Statement of
Robert Rector
Senior Research Fellow, Welfare and Family Issues
Domestic Policy Studies
The Heritage Foundation
Before the Subcommittee on
Immigration of the Committee on the Judiciary
of the United States House of Representatives
Delivered May 17, 2007
My name is Robert
Rector. I am Senior Research Fellow for Welfare and Family Issues
at The Heritage Foundation. The views I express in this testimony
are my own, and should not be construed as representing any
official position of The Heritage Foundation.
Summary
This testimony
provides a fiscal analysis of households headed by immigrants
without a high school diploma. The testimony refers to these
households as "low-skill immigrant households." My analysis, in
particular, focuses on the harmful fiscal impact of low skill
immigrants on state and local governments.
In FY 2004 there
were around 4.5 million low-skill immigrant households in the U.S.
containing 15.9 million persons. About 60 percent of these
low-skill immigrant households were headed by legal immigrants and
40 percent by illegal immigrants. The analysis presented here
measures the total benefits and services received by these "low-
skill immigrant households" compared to the total taxes paid.
In FY 2004, the
average low skill immigrant household received $30,160 in direct
benefits, means-tested benefits, education, and population-based
services from all levels of government. By contrast, low-skill
immigrant households paid only $10,573 in taxes in FY 2004. A
household's net fiscal deficit equals the cost of benefits and
services received minus taxes paid. The average low-skill household
had a fiscal deficit of $19,588 (expenditures of $30,160 minus
$10,573 in taxes).
At the state and
local level, the average low skill immigrant household received
$14,145 in benefits and services and paid only $5,309 in taxes. The
average low skill immigrant households imposed a net fiscal burden
on state and local government of $8,836 per year.
The fiscal burden
imposed by low skill immigrant households is slightly greater at
the state and local level than at the federal level. The annual
fiscal deficit for all 4.54 million low skill immigrant households
at the state and local level in 2004 was $49.1 billion. Over the
next ten years the state and local fiscal deficit caused by low
skill immigrants on state and local governments will approach a
half trillion dollars.
Current federal
immigration policy permits a massive inflow of both legal and
illegal low skill immigrants to enter and reside in the U.S. This
imposes a massive unfunded mandate on state and local government
which much bear the costs of that immigration flow.
Giving amnesty to
illegal immigrants would increase the costs outlined in this
testimony. Some 50 to 60 percent of illegal immigrants lack a high
school degree. Granting amnesty or conditional amnesty to illegal
immigrants would, overtime, increase their use of means-tested
welfare, Social Security and Medicare. Fiscal costs would go up
significantly in the short term but would go up dramatically after
the amnesty recipient reached retirement. Based on my current
research, I estimate that if all the current adult illegal
immigrants in the U.S. were granted amnesty the net retirement
costs to government (benefits minus taxes) could be over $2.5
trillion.
Recent proposed
immigration legislation in the Senate and House will raise costs on
the taxpayers at all levels of government. By granting amnesty to
illegal immigrants (who are overwhelmingly low skilled) and
creating massive new "guest worker" programs which would bring
millions of additional low skill families into the nation, such
legislation, if enacted, would impose massive costs on the U.S.
taxpayer.
Types of Government
Expenditure
To ascertain the
distribution of government benefits and services, my analysis
begins by dividing government expenditures into four categories:
direct benefits; means-tested benefits; educational services; and
population-based services.
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. At the state and local level, the major
direct benefit programs are Unemployment Insurance and Workmen's
Compensation. Overall, government spent $840 billion on direct
benefits in FY 2004; of this $57.6 billion was state and local
spending.
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.[1] 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. Overall, the U.S.
spent $564 billion on means-tested aid in FY 2004.[2] Of this, $158.4
billion was state and local spending.
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. 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. Of this $530.8 billion was state and local
spending.
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 of immigration, The New Americans, the
National Academy of Sciences argued that if a service remains fixed
while the population increases, a program will become "congested",
and the quality of the service for users will deteriorate. Thus,
the National Academy of Sciences uses the term "congestible goods"
to describe population-based services.[3] 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. Government spent $662 billion on
population-based services in FY 2004. Of this $481 billion was
state and local spending.
Exclusion of Public
Goods and Interest on Government Debt from Calculations
The four
expenditure categories described above can be termed "immediate
benefits and services". There are two additional spending
categories, which are not relevant to immigrants. They are:
- Interest and other financial obligations resulting
from prior government activity, including interest payments on
government debt and other expenditures relating to the cost of
government services provided in earlier years; and
- Pure public goods, which include national defense,
international affairs and scientific research, and some
environmental expenditures.
