS;

Elx = expenditures for program x for low-skill immigrant households reported in the CPS;

Ebx = total expenditures for program x according to independent budgetary sources; and

Hl = number of low-skill immigrant households in the CPS.

The share of expenditures reported in the CPS received by low-skill immigrant households would equal Elx/Etx. The actual expenditures allocated to low-skill immigrant households would be estimated to equal (Elx/Etx) times Ebx.

The average per household benefit from the program received by low-skill immigrant households would equal:

(Elx/Etx) times (Ebx /Hl)

For example, if the CPS reported that low-skill immigrant households received 10 percent of food stamp benefits and the total expenditures on food stamps according to budgetary data were $20 billion, low-skill immigrant households would be estimated to receive $2 billion in food stamp benefits. If there were 4 million low-skill immigrant households, the average food stamp benefit per low-skill household would equal $2 billion divided by 4 million households, or $500.

The key assumption behind this underreporting adjustment procedure is that low-skill immigrant households underreport receipt of welfare and other government benefits at roughly the same rate as the general population. For example, if receipt of food stamps is underreported by 15 percent in the CPS for the overall population, the adjustment procedure assumes that the sub-group of low-skill immigrant households in the CPS would also underreport food stamp receipt by 15 percent. The average level of food stamp benefits among low-skill immigrant households as reported in the CPS is then adjusted upward by this ratio to compensate for the underreporting.[64] Since there is no evidence to suggest that low-skill immigrant households underreport government benefits to the Census at a rate different from that of the general population, this procedure appears valid as an estimating technique.

Estimating the Allocation of education Expenditures

The average cost of public education services was calculated in a somewhat different manner since the CPS reports whether an individual is enrolled in a public school but does not report the cost of education services provided. Consequently, data from the Census survey of governments were used to calculate the average per pupil cost of public primary and secondary education in each state.[65] The total governmental cost of primary and secondary schooling for each household was then estimated by multiplying the number of enrolled pupils in the household by the average per pupil cost in the state where the household resides.

This procedure yielded estimates of total public primary and secondary education costs for low-skill immigrant households in the CPS and for the whole population in the CPS. Adjustments for misreporting in the CPS were made according to the procedures outlined above. Public costs for post-secondary education were allocated in a similar manner.

Estimating the Allocation of Medical Expenditures

There is often confusion concerning the calculation of the cost of Medicaid and Medicare benefits by the Census. The Census makes no effort to determine the costs of medical treatments given to a particular person. Instead, it calculates the average cost of Medicaid or Medicare benefits per person for a particular demographic/beneficiary group. For example, per capita Medicaid costs for children are very different from those for the elderly. The Census assigns the appropriate per capita Medicaid or Medicare costs to each individual who reports coverage in the CPS according to the individual's beneficiary class: for example, elderly, children, non-elderly able-bodied adults, and disabled adults.

Allocation of Medicaid expenditures is complicated by the fact that a significant portion of those expenditures goes to persons in long-term care institutions who are not counted in the CPS. In the average month in 2004, some 1.65 million persons resided in long-term care institutions;[66] about 62 percent of these individuals received Medicaid assistance.[67] The first step in allocating Medicaid expenditures is to determine the share of expenditures going to institutionalized and non-institutionalized persons within each of four primary recipient categories: elderly, children, non-elderly disabled adults, and non-elderly able-bodied adults. The procedures for determining this are presented in Appendix C. Once the separation of institutional and non-institutional Medicaid expenditures has been determined, the low-skill immigrant share of Medicaid spending in the general/non-institutional population can be determined for each of the recipient categories directly from CPS data.

For persons in institutions, additional sources of information are used in the estimates according to procedures described in Appendix B. In general, the analysis assumes that for each recipient category, the share of Medicaid expenditure going to immigrants without a high school degree will equal the low-skill immigrant share of Medicaid expenditures for the same recipient category in the general/non-institutional population as measured in the CPS.

In FY 2004, some $46 billion in Medicaid funds was spent on elderly individuals in nursing homes and other institutional long-term care facilities,[68] of which nearly 60 percent was spent on Medicaid recipients without a high school degree;[69] of the spending going to elderly residents without a high school degree, an estimated 22.7 percent went to immigrants without a high school degree. (See Appendix C.)

Estimating the Allocation of Population-Based Services

Wherever possible, this analysis has allocated the cost of population-based services for low-skill immigrant households in proportion to their estimated utilization of those services. For example, the proportionate utilization of roads andhighways by low-skill immigrant households was estimated, in part, on the basis of their share of gasoline purchases as estimated in the Consumer Expenditure Survey (CEX).

When an estimate of proportionate utilization was not possible, the cost of population-based services was allocated on a uniform per capita basis. Some population-based services, such as airports, will be used infrequently by low-skill immigrant households; in these cases, the cost of the service for low-skill immigrant households was set at zero or at an arbitrary low level.

Estimating the Allocation of the Costs of General
Government and Administrative Support Services

Allocation of the costs of general government services such as tax collections and legislative functions presents difficulties since there is apparently no one who directly benefits from those services. Most taxpayers would regard IRS collection activities as a burden, not a benefit; however, while government administrative functions per se do not benefit the public, they do provide a necessary foundation that makes all other government benefit and service programs possible. A household that receives food stamp benefits, for example, could not receive those benefits unless the IRS had collected the tax revenue to fund the program in the first place.

It seems reasonable to integrate proportionally the cost of government support services into the cost of other government functions that depend on those services. Following this reasoning, the expenditures for general government and administrative support have been allocated among households in the same proportions that total direct benefits, means-tested benefits, education, and population-based services are distributed among households.[70]

Estimating the Allocation of Financial Obligations Relating to Past Government Activities

Year by year, throughout most of the post-war period, U.S. taxpayers have not paid for the full cost of benefits and services provided by government. A portion of annual costs is passed on to be paid in future years. Government costs are shifted to future years through two mechanisms.

First, when government expenditure exceeds revenue, the government runs a deficit and borrows funds. The cost of borrowing is passed to future years in the form of interest payments and repayments of principal on public debts.

Second, when a government employee provides a service to the public, part of the cost of that service is paid for immediately through the employee's salary, but the employee may also receive government retirement benefits in the future in compensation for services provided in the present. Expenditures on public-sector retirement systems are thus, to a considerable degree, present payments in compensation for services delivered in the past.

interest payments on government debt are largely fixed by past government borrowing; an immigrant's entry into the U.S. does not cause interest payments to increase. While direct benefits, means-tested benefits, public education, and population-based services all will tend to increase as additional low-skill immigrants take up residence in the U.S., interest on government debt and similar obligations are largely unaffected in the intermediate-term future by increases in the number of immigrants. For that reason, this report does not include interest on the debt and similar costs in the primary net tax burden calculations presented in this paper. This is consistent with methods employed by the National Academy of Sciences in its assessment of the fiscal costs of immigrants in The New Americans.[71]

Estimating the Distribution of Pure Public Goods

Government pure public goods include expenditures on defense, veterans, international affairs, scientific research, and part of spending on the environment, as well as debt obligations relating to past public good spending. The total cost of pure public goods was divided by the whole U.S. population to determine an average per capita cost.

