What Federal Benefits Can Noncitizens Receive And What Taxes Do They Pay?

from the Congressional Budget Office

During the past two years, the Congress has considered proposals to modify the nation’s immigration system. The Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744), passed by the Senate in June 2013, addresses multiple facets of immigration policy, including changes to the existing visa system, improvements in border security and law enforcement, and changes to the status of people who currently live in the country without legal authorization.

Other proposals have focused on one component of immigration policy – for example, improving border security or changing certain aspects of the visa system. Whether the proposals involve broad or narrow changes to immigration policy, they could have a variety of consequences for both citizens and noncitizens, for the federal government, and for state and local governments. This CBO report examines some of those proposals and how such changes would affect the federal budget.

When estimating the budgetary consequences of immigration reform, CBO considers various factors. Depending on the details of proposed legislation, changes to immigration policy could have a significant effect on the size and composition of the noncitizen population and, as a result, on rates of participation in federal programs and the payment of taxes. For that reason, when estimating the budgetary effects of proposals, CBO considers the demographic and labor force characteristics of foreign-born people, their eligibility for and participation in federal programs, their tax liability, changes in the economy, and a number of other factors. If proposals were combined into a single, more comprehensive immigration bill, estimates of the budgetary effects would take into account the complex interactions among the various provisions; the net effect would not be a simple summation of the individual effects.

What Are the Demographic and Labor Force Characteristics of Noncitizens?

Of the 41 million foreign-born people living in the United States in 2012, about 22 million were non-citizens—a category that includes lawful permanent residents, or LPRs (people who have been granted permanent admission to the United States and are eligible to live and work here); temporary residents and visitors; and unauthorized residents. About half of those non-citizens were LPRs, temporary residents, or visitors; the rest, between 11 million and 12 million people, were in the country without authorization, a number that has changed little over the past few years.

Noncitizens differ from both foreign- and native-born citizens across several demographic dimensions, especially in terms of their skills and employment status. In particular, noncitizens are much more likely to be of working age (between 25 and 64 years old) and much less likely to be 65 years old or older. They are also significantly more likely than citizens to have less than a high school diploma or GED but about as likely to have a master’s or more advanced degree, reflecting a broad spectrum of education and skills. Since 1995, the unemployment rate among noncitizens has been, on average, more than a percentage point higher than that for citizens; in 2013, the unemployment rate for noncitizens was 7.1 percent compared with 6.0 percent for citizens.

How Have Recent Administrative Actions Affected Unauthorized Residents?

The Administration has taken a number of steps to delay possible removal proceedings for unauthorized residents under a process known as deferred action. Those who are approved for deferred action are considered lawfully present in the country for a limited period of time but do not gain legal status; they can, and most do, receive authorization to work.

As of September 30, 2014, about 610,000 people who entered the United States as children had been approved for deferred action through the Deferred Action for Childhood Arrivals program. In November 2014, the President expanded that program to include additional people who arrived as children and also established a deferred action program for parents of U.S. citizens and LPRs. CBO estimates that, by 2017, between 2 million and 2½ million people will have received approval for deferred action.

What Federal Benefits Can Noncitizens Receive and What Taxes Do They Pay?

Under current law, only qualified aliens—primarily comprising LPRs, refugees, and people who have been granted asylum—and some types of temporary residents are eligible to participate in most federal benefit programs, provided they meet other program-specific eligibility requirements. (For some programs, those requirements include waiting periods of several years following the attainment of qualified alien status). Some noncitizens who are not qualified aliens but are lawfully present (for example, people who have been approved for deferred action) are eligible to receive Social Security and Medicare benefits if they qualify on the basis of their age and work history. Other noncitizens are not eligible to receive benefits from most federal programs; exceptions include emergency health care services provided through Medicaid, some benefits through the Children’s Health Insurance Program (CHIP), and some refundable tax credits. However, noncitizens’ U.S. – ;born children are eligible for the same federal benefits that are available to other U.S. citizens.

Most noncitizens who live and work in the United States are subject to taxation—including income taxes, payroll taxes, excise taxes, and estate and gift taxes. The specific taxes for which they are liable, and in some cases the amount of those taxes, depend on the type of visa they hold and how long they have been in the country.