Unlike the first
four spending categories, expenditures on public goods, debt and
other financial obligations are fixed and are largely independent
of the level or type of immigration flow into the U.S. The entry of
legal or illegal immigrants into the U.S. will not cause
expenditures in these two categories of expenditure to increase,
therefore these two categories of expenditure are not included in
the fiscal burden calculation for low-skill immigrants presented in
this testimony.
The Declining
Education Levels of Immigrants
Current immigrants (both legal and
illegal) have very low education levels relative to the
non-immigrant U.S. population. As Chart 1 shows, some 50 percent,
and perhaps as many as 60 percent, of illegal immigrant adults lack
a high school degree.[4] Among legal immigrants the situation is
better, but a quarter still lack a high school diploma. Overall, a
third of immigrant households are headed by individuals without a
high school degree. By contrast, only nine percent of non-immigrant
adults lack a high school degree. The current immigrant population,
thus, contains a disproportionate share of poorly educated
individuals. These individuals will tend to have low wages, pay
little in taxes and receive above average levels of government
benefits and services.
There is a common misconception that
the low education levels of recent immigrants is part of a
permanent historical pattern, and that the U.S. has always brought
in immigrants who were poorly educated relative to the native born
population. Historically, this was not the case. For example, in
1960, recent immigrants were no more likely than were
non-immigrants to lack a high school degree. By contrast, in 1998,
recent immigrants were almost four times more likely to lack a high
school degree than were non-immigrants.[5]
As the relative education level of
immigrants fell so did their relative wage levels. In 1960, the
average immigrant male in the U.S. actually earned more than the
average non-immigrant man. As the relative education levels of
subsequent waves of immigrants fell, so did relative wages. By
1998, the average immigrant earned 23 percent less than the average
non-immigrant.[6]
Recent waves of immigrants are
disproportionately low-skilled because of two factors. For years,
the U.S. has had a permissive policy concerning illegal
immigration: the 2000 mile border with Mexico has remained porous
and the law prohibiting the hiring of illegal immigrants has not
been enforced. This encourages a disproportionate flow of low-skill
immigrants because few college educated workers are willing to
undertake the risks and hardships associated with crossing the
southwest U.S. deserts illegally. Second, the legal immigration
system gives priority to "family reunification" and kinship ties
rather than skills; this focus also significantly contributes to
the inflow of low-skill immigrants into the U.S.
Fiscal Deficit at
All Levels of Government
Looking at
federal, state and local benefits combined, the average low skill
immigrant household received $30,160 per household in direct
benefits, means-tested benefits, education, and population-based
services in FY 2004. By contrast, as Chart 2 shows, total federal,
state, and local taxes paid by low-skill immigrant households came
to $10,573 per household in 2004. The average fiscal deficit per
low skill immigrant household was $19,588.
Age Distribution of
Benefits and Taxes among Low-Skill Immigrants
Chart 3 separates
the 4.5 million low-skill immigrant households into six categories
based on the age of the immigrant head of household. It shows
benefits received and taxes paid at each age level. For each age
category, the benefits received by low-skill immigrant households
exceed the taxes paid.
These figures
belie the notion that government can relieve financial strains in
Social Security and other programs simply importing younger
immigrant workers. The fiscal impact of an immigrant worker is
determined far more by skill level than by age. Low-skill immigrant
workers impose a net drain on government finance as soon as they
enter the country and add significantly to those cost every year
they remain. Actually, older low-skill immigrants are less costly
to the U.S. taxpayer since they will be a burden on the fisc for a
shorter period of time.
Fiscal Impact at the
Federal Level
Low-skill
immigrant households generate a fiscal deficit at both the federal
level and the state and local level. As Chart 3 states, at the
federal level, low-skill immigrant households receive, on average,
$14,145 per year in benefits and pay $5,309 in taxes. This amounts
to nearly three dollars in benefits for each dollar of taxes paid.
The fiscal deficit (benefits received minus taxes paid) equaled
$8,836 per household per year.
Fiscal Impact at the
State and Local Level
The fiscal impact
is actually somewhat larger at the state and local level than at
the federal level. As Chart 4 shows the average low-skill immigrant
household received $16,016 in state and local benefits while paying
$5,263 in taxes. This amounts to over three dollars of benefits for
each dollar of taxes paid. The state and local fiscal deficit
(benefits received minus taxes paid) equaled $10,753 per household
per year.