The fact that an immigrant enters the U.S. and benefits from governmental public good expenditures does not increase costs or diminish the utility of public goods spending for other taxpayers. Because of this, the low-skill immigrant share of public goods spending has not been included in the net tax burden calculations presented in this paper. This is consistent with methods employed by the National Academy of Sciences in its assessment of the fiscal costs of immigrants in The New Americans.[72]

Estimating the Distribution of taxes and Other Government Collections

The distribution of federal and state income taxes was calculated from CPS data. The Census imputes tax payments into the CPS based on a household's income and demographic characteristics and the appropriate federal and state tax rules; however, since income is underreported in the CPS, this means that imputed taxes will also be too low. Thus, the imputed tax payments in the CPS were adjusted to equal the aggregate income tax revenues reported in government budgetary documents. (Federal revenue totals were taken from Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2006.[73] State and local tax and revenue data were taken from the U.S. Census survey of governments.[74])

The procedures for adjusting for the underreporting of income taxes were the same as those used to adjust for underreporting of expenditures. For example, for federal income tax, let:

Tt = total income tax reported in the CPS;

Tl = total income tax for low-skill immigrant households reported in the CPS;

Tb = total income tax according to independent budgetary sources; and

Hl = number of low-skill immigrant households in the CPS.

The share of taxes paid by low-skill immigrant households as reported in the CPS would equal Tl /Tt. The actual expenditures allocated to low-skill immigrant households would be estimated to equal (Tl /Tt ) times Tb.

The average paid per low-skill household would equal:

(Tl /Tt ) times (Tb/Hl)

State income taxes were adjusted for underreporting according to the same formula.

Employees were assumed to pay both the "employee" and "employer" share of FICA taxes. Allocation of FICA taxes was estimated based on the distribution reported in the CPS, adjusted for underreporting in the manner described above.

The incidence of federal and state corporate profits tax was assumed to fall 70 percent on workers and 30 percent on owners of capital.[75] The workers' share was allocated according to the distribution of earnings in the CPS; the owners' share was allocated according to the allocation of property income in the CPS.

Sales and excise taxes were assumed to fall on the consumer; tax payments were estimated based on the share of total consumption of relevant commodity or commodities in the Consumer Expenditure Survey (CEX). For example, since the CEX reported that households headed by persons without a high school degree consumed 18.2 percent of the sales of tobacco products, these same households were estimated to pay a corresponding 18.2 percent of all excise and sales taxes on tobacco products. Additional information on specific taxes is provided below.

Estimating Consumption by Low-Skill Immigrant Households

Many tax and expenditure calculations in this paper require an estimate of consumption of various items by low-skill immigrant households based on CEX data. An earlier version of this analysis measured the fiscal impact of all households headed by persons without a high school degree (both immigrants and non-immigrants).[76] Measuring the consumption of these households was easy because the CEX identifies households according to the education level of the household head; however, the CEX does not report the immigration status of the head of the household.

The present paper circumvents this problem by using low-skill Hispanic households in the CEX as a proxy group to estimate the consumption of low-skill immigrant households. There is considerable overlap between low-skill Hispanic households (meaning households headed by Hispanics without a high school degree) and low-skill immigrant households. It seems reasonable, therefore, to assume that the consumption of various goods as a percentage of income is similar between the two groups. For example, if food consumption as a share of income for Hispanic households headed by persons without a high school degree is known from the CEX, a similar figure can be estimated for low-skill immigrant households after adjusting for modest differences in income between the two groups.

The consumption of various goods by low-skill immigrant households was therefore estimated by taking the aggregate consumption of that good by low-skill Hispanic households and multiplying by the ratio of aggregate low-skill immigrant income to low-skill Hispanic income in the CPS. For any consumption good1 let:

CTCEX = Total Dollar Value of Consumption of Item1 in CEX for Whole Population;

CLH1 =Total Dollar Value of Consumption of Item1 in CEX by Low-Skill Hispanic Households;

CLI1 = Derived Total Dollar Value of Consumption of Item1 by Low-Skill Immigrant Households;

YLH = Total Income of Low Skill Hispanic Households in CPS;

YLI = Total Money Income of Low Skill Immigrant Households in CPS.

Then:

CLI1 = YLI times CLH1 /YLH

The low-skill immigrant share of total consumption of the good would equal:

CLI1/CTCEX

It might be argued that, despite the considerable overlap between low-skill immigrant households and households headed by Hispanics without a high school degree, the procedure outlined above overestimates the consumption of low-skill immigrants because immigrants are likely to send a substantial portion of their income back to their native country in remittances, whereas non-immigrants of similar education status will spend all of their income in the U.S. If this argument is correct, it would mean that the fiscal deficit estimates in this paper are somewhat too low. If low-skill immigrant households consume less than this model estimates, amount of government services received and consumption taxes paid by low-skill households would be reduced. But the drop in tax payments would be substantially larger than the reduction in benefits. For example, if the consumption level of low-skill immigrant households was 20 percent below the level assumed in this report, this would result in a $900 per household drop in taxes paid but only a $240 drop in benefits received.

Adjusting the Estimated taxes and Benefits for Illegal Immigrant Households

There were some 11 million illegal immigrants in the U.S. in 2004.[77] About 9.3 million of these individuals were adults,[78] roughly half of whom lacked a high school degree.[79] About 90 percent of illegal immigrants are reported in the CPS.[80] This report covers only those illegal immigrants who are reported in the CPS and does not address the remaining 10 percent not counted by the Census. Assuming that the illegal immigrant households omitted from the CPS are similar to those that are included, incorporation of the missing 10 percent of illegals might raise the aggregate net tax burden imposed by low-skill immigrant households by roughly 4 percent.[81]

Of the 4.5 million low-skill immigrant households analyzed in this report, approximately 41 percent were headed by illegal immigrants.[82] Households headed by illegal immigrants differ from other immigrant households in certain key respects. Illegal immigrants themselves are not eligible for most means-tested welfare benefits, but illegal immigrant households do contain some 3 million children who were born inside the U.S. to illegal immigrant parents; these children are U.S. citizens and are eligible for and do receive means-tested welfare.

Most of the tax and benefits estimates presented in this paper are unaffected by a low-skill immigrant household's legal status. For example, children in illegal immigrant households are eligible for and do receive public education. Similarly, nearly all of the data on direct and means-tested government benefits in the CPS are based on a household's self-report concerning receipt of each benefit by family members; the analysis assumes that if an illegal immigrant household reports receipt of a government benefit, that report is accurate. The fact that low-skill illegal immigrant households are less likely to receive certain types of government benefits is already reflected in lower levels of reported benefit receipt for those households in the CPS; the CPS data will accurately the reflect the limited eligibility for benefits within illegal immigrant households.