How Might Proposals to Modify the Immigration System Affect the Federal Budget?

Proposals to modify U.S. immigration policy vary greatly in scope and their potential impact on the federal budget. In this report, CBO discusses the possible effects that changes to immigration policy would have on several major federal spending programs and on federal tax revenues. Among the programs and benefits that could be affected:

• Health care programs for low-income people—including Medicaid, CHIP, and subsidies for health insurance (which include premium and cost-sharing assistance for health insurance purchased through the exchanges that were established in 2014 under the Affordable Care Act, or ACA),
• The Supplemental Nutrition Assistance Program (SNAP),
• Social Security,
• Supplemental Security Income (SSI),
• Medicare,
• Pell grants and federal student loans,
• Unemployment insurance, and
• Refundable tax credits.

Each program has its own set of eligibility rules and criteria, which determine how changes to federal immigration policy would affect participation in the program and spending by the government. Consequently, such policy changes could affect spending in varying ways both in the near term and over time. Spending for some programs would change almost immediately upon enactment if more noncitizens were allowed to enter the country, whereas spending for other programs would not change much for a while: For example, under some proposals, foreign-born people who entered the country lawfully after the policy change was implemented would automatically be eligible for emergency Medicaid benefits and subsidies for health insurance purchased through exchanges; they also would begin paying income and payroll taxes as soon as they entered the country. In contrast, additional spending for Social Security and Medicare would occur mostly after the first few decades, once new entrants had been in the workforce for a sufficient time and reached the age at which they were eligible to claim benefits.

Because most noncitizens who live and work in the United States are subject to taxation, changes to federal immigration policy would affect the amount of revenues the government collects. How total revenues collected by the federal government would change under new immigration policy would depend on the resulting changes in the size of the U.S. population, the types of people who would be permitted to work under those new laws, and other considerations. A policy that led to a significant increase in the working-age population would expand the labor force and lead to a significant amount of additional revenues from income and payroll taxes.

This report does not address in detail how a change in immigration policy might affect federal spending or tax revenues through its effects on the broader economy—as evidenced in changes to gross domestic product, employment, and total wages. In some instances, when those effects would probably be significant, CBO and the staff of the Joint Committee on Taxation (JCT) have relaxed the long-standing convention of not incorporating such macroeconomic effects in cost estimates. Immigration legislation also could have a broader set of effects on output and income that are not reflected in cost estimates. Those additional economic effects include changes in the productivity of labor and capital, the income earned by capital, the rate of return on capital (and therefore the interest rate on government debt), and the differences in wages for workers with different skills. Those effects and their estimated consequences for the federal budget have, on occasion, been discussed in separate reports regarding the proposed legislation.

Earlier this month, the House of Representatives adopted a rule that requires CBO and JCT to include the budgetary feedback of any macroeconomic effects in cost estimates for some major pieces of legislation. Legislation that would make significant changes in immigration policy might be covered by this rule; if so, future cost estimates provided to the House for such legislation will, to the extent practicable, incorporate the sorts of effects described here.

Because immigration proposals could affect both spending and revenues, some might result in net budgetary savings whereas others might result in net budgetary costs. However, assessing the net effect on the federal budget of changes in immigration policy is complicated by a variety of factors, including a lack of reliable data about the number of unauthorized residents currently in the country and the extent to which LPRs, temporary residents, and unauthorized residents use government programs.

This report focuses on proposals that would change the status or composition of three populations of noncitizens: LPRs, temporary workers, and currently unauthorized residents.

Changing the Criteria for Admitting Lawful Permanent Residents. According to government estimates, about 13 million people currently live in the country as LPRs. Changes to visa policies that broadly affected the characteristics of new LPRs—for example, by shifting the type of permanent visas awarded from family-based preferences to work-related or merit-based preferences—might have a significant impact on the demographic composition of LPRs and, as a result, on their use of federal programs and payment of taxes.