State and Local
Benefits and Services
Chart 5 shows the
state and local benefits received by the average low-skill
immigrant household. Public education costs at $7,737 per household
represent nearly half of these expenditures. The second largest
expenditures is means-tested welfare. State and local governments
run few of their own welfare programs, but they are required to
financially contribute to many of the 60 different federal
means-tested programs, such as Medicaid or the Temporary Assistance
to Needy Families (TANF). The low-skill immigrant share of these
expenditures came to $2,957 per household per year.
Police and fire
protection was the third largest category of spending at $2,198 per
household. Other state and local expenditures included
transportation ($572 per household); unemployment insurances and
worker's compensation ($488 per household); and sewer and utilities
($411 per household).
State and Local
Taxes and Revenues
Chart 6 shows that
low-skill immigrant households pay an average of $5,263 per
household in state and local taxes. Sales and excise taxes ($1,706
per household) are the largest categories followed by property
taxes ($1,618 per household). Annual lottery ticket purchases are
estimated to be $714 per household. State individual income taxes
are only a small portion of taxes paid ($431 per household).
Aggregate Annual Net
Fiscal Costs
In 2004, there
were 4.54 million low-skill immigrant households. The average net
fiscal deficit per household for federal, state and local spending
combined was $19,588. This means that the total annual fiscal
deficit (total benefits received minus total taxes paid) for all
4.54 million low-skill immigrant households together equaled $89.1
billion.
Over half of this
fiscal deficit occurs at the state and local level. The annual
fiscal deficit for all low skill immigrant households at the state
and local level in 2004 was $49.1 billion. Over the next ten years
the state and local fiscal deficit will approach a half trillion
dollars.
Estimation
Methodology
The methodology
used for the state and local fiscal estimates in this testimony is
fully explained in my recent publication, The Fiscal Cost of Low
Skill Households to the U.S. Taxpayer.[7] The analysis is based on
three core methodological principles: comprehensiveness; fiscal
accuracy; and transparency.
- Comprehensiveness - The analysis seeks to cover all government
expenditures and all taxes and similar revenue sources for federal,
state and local governments. Comprehensiveness helps to ensure
balance in the analysis; if a study covers only a limited number of
government spending programs or a portion of taxes, the omissions
may bias the conclusions.
- Fiscal accuracy - A cardinal principle of the estimation
procedure employed for each expenditure program or category in the
analysis is that, if the procedure is replicated for the whole U.S.
population, the resulting estimated expenditure will equal actual
expenditures on the program according to official budgetary
documents. The same principle is applied to each tax and revenue
category. Altogether, the estimating procedures used in this paper,
if applied to the entire U.S. population, will yield figures for
total government spending and revenues that match the real life
totals presented in budgetary sources.
- Transparency - Specific calculations were made for 30 separate
tax and revenue categories and over 60 separate expenditure
categories. Since conclusions can be influenced by the assumptions
and procedures employed in any analysis, we have endeavored make
the mechanics of the analysis as transparent as possible to
interested readers by describing the details of each calculation in
the monograph.[8]
Data on receipt of
direct and means-tested benefits were taken from the U.S. Census
Bureau's Current Population Survey (CPS). Data on attendance in
public primary and secondary schools were also taken from the CPS;
students attending public school were then assigned educational
costs equal to the average per pupil expenditures in their state.
Public post-secondary education costs were calculated in a similar
manner.
Wherever possible,
the cost of population-based services was based on the estimated
utilization of the service by low-skill immigrant households. For
example, the low-skill immigrant households' share of highway
expenditures was assumed, in part, to equal their share of gasoline
consumption as reported in the Bureau of Labor Statistics Consumer
Expenditure Survey (CEX). When data on utilization of a service
were not available, the estimated low-skill immigrant households'
share of population-based services was assumed to equal their share
of the total U.S. population.
Sales, excise, and
property tax payments were based on consumption data from the
Consumer Expenditure Survey (CEX). For example, if the CEX showed
that low-skill immigrant households accounted for 10 percent of all
tobacco product sales in the U.S., those households were assumed to
pay 10 percent of all tobacco excise taxes.
Federal and state
income taxes were calculated based on data from the CPS. Corporate
income taxes were assumed to be borne partly by workers and partly
by owners; the distribution of these taxes was estimated according
to the distribution of earnings and property income in the CPS.
CPS data generally
underreport both benefits received and taxes paid somewhat.
Consequently, both benefits and tax data from the CPS had to be
adjusted for underreporting. The key assumption in this adjustment
process was that households headed by immigrants without a high
school diploma (low-skill immigrant households) and the general
population underreport benefits and taxes to a similar degree.