However, for two benefit programs, the earned income tax Credit (EITC) and the additional child tax Credit (ACTC), the CPS imputes receipt of benefits rather than relying on self-report of the householder. The EITC is a refundable tax Credit that provides cash to low-income working parents with children. In general, parents must be working lawfully in the U.S. to be eligible for the credit. Since the Census does not distinguish the legal status of parents and assumes that all employment is "on the books," these procedures clearly result in the assignment of EITC benefits to many illegal immigrant families who in reality receive no benefits. The present analysis adjusts for the misallocation of EITC benefits to illegal immigrant households in the CPS; it reduces the share of EITC benefits going to low-skill immigrant households in the CPS by the portion of low-skill immigrant households that are assumed to be illegal (41 percent). ACTC benefits are reduced in a similar manner.

There are also six taxes that are significantly affected by an immigrant household's legal status: the federal income tax, state income tax, FICA tax, worker's compensation tax, federal unemployment insurance tax, and state unemployment insurance tax. The value of income and FICA taxes paid by households is imputed into the CPS by Census analysts according to the household's income demographic characteristics and state of residence. The Census imputation procedures assume that all households work "on the books" and pay taxes owed; however, most analyses assume that nearly half (45 percent) of illegal immigrants work "off the books" and would not therefore pay income or FICA taxes.[83] Any estimate of the FICA, income, workers' compensation, and unemployment insurance taxes paid by low-skill immigrant households must therefore adjust for the tax reduction effect due to the high number of illegal immigrants who work "off the books."

This paper uses an "illegal immigrant adjustment factor" to reduce the estimated tax payments made by low-skill immigrant households. The illegal immigrant adjustment factor was computed as follows: Some 41.5 percent of low-skill immigrant households are assumed to be headed by illegal immigrants; among these, some 45 percent are assumed to work "off the books." Overall, 18.7 percent (45 percent times 41.5 percent) of the income in low-skill immigrant households is assumed to be the result of "off the books" labor on which taxes are not paid. The estimated level of federal income tax, state income tax, FICA tax, worker's compensation tax, and unemployment insurance paid by low-skill immigrant households is therefore reduced by 18.7 percent.

(This procedure is likely to underestimate the level of "off the books" labor in low-skill immigrant households and overestimate the taxes paid because it seems likely that less educated illegal immigrants would be more likely to work informally and "off the books" than would better educated illegal immigrants. Consequently, the "off the books" labor rate for illegal immigrant households headed by high school dropouts may be higher than the overall average of 45 percent.)

Indirect taxes such as sales, excise, and property taxes are determined by household consumption levels as estimated from the CEX and are unaffected by a family's legal status. Similarly, population-based services such as highways, sewers, and fire protection services are allocated on the basis of consumption or on a per capita basis and would be largely unaffected by a household's legal status. It is often reported that illegal immigrants consume less as a share of income and send more money back as remittances to their native countries. If this is true, illegal immigrants will pay less in consumption and property taxes relative to their incomes than will other social groups. However, since the analysis estimates the consumption and property taxes paid by low-skill immigrant households (both legal and illegal) on the basis of the self-reported consumption of low-skill Hispanic households in the CEX (immigrant and non-immigrant), the tendency for immigrant households to consume less and send part of their income abroad in remittances is already, to a considerable degree, built into the analysis. Similarly, population-based services such ashighways, sewers, and fire protection services are allocated on the basis of consumption or on a per capita basis and would be largely unaffected by a household's legal status.

Appendix B
Specific Calculations on Expenditures and taxes

The average cost of government benefits and services per low-skill household was calculated for 61 separate expenditure categories. The algorithms employed for each category are described below, and the specific calculations are shown in Appendix Table 4. Average payments per low-skill household were calculated for 33 specific tax and revenue categories. The algorithm used for each revenue category is described below, and the calculations for each category are presented in Appendix Table 5.

Calculations for Specific Direct Benefit Expenditures

• Social Security Benefits. Social Security benefits for individual households were calculated using dollar benefit values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• Medicare. The value of Medicare benefits per household was calculated based on data in the CPS. The CPS calculates the value of Medicare coverage for an individual as equal to the average cost per eligible beneficiary. Adjustments for misreporting of benefits in the CPS were made using the procedures described above.[84]
• Unemployment Insurance Benefits. Unemployment insurance benefits for individual households were calculating using dollar benefit values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• Workmen's Compensation. Workmen's compensation benefits for individual households were calculated using dollar benefit values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• Other Federal Retirement Programs. This category includes Railroad Retirement and the Black Lung Disability Trust Fund. Benefits for individual households were calculated using dollar values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• Agricultural Subsidy Programs. Low-skill immigrant households were assumed to receive zero benefit from these programs.
• Deposit Insurance. Net expenditure for this category is very low; low-skill immigrant households were assumed to receive benefits in proportion to their share of interest income in the CPS.

Calculations for Public education

• Public Primary and Secondary education. The average cost of public education services was calculated in a somewhat different manner since the CPS reports whether an individual is enrolled in a public school but does not report the cost of education services provided. Data from the October 2004 CPS were used to determine enrollment in public schools, and data from the Census survey of governments were used to calculate the average per pupil cost of public primary and secondary education in each state.[85] The total governmental cost of primary and secondary schooling for each household was then estimated by multiplying the number of enrolled pupils in the household by the average per pupil cost in the state where the household resides.
  
  This procedure provided an estimate of total public primary and secondary education costs for the whole population and the percentage of total costs going to low-skill immigrant households. The percentage of costs going to low-skill immigrant households was multiplied by the expenditure total for primary and secondary education from independent budgetary sources; this yielded an estimate of aggregate primary and secondary public school expenditures for low-skill immigrant households. Average per household costs of public primary and secondary education were calculated by dividing the total costs of low-skill immigrant households by the overall number of such households.
• Public Post-Secondary education. Public costs for post-secondary education were allocated using the same procedures used for primary and secondary education expenditures.
• Other education. These state and local costs were allocated in proportion to the low-skill immigrant households' share of the general population.

Calculations for Specific Means-Tested Benefit Expenditures

Means-Tested Expenditures in General. Aggregate figures on federal means-tested expenditures were taken from Office of Management and Budget totals in Historical Tables, Budget of the United States Government, Fiscal Year 2006. (See Appendix Table 1.) Federal expenditures on individual means-tested programs are presented in Appendix Table 4 and were taken from Congressional Research Service, Cash and Noncash Benefits for Persons with Limited Income: Eligibility Rules, Recipient and Expenditure Data, FY2002-FY2004.

Figures on specific state and local means-tested expenditures are presented in Appendix Tables 2A, 2B, 2C, and 3 and were taken from the CRS report. These figures exclude state means-tested expenditures financed by federal grants. An estimated $2.5 billion in state-run General Relief programs was included in the "public assistance" category in Appendix Table 4; these expenditures do not appear in the CRS report because they lack a federal component.

The total means-tested expenditure figure of $564.7 billion, presented in Appendix Table 4, excludes means-tested veterans benefits (which are counted as public good spending) and most means-tested educational spending.[86]

Medicaid Expenditures in General. The Medicaid Statistical Information System (MSIS)[87] reports Medicaid expenditures for four recipient groups: children, disabled non-elderly adults, able-bodied non-elderly adults, and elderly adults. The MSIS data further divide expenditures in each of the four recipient categories into expenditures for individuals in three residential/institutional statuses: recipients in the general population, recipients in nursing facilities, and recipients in intermediate care facilities for the mentally retarded (ICF-MR).[88] The interaction of the four recipient categories and the three residential categories yields 12 overall sub-categories for Medicaid expenditures. Separate calculations were made for each of these 12 sub-categories. The estimation of aggregate Medicaid expenditures in each of the 12 sub-categories is described in Appendix C. The methods for estimating the low-skill immigrant share of Medicaid expenditures in each of the 12 sub-categories are described below.