Under current law, permanent residents who meet program requirements are generally eligible to receive benefits after a specified waiting period or period of employment; thus, an increase in the number of LPRs would ultimately increase spending for programs such as Social Security and Medicare. Whether those residents qualify for certain means-tested benefits (such as those provided by Medicaid and SNAP) is determined, in part, by their income. If the policy change resulted in more LPRs with sufficiently low income to qualify for benefits, costs for those federal programs also would increase. In the first five years, the biggest impact on spending would probably involve the health insurance subsidies; after that, changes in spending for other programs would have increased importance. Tax revenues also would change if the visa system was altered, though whether revenues increased or decreased would depend on the details of the policy.

Changes that significantly increased the net flow of foreign-born workers into the United States, and therefore increased the total population, would lead to an increase in the supply of labor, which would have broad effects on the economy and the budget. The magnitude of those effects would depend on factors such as the new immigrants’ rate of participation in the labor force, their unemployment rate, the average number of hours they work, and their average wage.

Changing the Visa System for Temporary Workers. The United States issued about 9.2 million visas for temporary admission in 2013. About 670,000 of those visas were issued to temporary workers and the rest were issued to other temporary residents and visitors. Because temporary workers are generally not eligible to receive benefits from most federal programs, policies that changed the number of temporary visas awarded to foreign-born workers might have a smaller effect on the federal budget than changes to the number of permanent residents. However, if a temporary-worker program allowed participants to eventually adjust their status, and the number of LPRs or citizens increased as a result, the long-term fiscal impact of those residents and their children might be significant. A policy that modified the visa system in a way that resulted in a shift in the demographic composition of temporary workers also would affect the federal budget. For example, a shift that resulted in a larger share of people with more skills or education would probably reduce spending on needs-based programs and boost wages and tax revenues.

Granting Legal Status to Unauthorized Residents. Granting legal status to some or all of the noncitizens living in the country without authorization would affect their tax liability, their eligibility for federal benefits, and the amount of benefits they received. Those effects would depend critically on the specific provisions of the legislation, which would determine when and how those newly authorized residents became eligible for federal benefits. Over time, such changes in status might increase spending for a variety of federal benefits, including those provided by health care programs for low-income people (specifically, Medicaid, CHIP, and subsidies for the purchase of health insurance through the exchanges established by the ACA), SNAP, Social Security, Medicare, and refundable tax credits. Several other federal programs, such as SSI, Pell grants, and unemployment insurance also could experience spending increases. In addition, legalization policies might result in increased tax revenues, stemming mostly from taxes on higher wages that workers may earn as a result of attaining legal status and taxes from increased reporting of employment income by workers who are currently not paying taxes.

The effects also would vary over time: In the first decade after enactment, the amount that the federal government spent on benefit programs might not rise significantly if waiting periods for benefits remained the same as they are under current law and if other eligibility rules were not changed. In subsequent years, government spending would rise as people crossed those thresholds and became eligible for benefits as they aged (for example, Social Security and Medicare benefits). In addition, children born in the United States to those residents would be eligible for benefit programs on the same basis as other citizens.

How Might Increased Enforcement of Immigration Law Affect the Federal Budget?

Proposals to enhance the enforcement of immigration law generally focus on improving border security and internal enforcement (the process of identifying, locating, and removing people who entered the country unlawfully or remained after their authorized stay had ended), or on improving the system that allows employers to verify the legal status of new workers.

Bolstering border security and improving internal enforcement could require additional federal funding for personnel—more Border Patrol agents, for instance—or more funding for improved border infrastructure and technologies. Budgetary effects also would include reductions in spending for federal benefit programs and in receipts of tax revenues that stemmed from a decrease in the number of people living in the country without authorization.

Policies designed to improve verification of a person’s legal status at the workplace would target the estimated 8 million unauthorized residents who work. Some of those people have received or will receive an authorization to work under the Administration’s deferred action programs. The remaining workers do so without authorization, despite requirements for newly hired workers to have evidence of work authorization and identity.

Implementing such proposals might have a significant impact on the federal budget. Expanding the existing E Verify program would increase administrative costs of the Department of Homeland Security (DHS) and the Social Security Administration (SSA), the agencies responsible for managing the program. Such an expansion might result in lower federal revenues if more unauthorized workers were paid outside of the tax system.

[click here to read the entire study]