Thus, if food stamp benefits were underreported by 10 percent in
the CPS as a whole, then low-skill immigrant households were also
assumed to underreport food stamp benefits by 10 percent. In the
absence of data suggesting that low-skill and high-skill households
underreport at different rates, this seemed to be a reasonable
working assumption. The New Americans study of immigration
by the National Academy of Sciences also adjusted for
under-reporting in its fiscal analysis.
Estimating Taxes and
Benefits for Illegal Immigrant Households
By most reports,
there were some 11 million illegal immigrants in the U.S. in 2004.
[9]
About 9.3 million of these individuals were adults.[10]
Roughly 50 to 60 percent of these illegal adult immigrants lacked a
high school degree.[11] About ninety percent of illegal
immigrants are reported in the CPS.[12] This testimony covers only
those illegal immigrants reported in the CPS and does not address
the remaining ten percent not counted by Census.
Of the 4.5 million
low-skill immigrant households analyzed in this report an estimated
41 percent were headed by illegal immigrants.[13] Households headed
by illegal immigrants differ from other immigrant households in
certain key respects. Illegal immigrants themselves are not
eligible for 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 the data on direct and
means-tested government benefits in the CPS is based on a
household's self report concerning receipt of each benefit by
family members. Because eligibility for some benefits is limited
for illegal immigrants, illegal immigrants will report lower
benefit receipt in the CPS, thus, in most cases, this analysis
automatically adjusts for the lower use of government and benefits
by illegal immigrants.
In a few isolated
cases, the CPS data does not rely on a households' self-report of
receipt of benefits but imputes receipt to all households who are
apparently eligible based on income level. The most notable example
of this practice is the Earned Income tax Credit. Since illegal
immigrant households are not eligible for the EITC, the CPS
procedure assigns EITC benefits to illegal immigrant households
which have not, in fact, been received by those households. To
compensate for this mis-allocation of benefits, my analysis reduces
the EITC benefits received by low-skill immigrant households by the
portion of those households which are estimated to be illegal
(roughly 40 percent).
Similarly, the CPS
assumes all laborers work "on the books" and pay taxes owed. CPS
therefore imputes federal and state income taxes and FICA taxes
based on household earnings. But most analyses assume that some 45
percent of illegal immigrants work "off the books", paying neither
individual income nor FICA taxes. [14] The present analysis
adjusts the estimated income and FICA taxes paid by low-skill
immigrant households downward slightly to adjust for the "off the
books" labor of low-skill illegal immigrants.
The Net Retirement
Costs of Amnesty to Illegal Immigrants
Giving amnesty to
illegal immigrants would increase the costs outlined in this
testimony. Some 50 to 60 percent of illegal immigrants lack a high
school degree. Granting amnesty or conditional amnesty to illegal
immigrants would, overtime, increase their use of means-tested
welfare, Social Security and Medicare. Fiscal costs would go up
significantly in the short term but would go up dramatically after
the amnesty recipient reached retirement. Based on my current
research, I estimate that if all the current adult illegal
immigrants in the U.S. were granted amnesty the net retirement
costs to government (benefits minus taxes) could be over $2.5
trillion.
The calculation of
this figure is as follows. In March 2006, there were 9.3 million
adult illegal immigrants in the U.S. Most illegal immigrants are
low-skill. On average, each elderly low-skill immigrant creates a
net cost (benefits minus taxes) for the taxpayer of about $17,000
per year. (This includes federal state and local government costs.)
If the government gave amnesty to 9.3 million illegal immigrants,
most of them would eventually become eligible for Social Security
and Medicare benefits or Supplemental Security Income and Medicaid
benefits.
However, not all
of the 9.3 million adults given amnesty would survive till age 67.
Normal mortality rates would probably reduce the population by
roughly 15 percent before age 67. That would mean 7.9 million
individuals would reach 67 and enter retirement.
Of those reaching
67, the average life expectancy would be around 18 years. The net
governmental cost (benefits minus taxes) of these elderly
individuals would be around $17,000 per year. Over eighteen years
of expected life, costs would equal $306,000 per elderly amnesty
recipient. A cost of $306,000 per amnesty recipient times 7.9
million amnesty recipients would be $2.4 trillion. These costs
would hit the U.S. taxpayer at exactly the point that the Social
Security system is expected to go into crisis.
This is a
preliminary estimate based on my ongoing research. More research
should be performed, but I believe policy makers should examine
these potential costs carefully before rushing to grant amnesty, "Z
visas" or "earned citizenship" to the current illegal immigrant
population.