Medicaid Expenditures on Elderly Persons in the General Population. After the amount of Medicaid spending that went to elderly persons in the general population was determined according to the procedures in Appendix C, the share of those Medicaid expenditures that went to elderly recipients in low-skill immigrant households was calculated directly from CPS data. The following example illustrates the overall equations for estimating Medicaid expenditures for elderly persons in low-skill immigrant households in the general population, incorporating the steps in Appendix B and C. Let:

Mel = Medicaid expenditures for elderly persons residing in low-skill immigrant households in the general population;

Mei = Medicaid expenditures on the elderly in long-term care institutions;

Met = Total Medicaid expenditures on the elderly according to MSIS data;

MSISt = Total Medicaid expenditure according to MSIS data;

CRSt = Total Medicaid expenditure according to Congressional Research Service data; and

CPSe = Share of Medicaid expenditures for elderly persons in the CPS going to elderly persons residing in low-skill immigrant households.

Medicaid expenditures for elderly persons residing in low-skill immigrant households in the general population can then be calculated:

Mel = (Met - Mei) times CRSt/MSISt times CPSe

Expenditures for children, non-elderly disabled adults, and non-elderly able-bodied adults in low-skill immigrant households in the general population were calculated in a similar manner.

• Medicaid Expenditures on Children in the General Population. The share of Medicaid expenditures on children in the general population that went to child recipients in low-skill immigrant households was calculated directly from CPS data.
• Medicaid Expenditures on Non-elderly Able-bodied Adults in the General Population. The share of Medicaid expenditures on non-elderly able-bodied adult recipients in the general population that went to individuals in low-skill immigrant households was calculated directly from CPS data.
• Medicaid Expenditures on Non-elderly Disabled Adults in the General Population. The share of Medicaid expenditures on non-elderly disabled adults in the general population that went to individuals in low-skill immigrant households was calculated directly from CPS data.
• Medicaid Expenditures on Elderly Recipients in Nursing Facilities.[89] The share of Medicaid spending on the elderly in nursing facilities that went to persons without a high school degree was estimated based on education data on long-term care residents in the 1999 National Long Term Care Study. This study showed that some 59 percent of elderly Medicaid recipients in nursing facilities lacked a high school degree.[90]
  
  No direct information is available on the immigrant share of Medicaid expenditures on elderly dropouts in nursing facilities. The immigrant share of Medicaid expenditures on elderly dropouts in nursing facilities was therefore assumed to equal the immigrant share of Medicaid expenditures on elderly dropout households in the general population as measured in the CPS: 22.7 percent. The overall low-skill immigrant share of Medicaid expenditures on elderly persons in nursing facilities was thus estimated to equal the dropout share of Medicaid expenditures on the elderly in nursing facilities (59 percent) times the estimated immigrant share among elderly dropout recipients (22.7 percent) for a total of 13.6 percent.
• Medicaid Expenditures on Child Recipients in Nursing Facilities. The low-skill immigrant share of total Medicaid expenditures going to child recipients in nursing homes was assumed to equal the low-skill immigrant share of Medicaid expenditure on child recipients in the general population as measured by the CPS.
• Medicaid Expenditures on Non-elderly Disabled Adult Recipients in Nursing Facilities. The low-skill immigrant share of total Medicaid expenditures going to non-elderly disabled recipients in nursing homes was assumed to equal the low-skill immigrant share of Medicaid expenditure on non-elderly disabled recipients in the general population as measured by the CPS.
• Medicaid Expenditures on Non-elderly Able-bodied Adult Recipients in Nursing Facilities. The low-skill immigrant share of Medicaid expenditures going to non-elderly able-bodied adults in nursing homes was assumed to equal the low-skill immigrant share of Medicaid expenditure on non-elderly able-bodied adults in the general population as measured in the CPS.
• Medicaid Expenditures on Child Recipients in Intermediate Care Facilities for the Mentally Retarded (ICF-MR). Medicaid spending on children from low-skill immigrant households residing in ICF-MR is assumed to be proportionate to the share of Medicaid spending on children going to low-skill immigrant households in the general population as measured in the CPS.
• Medicaid Expenditures on Elderly Recipients in Intermediate Care facilities for the Mentally Retarded (ICF-MR). The number of mentally handicapped adults who immigrate to the U.S. is presumably very small; therefore, the immigrant share of Medicaid spending on adults in ICF-MR was set at zero.
• Medicaid Expenditures on Non-elderly Disabled Adult Recipients in Intermediate Care Facilities for the Mentally Retarded (ICF-MR). The number of mentally handicapped adults who immigrate to the U.S. is presumably very small; therefore, the immigrant share of Medicaid spending on adults in ICF-MR was set at zero.
• Medicaid Expenditures on Non-elderly Able-bodied Adult Recipients in Intermediate Care Facilities for the Mentally Retarded (ICF-MR). The number of mentally handicapped adults who immigrate to the U.S. is presumably very small; therefore, the immigrant share of Medicaid spending on adults in ICF-MR was set at zero.
• Food Stamps. The Food Stamp Program is a means-tested program. Benefits for individual households were calculating using dollar benefit values reported in the CPS. Adjustments for underreporting of food stamp benefits in the CPS were made using the procedures described above.
• Supplemental Security Income (SSI). SSI is a means-tested program. SSI benefits for individual households were calculated using dollar benefit values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• The Earned Income Tax Credit (EITC). The EITC is a means-tested program supporting low-income working families with children. Dollar values of EITC benefits are calculated by the Census for each eligible household and imputed into the CPS data files. For the present analysis, EITC benefits for individual households were based on the dollar benefit values reported in the CPS. Adjustments for underreporting of EITC benefits in the CPS were made using the procedures described above. Reductions for non-receipt of EITC by illegal immigrant households were made according the procedures described in Appendix A.
• The Additional Child Tax Credit (ACTC). The ACTC is a means-tested refundable tax Credit supporting low-income working families with children. Dollar values of ACTC benefits are calculated by the Census for each eligible household and imputed into the CPS data files. For the present analysis, ACTC benefits for individual households were based on the dollar benefit values reported in the CPS. Adjustments for underreporting of ACTC benefits in the CPS were made using the procedures described above. Reductions for non-receipt of ACTC by illegal immigrant households were made according the procedures described in Appendix A.
• Public Housing Subsidies. There are a number of federal means-tested housing benefit programs. Public housing benefits for individual households were determined using dollar benefit values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• Public Assistance. Public assistance covers cash benefits from the Temporary Assistance to Needy Families (TANF) program and General Relief programs.[91] Public assistance benefits were determined for individual households using dollar benefit values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• Energy Assistance. Energy assistance is a means-tested benefit program. Benefits for individual households were determined using dollar benefit values reported in the CPS. Adjustments for underreporting of benefits in the CPS were made using the procedures described above.
• Women, Infants and Children (WIC) Nutrition Program. WIC is a means-tested program subsidizing food consumption for low-income pregnant women and low-income mothers with infants and small children. The CPS reports receipt of WIC benefits by households but gives no dollar value. The share of total WIC spending going to low-skill immigrant households was assumed to equal the share of households receiving WIC recipients in the CPS that were low-skill immigrant households.
• Day Care Assistance. Federal, state, and local governments provide day care assistance to low-income parents through a variety of means-tested programs. The CPS reports receipt of day care assistance by households but gives no dollar value. The share of total day care spending going to low-skill immigrant households was assumed to equal the share of households receiving day care in the CPS that were low-skill immigrant households.
• Indian Health Services. Indian Health is a means-tested aid program. The CPS reports receipt of Indian Health benefits by households but gives no dollar value. The share of total Indian Health spending going to low-skill immigrant households was assumed to equal the share of households receiving Indian Health aid in the CPS that were low-skill immigrant households.
• Training. The CPS reports whether an individual participates in government job training programs but assigns no cost to this participation. The share of total means-tested training spending going to low-skill immigrant households was assumed to equal the share of low-skill immigrant households in the CPS reporting receipt of government training.
• Other Means-Tested Aid. Altogether, the federal government operates some 70 different means-tested aid programs. The CPS contains data on household utilization of 12 of the largest programs, which cover 93 percent of overall means-tested spending, but provides no data on the smaller programs. Allocation of benefits from the remaining means-tested programs was estimated in the following manner.
  
  First, the share of reported total spending for the 11 means-tested programs covered by the CPS going to households headed by immigrants without a high school degree was determined.
  
  Second, the low-skill immigrant households were assumed to receive a share of the means-tested benefits from the remaining unreported programs equal to their share of all expenditures on the reported means-tested programs in the CPS.
  
  Third, once the estimated total benefits from these residual programs received by low-skill immigrant households as a whole was calculated, an average value per low-skill immigrant household could be computed.

Specific Calculations for Population-Based Programs

• Highways and Roads. Utilization of roads,highways, and parking facilities by low-skill immigrant households was assumed to be proportionate to their share of gasoline expenditures, estimated from the CEX according to the procedures described above.
• Mass Transit Subsidies. Low-skill immigrant households were assumed to utilize mass transit in proportion to their estimated share of expenditures on public Transportation, estimated from the CEX according to the procedures described above.
• Air Transportation. Low-skill immigrant households were assumed to receive minimal benefit from government spending on airports and air travel. The low-skill households' share of this spending was arbitrarily set at 0.5 percent of total expenditures.
• Sea and Inland Port Facilities and Other Ground Transportation. The share of these expenditures benefiting low-skill immigrant households was assumed to be proportionate to their share of total consumption estimated from the CEX according to the procedures described above.
• Other Federal Ground Transportation. Low-skill immigrant households were assumed to receive none of the benefits of this spending.
• Justice, Police, and Public Safety. These programs provide a general benefit to entire communities. Expenditures were assumed to have a uniform per capita value across the entire population. The share of expenditures benefiting low-skill immigrant households was assumed to be equal to their share of the total population.
• Population-Based Expenditures on Resources, Sanitation, and the Environment. This category covers parks and recreation, sewage and waste management, pollution control, natural resources, and public utility expenditures that are not financed through user fees. Expenditures were assumed to have a uniform per capita value across the entire population. The share of expenditures benefiting low-skill immigrant households was assumed to be equal to their share of the total population.
• Public Utility Spending for Water Supply. These expenditures represent expenditures on public water supply beyond those financed through user fees. The low-skill immigrant households' share of this spending was assumed to equal the group's share of expenditures on water estimated from the CEX according to the procedures described above.
• Public Utility Spending for Electric Power Supply. These expenditures represent expenditures on public electric power beyond those financed through user fees. The low-skill immigrant households' share of this spending was assumed to equal the group's share of expenditures on electricity estimated from the CEX according to the procedures described above.
• Public Utility Spending for Gas Supply. These expenditures represent expenditures on public gas supply beyond those financed with user fees. The low-skill immigrant households' share of this spending was assumed to equal the group's share of expenditures on gas supply estimated from the CEX according to the procedures described above.
• Pollution Control and Abatement. The analysis assumes that expenditures on pollution control would be proportionate to a household's propensity to pollute and that a household's propensity to pollute would be proportionate to its share of overall consumption. In consequence, low-skill immigrant households' share of pollution control expenditure would be proportionate to the group's share of total consumption estimated from the CEX according to the procedures described above.
• General Health. This category includes spending on Mental Health, Substance Abuse, and Public Health. These expenditures were assumed to have a uniform per capita value across the entire population. The share of expenditures benefiting low-skill immigrant households was assumed to be equal to their share of the total population.
• Consumer and Occupational Health. These expenditures were assumed to have a uniform per capita value across the entire population. The share of expenditures benefiting low-skill immigrant households was assumed to be equal to their share of the total population.
• Protective Inspection and Regulation. These expenditures were assumed to have a uniform per capita value across the entire population. The share of expenditures benefiting low-skill immigrant households was assumed to be equal to their share of the total population.
• Community Development. These expenditures were assumed to have a uniform per capita value across the entire population. The share of expenditures benefiting low-skill immigrant households was assumed to be equal to their share of the total population.
• Miscellaneous Spending. This category includes labor services, activities to advance commerce, postal service, and libraries. These expenditures were assumed to have a uniform per capita value across the entire population. The share of expenditures benefiting low-skill immigrant households was assumed to be equal to their share of the total population.

Specific Calculations for General Government
Support Services for Other Government Programs

• General Government/Administrative Support Functions at the State and Local Levels. This category consists mainly of administrative services in support of other government functions. It includes tax and revenue collection, lottery administration, budgeting, central administration, legislative functions, trust fund administration, central administration, and legislative functions. These activities do not provide benefits or services to the general public, but rather provide support for other programs that do directly affect the public. For example, tax collection does not directly benefit anyone but is necessary to provide funding for all other programs that do provide benefits and services to the public. Since the purpose of these support functions is to sustain other government programs, the costs of administrative support services were allocated according to the share of overall state and local direct benefits, means-tested benefits, education, and population-based services received by a household.
• General Government/Administrative Support Functions at the Federal Level. Like the previous category, this category includes tax collection activity, legislative functions, and other administrative support activities; and like the previous category, these activities do not directly benefit the public, but rather sustain all other government activities. In FY 2004, some 27 percent of total federal spending was allocated to pure public good functions. Therefore, 27 percent of federal general government and administrative support spending was estimated to be in support of pure public good functions. The remaining spending was allocated among households according to the share of all federally funded direct benefits, means-tested benefits, education, and population-based services received by a household.

Specific Calculations for Financial Obligations Relating to Past Government Activities

As explained in Appendix A, the entry of low-skill immigrants into the U.S. does not raise the costs of interest on public or other financial obligations relating to past government activity (at least in the intermediate term) for other taxpayers. As a consequence, expenditures relating to interest and other obligations are not included in the fiscal deficitscalculations for low-skill immigrants presented in this paper.