Amnesty proponents
may argue that some of these individuals will go home without
getting benefits, or before they reach retirement age. Though
perhaps valid, that argument only emphasizes how expensive amnesty
recipients would be; the longer they remain in the country the
greater the cost to the taxpayer.
Potential Economic
Gains and Losses from Low Skill Immigration
While the fiscal
consequences of low skill immigration are strongly negative, it is
possible that low skill immigrants create economic benefits that
partially compensate for the net tax burdens they create. For
example, it is frequently argued that low skill immigration is
beneficial because low skill immigrants expand the economy of gross
domestic product (GDP). While it is obviously true that low skill
immigrants enlarge the GDP, the problem with this argument is that
the immigrants themselves capture most of the gain from expanded
production in their own wages. Metaphorically, while low skill
immigrants make the American economic pie larger, they themselves
consume most of the pie slice their labor adds.
This dilemma can
be illustrated with the following example. Imagine a factory
employing ten workers. One day, an eleventh worker is added and
factory output goes up by 10 percent. The increase in factory
output (equivalent to growth in GDP) appears quite beneficial, but
from the perspective of the original ten factory workers, the
relevant question is whether that extra output caused their wages
to rise. The answer is probably no, in fact, in some circumstances
their wages may fall. Merely adding extra workers to a factory or
an economy does not magically cause the incomes of previous workers
to go up.
If simply adding
laborers to an economy would automatically raise everyone's
standard of living within the economy, economic development would
be a remarkably easy task. The nations with the fastest population
growth would soon have the most affluent citizens. Unfortunately,
high quality economic growth (economic growth that raises overall
living standards) is far more difficult to achieve. Adding more
laborers does not automatically increase the standard of living of
the existing citizenry; to raise living standards it is necessary
to raise the output of the average worker.
The central issue
in the debate over the costs and benefits of low skill immigration
is not whether such immigration makes the U.S. GDP larger (clearly
it does), but whether low skill immigration raises the post tax
income of the average non-immigrant American. Given the very large
net tax burden that low skill immigrants impose on U.S. society,
such immigrants would have to raise the incomes of non-immigrants
to a remarkable degree to have a net beneficial effect. But there
is little evidence to suggest that low skill immigrants increase
the incomes of non-immigrants. The National Academy of Sciences,
for example, estimated that all immigration produces a net
economic gain of only $1 to $10 billion per year; this gain is the
result of a reduction in consumer prices that is driven be a
decline in wages for low skill non-immigrant workers.
Conclusion
Understanding of the fiscal
consequences of low skill immigration is impeded by a lack of
understanding of the scope of government financial redistribution
within U.S. society. It is a common misperception that the only
individuals who are fiscally dependent (receiving more in benefits
than they pay in taxes) are welfare recipients who perform little
or no work, and that as long as an individual works regularly he
must be a net tax producer (paying more in taxes than his family
receives in benefits).
In reality, the present
welfare system is designed primarily to provide financial support
to low income working families; moreover, welfare is only a modest
part of the overall system of financial redistribution operated by
the government. Current government policies provide extensive free
or heavily subsidized aid to low skill families (both immigrant and
non-immigrant) through welfare, Social Security, Medicare, public
education and many other services. At the same time government
requires these families to pay little in taxes. This very expensive
assistance to the least advantaged American families has become
accepted as our mutual responsibility for one another, but it is
fiscally unsustainable to apply this system of lavish income
redistribution to an inflow of millions of poorly educated
immigrants.
It is sometimes
argued that since higher-skill immigrants are a net fiscal plus for
the U.S. taxpayers while low-skill immigrants are a net loss, the
two cancel each other out and therefore no problem exists. This is
like a stock broker advising a client to buy two stocks, one which
will make money and another that will lose money. Obviously, it
would be better to purchase only the stock that will be profitable
and avoid the money losing stock entirely. Similarly,
low-skill immigrants increase poverty in the U.S. and impose a
burden on taxpayers that should be avoided.
Current
immigration practices, both legal and illegal, operate like a
system of trans-national welfare outreach bringing millions of
fiscally dependent individuals into the U.S. This policy needs to
be changed. U.S. immigration policy should encourage high-skill
immigration and strictly limit low-skill immigration. In
general, government policy should limit immigration to those
who will be net fiscal contributors, avoiding those who will
increase poverty and impose new costs on overburdened U.S.
taxpayers.
Recent proposed
legislation in the Senate and House will do exactly the opposite.
By granting amnesty to illegal immigrants (who are overwhelmingly
low skilled) and creating massive new "guest worker" programs which
would bring millions of additional low skill families into the
nation, such legislation, if enacted, would impose massive costs on
the U.S. taxpayer.
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