Specific Calculations for Public Goods Expenditure

This category includes spending on national defense, international affairs, science and scientific research, veterans programs, natural resources and the environment, and financial obligations relating to past public goods spending. As explained in Appendices A and D, the entry of low-skill immigrants into the U.S. does not raise the costs of public goods for other U.S. taxpayers; therefore, public goods expenditures are not included in the fiscal deficitscalculations presented in this paper.

Specific Calculations for taxes and Revenues

Specific Calculations for Federal taxes and Revenues

• Federal Individual Income Tax. The distribution of federal income taxes was calculated from CPS data, which showed that low-skill immigrant families paid 0.81 percent of federal income tax. The illegal immigrant adjustment factor of 18.7 percent, described in Appendix A, was then subtracted from this coefficient, reducing the low-skill immigrant share of federal individual income tax to 0.66. Adjustments for underreporting of tax payments in the CPS were made using the procedures used for adjusting benefits for underreporting as described in Appendix A.
• Federal Insurance Contribution Act (FICA) Taxes. Employees were assumed to pay both the "employer" and "employee" share of FICA taxes. The Census imputes FICA tax values into the CPS based on reported earnings. Data on the distribution of FICA tax were taken from the CPS, which showed that low-skill immigrant families paid 2.35 percent of this tax in FY 2004. The illegal immigrant adjustment factor of 18.7 percent, described in Appendix A, was then subtracted from this coefficient, reducing the low-skill immigrant share of federal individual income tax to 1.91 percent. Adjustment for underreporting of the tax was done in the manner previously described.
• Federal Corporate Income Tax. There are many conflicting opinions on the incidence of corporate income tax. The tax may be paid by owners, workers, consumers, or a combination of all three. For example, the Congressional Budget Office has traditionally assumed that the burden of this tax was fully borne by the owners of businesses; however, a recent CBO analysis concluded that in a competitive international environment, 70 percent of the cost of this tax was in fact shifted to workers.[92] As a whole, workers will experience lower wages as a result of the tax.
  
  This study uses the conclusions of this recent CBO analysis, assigning 70 percent of the federal corporate income tax burden to workers and 30 percent to owners; this allocation increases the estimate of the average taxes paid by low-skill immigrant households. The distribution of the workers' share of the tax burden was estimated on the basis of the distribution of earnings reported in the CPS. The share of federal corporate income tax borne by workers in low-skill immigrant households was assumed to be proportionate to the share of total earnings reported by low-skill immigrant households in the CPS. The distribution of the owners' share of the tax burden was estimated on the basis of the distribution of property income (dividends, interest, and rent) in the CPS; the share borne by workers in low-skill immigrant households was assumed to be proportionate to the share of total property income reported by low-skill immigrant households in the CPS.
• Federal Receipts for Unemployment Insurance. This tax was assumed to fall on workers. The share paid by low-skill workers was assumed to equal their share of the number of earners, which was 4.2 percent. The illegal immigrant adjustment factor of 18.7 percent, described in Appendix A, was then subtracted from this coefficient, reducing the low-skill immigrant share of unemployment insurance payments to 3.4 percent.
• Federal Highway Trust Fund taxes. This tax was assumed to fall half on the private owners of motor vehicles and half on businesses. The business share was further assumed to fall half on consumers and half on owners. Overall, the tax was assumed to fall 50 percent on private motor vehicle operators, 25 percent on consumers, and 25 percent of owners of businesses.[93] The portion of the tax paid by private motor vehicle operators that fell on low-skill immigrant households was assumed to equal those households' share of gasoline consumption as estimated from the CEX. The portion of the tax paid by consumers that fell on low-skill immigrant households was assumed to be proportionate to those households' share of total consumption as estimated from the CEX. The portion of the tax paid by business owners that fell on low-skill immigrant households was assumed to be proportionate to those households' share of property income (interest, dividends, and rent) as reported in the CPS.
• FederalAirportand Airways taxes. Low-skill immigrant households probably use air travel infrequently. They were assumed to pay 0.5 percent of these taxes and to utilize a corresponding 0.5 percent of government air travel expenditures.
• Federal excise Tax on Alcohol. This tax was assumed to fall on the consumers of alcohol. The share of the tax borne by low-skill immigrant households was assumed to be proportionate to those households' share of the total consumption of alcohol products as estimated from the CEX.
• Federal excise Tax on Tobacco. This tax was assumed to fall on the consumers of tobacco products. The share of the tax borne by low-skill immigrant households was assumed to be proportionate to those households' share of the total consumption of tobacco products as estimated from the CEX.
• Federal excise Tax on Telephones. This tax was assumed to fall on telephone users. The share of the tax borne by low-skill immigrant households was assumed to be proportionate to those households' share of the total consumption of telephone products as estimated from the CEX.
• Federal excise Tax on Transportation Fuels. This tax was assumed to fall on the consumers of transportation fuels. The share of the tax borne by low-skill immigrant households was assumed to be proportionate to those households' share of the total consumption of fuels as estimated from the CEX.
• Other Federal excise taxes. These taxes were assumed to fall on consumers in general. The share of tax borne by low-skill immigrant households was assumed to be proportionate to those households' share of the total consumption as estimated from the CEX.
• Federal Gift and Estate Taxes. Low-skill immigrant households were assumed to pay none of these taxes.
• Federal Customs, Duties, and Fees. These taxes were assumed to fall on consumers. The share of tax borne by low-skill immigrant households was assumed to be proportionate to those households' share of the total consumption as estimated from the CEX.

Specific Calculations for State and Local taxes and Revenues

• State Individual Income Tax. This tax was estimated in the same manner as the federal individual income tax. State income tax data reported in the CPS are calculated using the tax rules of the individual states. The distribution of state individual income taxes was calculated from CPS data, which showed that low-skill immigrant families paid 1.12 percent of these taxes. The illegal immigrant adjustment factor of 18.7 percent, described in Appendix A, was then subtracted from this coefficient, reducing the low-skill immigrant share of state individual income taxes to 0.91 percent. Tax payments recorded in the CPS were adjusted for underreporting according to the procedures described in Appendix A.
• State Corporate Income Tax. This tax was estimated in the same manner as the federal corporate income tax.
• State and Local Property taxes. Property taxes were assumed to fall partly on businesses and partly on owner-occupied and rented dwellings. The tax falling on businesses was assumed to be partly borne by owners and partly passed on to consumers. Overall, 50 percent of the tax was allocated to households as home owners and renters; the share of this tax paid by low-skill immigrant households was assumed to be proportionate to these households' estimated share of payments for shelter costs in the CEX. Another 25 percent of property taxes was assumed to be paid by owners of capital; the share paid by low-skill immigrant households was assumed to be proportionate to these households' share of dividends, interest, and rent income in the CPS. A final 25 percent of property tax was assumed to be passed on from businesses to consumers; the share of this burden borne by low-skill immigrant households was assumed to be equal to their share of total consumption as estimated from the CEX.
• State and Local General Sales taxes. These taxes were assumed to fall on consumers. The share paid by low-skill immigrant households was assumed to be proportionate to their share of the consumption of non-exempt goods and services as estimated from the CEX according to the procedures described in Appendix A. Items routinely exempted from sales tax coverage include food eaten at home, housing expenditures, utilities, fuels, gas and motor oil, public services, health care, education, cash contributions, and personal insurance and pension payments.[94]
• State and Local Tax on Motor Fuel. This tax was calculated in the same manner as the federal Highway Trust Fund taxes.
• State and Local Sales Tax on Alcohol. This tax was estimated in the same manner as the federal excise tax on alcohol.
• State and Local Sales Tax on Tobacco. This tax was estimated in the same manner as the federal excise tax on tobacco.
• Motor Vehicle License Fees. The share of these fees paid by low-skill immigrant households was assumed to equal these households' share of spending on licenses as estimated from the CEX according to the procedures described in Appendix A.
• Public Utilities Tax. The share of this tax paid by low-skill immigrant households was assumed to equal these households' share of total utility expenditures as estimated from the CEX according to the procedures described in Appendix A.
• Other Selective State and Local Sales taxes. The share of these taxes paid by low-skill immigrant households was assumed to equal these households' share of total consumption estimated from the CEX according to the procedures described in Appendix A.
• Other State and Local taxes Including Estate, Stock Transaction, and Severance taxes. Low-skill immigrant households are assumed to pay few of these taxes.
• State taxes for Unemployment Insurance. These taxes, like FICA taxes, were assumed to fall on workers. The share of taxation borne by low-skill immigrant households was assumed to equal their share of the total number of earners reported in the CPS. The distribution of state unemployment insurance taxes was calculated from CPS data, which showed that low-skill immigrant families would pay 4.2 percent of these taxes based on their share of total workers. The illegal immigrant adjustment factor of 18.7 percent, described in Appendix A, was then subtracted from this coefficient, reducing the low-skill immigrant share of state individual income taxes to 3.4 percent.
• Other Insurance Trust Fund Revenues. The share of these revenues paid by low-skill immigrant households was assumed to be proportionate to the number of persons in low-skill immigrant households as a share of the general population.
• State taxes for Workmen's Compensation. These taxes, like FICA taxes, were assumed to fall on workers. The share of taxation borne by low-skill immigrant households was assumed to equal their share of the total number of earners reported in the CPS. The distribution of state individual income taxes was calculated from CPS data, which showed that low-skill immigrant families would pay 4.2 percent of these taxes based on their share of total workers. The illegal immigrant adjustment factor of 18.7 percent, described in Appendix A, was then subtracted from this coefficient, reducing the low-skill immigrant share of state individual income taxes to 3.4 percent.
• Employee Contributions to State and Local Government Retirement Funds. The distribution of these revenue contributions was assumed to be proportionate to the distribution of state and local employees participating in employer pension plans according to CPS data.
• State Lottery Receipts. An important source of government revenue paid by households headed by persons without a high school degree is the purchase of state lottery tickets. A major study of the sale of state lottery tickets to different socioeconomic groups shows that per capita spending on state lottery tickets by adult high school dropouts was twice that of other adults.[95] However, a large part of these purchases is generated by low-skill black households, which form only a small part of the low-skill immigrant population. By contrast, Hispanics, who form a very large part of the low-skill immigrant population, have average per capital levels of lottery purchases.
  
  In the present analysis, lottery spending by per adult in households headed by immigrants without a high school degree was assumed to be 50 percent higher than the purchase rate of adults in the general population. The share of state lottery revenue contributed by low-skill immigrant households was calculated as 1.5hl /(0.5hl +ht), where hl is the number of low-skill immigrant households and ht is the number of households in the total population.
• Earnings on Investments Held in Employee Retirement Trust Funds. These state and local revenues represent the property income received by government trust funds as owners of capital. These earnings are not taxes and cannot be allocated among households.
• State and Local interest Earnings and Earnings from the Sale of Property. These revenues represent the property income received by government as owner of capital and other property. These earnings are not taxes and cannot be allocated among households.
• Special Assessments. Low-skill immigrant households were assumed to pay none of these taxes.
• Other State and Local Revenue. This revenue includes dividends on investment, recovery of expenditures made in prior years, and other non-tax revenue. Low-skill immigrant households were assumed to fund none of this revenue.

Appendix C
Medicaid Expenditures

Calculating Medicaid expenditures is challenging because about one-quarter of Medicaid spending goes for care for persons in nursing homes and other long-term care and intermediate-care institutions; these individuals are not included in the Current Population Survey. To obtain an accurate account of Medicaid spending, one must carefully separate institutional from non-institutional expenditures and estimate the share of institutional expenditures going to low-skill immigrants.

The Medicaid expenditure calculations in the paper were based on data from the Medical Statistical Information System (MSIS) for 2003, the most recent year available.[96] MSIS separates Medicaid expenditures into four separate recipient categories: elderly, children, non-elderly able-bodied adults, and non-elderly disabled adults. MSIS also separates expenditures into three institutional/residential statuses: residence in the general population, residence in nursing facilities, and residence in Intermediate Care Facilities for the Mentally Handicapped (ICF-MR). Combining the four recipient categories with the three residential statuses yields a total of 12 expenditure sub-categories, each of which has been calculated separately in this paper. Expenditures in each of these 12 sub-categories were calculated by the following steps.

Step One: Allocation of Expenditures to Persons of Unknown Recipient Status. A portion of the Medicaid expenditures goes to individuals whose recipient category is unidentified in the MSIS. These anonymous expenditures were imputed into the four normal recipient categories pro rata according to the distribution of MSIS expenditures to clearly identified recipients.

Step Two: Allocation of Institutional Long-term Care Expenditures to Individuals of Unknown Recipient Status. Within both nursing facility and ICF-MR expenditure categories, a portion of Medicaid spending goes to individuals whose recipient category is unidentified. These expenditures were imputed into the four normal recipient categories pro rata according to the distribution of MSIS nursing facility and ICF-MR expenditures to clearly identified recipients.

Step Three: Inclusion of Ancillary Medical Costs in Institutional Care. MSIS expenditures for care in nursing facilities (NF) and Intermediate Care Facilities (ICF-MR) cover only the cost of residential care in those institutions and do not include Medicaid payments for ancillary medical services, such as drugs, physician, lab, and X-ray services, received by recipients in institutional care. Ancillary expenditures as a percent of institutional long-term care spending vary by recipient group. Ancillary expenditures on children have been estimated to be about 22 percent of this group's facility institutional long-term care costs, about 64 percent for non-elderly able-bodied adults, about 25 percent for non-elderly disabled adults, and about 12 percent for elderly adults.[97] The MSIS figures for expenditures on individuals in institutions were adjusted to include ancillary medical services funded by Medicaid for those individuals; this yielded an adjusted institutional long-term care expenditure total (ALCET) for each of the four recipient categories in nursing facilities (NF) and each of the four recipient categories in ICF-MR.

Step Four: Calculation of Medicaid Costs for the General Population. The ALCET for elderly recipients in NF and ICF-MR was subtracted from the overall MSIS expenditure total for elderly recipients (as adjusted in step three). This yielded an estimate of residual Medicaid expenditures on elderly recipients in the general (non-institutional) population covered by the CPS. The same procedure was applied to the other three recipient groups in the general population: children, non-elderly able-bodied adults, and non-elderly disabled adults.

Step Five: Estimate of the Percent of Medicaid Spending Going to the 12 Sub-categories. The completion of steps three and four generated MSIS expenditures in each of the 12 recipient/residential sub-categories. These figures were converted into percentages of total MSIS Medicaid spending. The results are shown in Appendix Table C1.

Step Six: Adjustment of Aggregate Medicaid Spending to Equal FY 2004 CRS Levels. MSIS data show aggregate Medicaid expenditures of $233 billion in FY 2003. MSIS expenditures fall short of actual Medicaid expenditures because MSIS does not include disproportionate provider payments, some supplemental payments, and administrative costs. In addition, the MSIS expenditure calculations for the different recipient groups are based on FY 2003 data, which are the most recent available, and thus obviously fall short of the FY 2004 levels. The most comprehensive Medicaid expenditures come from the Congressional Research Service, which stated that aggregate federal and state Medicaid expenditures equaled $300.3 billion in FY 2004.[98] The percent share expenditure total for each of the 12 recipient sub-categories in Appendix Table C1 were multiplied by the CRS expenditure total of $300.3 billion to produce the aggregate spending figures for each of the 12 sub-categories presented in Appendix table C2. This adjustment assumes that the difference between MSIS and CRS expenditures is distributed proportionally across the 12 sub-categories.

The Medicaid spending aggregates in Appendix Table C2 for the 12 sub-categories are used in Appendix Table 5 as the bases for calculating expenditures for low-skill immigrant households in each sub-category. The methods for estimating the low-skill immigrant share of expenditures in each of the 12 sub-categories are described in Appendix B.

Appendix D
Pure Public Goods, Private Consumption Goods, and Population-Based Services

Fiscal distribution analysis seeks to determine the government benefits received by a particular group compared to taxes paid. A necessary first step in this process is to distinguish government programs that provide "pure public goods" as opposed to "private goods." These two types of expenditures have very different fiscal implications.

Economist Paul Samuelson is credited with being the first to develop the theory of public goods. In his seminal 1954 paper "The Pure Theory of Public Expenditure,"[99] Samuelson defined a pure public good (or what he called in the paper a "collective consumption good") as a good "which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good." By contrast, a "private consumption good" is a good that "can be parceled out among different individuals." Its use by one person precludes or diminishes its use by another.

A classic example of a pure public good would be a lighthouse: The fact that any particular ship perceives the warning beacon does not diminish the usefulness of the lighthouse to other ships. A typical example of a private consumption good is a hamburger: When one person eats it, it cannot be eaten by others.

Formally, all pure public goods will meet two criteria:[100]

• Non-rivalrous Consumption. Everyone in a given community can use the good; its use by one person will not diminish its utility to others.
• Zero-cost Extension to Additional Users. Once a pure public good has been initially produced, it requires no extra cost for additional individuals to benefit from the good. Expansion of the number of beneficiaries does not reduce its utility to any initial user and does not add new costs of production. As Nobel prize-winning economist James Buchanan explains, with a pure public good, "Additional consumers may be added at zero marginal cost."[101]

The second criterion is a direct corollary of the first. If consumption of a good is truly non-rivalrous, then adding extra new consumers will not reduce utility or add costs for the initial consumers.

The distinction between collective and private consumption goods can be illustrated by considering the difference between a recipe for pie and an actual piece of pie. A recipe for pie is a public consumption good in the sense that it can be shared with others without reducing its usefulness to the original possessor; moreover, the recipe can be disseminated to others with little or no added cost. By contrast, an actual slice of pie is a private consumption good: Its consumption by one person bars its consumption by another. Efforts to expand the number of individuals utilizing the pie slice will either reduce the satisfaction of each user (as each gets a smaller portion of the initial) or entail new costs (to produce more pie).

Examples of Governmental Pure Public Goods

Pure public goods are relatively rare. One prime example of a governmental public good is medical research. If research funded by the National Institutes of Health produces a cure for cancer, all Americans will benefit from this discovery. The benefit received by one person is not reduced by the benefit received by others; moreover, the value of the discovery to each individual would remain the same even if the U.S. population doubled.

Another notable example of a pure public good is defense expenditure. The utility of an Army division or and aircraft carrier lies in its effectiveness in combating foreign threats to America. In most respects, one person's benefit from defense strength is not reduced because others also benefit. The military effectiveness of an Army division or an aircraft carrier is not reduced just because the size of the civilian population being defended is increased.

Finally, individuals may receive psychic satisfaction from the preservation of wildlife or wilderness areas. This psychic satisfaction is not reduced because others receive the same benefit and is not directly effected by changes in the population. By contrast, enjoyment of a national park may be reduced if population increases lead to crowding. In consequence, general activities to preserve species may be considered a public good, while provision of parks is a private good.

Pure Public Goods Compared to Population-Based Goods

Many government services that are dubbed public goods are not true public goods. Economists Thomas MaCurdy and Thomas Nechyba state that "relatively few of the goods produced by [the] government sector are pure public goods, in the sense that the cost of providing the same level of the good is invariant to the size of the population."[102] In other words, many government services referred to conventionally as "public goods" need to be increased at added expense to the taxpayer as the population increases, thereby violating the criterion of zero-cost extension to additional users.

For example, police protection is often incorrectly referred to as a "public good." True, police do provide a diffuse service that benefits nearly all members of a community, but the benefit that each individual receives from a policeman is reduced by the claims other citizens may make on the policeman's time. Someone living in a town of 500 protected by a single policeman gets far more protection from that policeman than would another individual protected by the same single policeman in a town of 10,000.

The National Academy of Sciences explains that government services that generally need to be increased as the population increases are not real public goods. It refers to these services as "congestible" goods: If such a program remains fixed in size as the number of users increases, it may become "congested," and the quality of service will consequently be reduced. An obvious example would be highways. Other examples of "congestible" goods are sewers, parks, fire departments, police, courts, and mail service.[103] These types of programs are categorized as "population-based" services in the paper.

In contrast to population-based services, governmental pure public goods have odd fiscal properties. The fact that a low-income person who pays little or nothing in taxes receives benefit from government defense or medical research programs does not impose added cost or reduce the utility of those programs to other taxpayers. Therefore, it is inaccurate to say that the non-taxpayers' use of these programs imposes a burden on other taxpayers. On the other hand, non-taxpayers or individuals who pay little in taxes are "free riders" on public goods in the sense that they benefit from a good for which they have not paid.

The entry of low-skill immigrants into the U.S. does not increase the costs or reduce the utility of public goods for other taxpayers; therefore, public goods spending is not included in the net fiscal deficit calculations for low-skill immigrant households presented in this paper. By contrast, entry of low-skill immigrants does increase costs and reduce the utility of "congestible" or population-based services for other taxpayers; therefore, those expenditures have been included in the net fiscal deficit calculations for low-skill immigrant households presented in this paper.