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

In a recent report titled Undocumented Immigrants’ State & Local Tax Contributions, the Institute on Taxation and Economic Policy (ITEP) explores in depth not only the present tax contributions of undocumented immigrants, but how much those contributions would increase under two different scenarios. The first is the temporary reprieve from deportation and the renewable three-year work authorization that the Obama administration would grant to some undocumented immigrants via executive action. The other is the legalization—that is, the granting of legal permanent resident (LPR) status—to all undocumented immigrants. Not surprisingly, when the threat of deportation is removed, undocumented immigrants pay more in taxes than those without a reprieve, while legalized immigrants pay the most.

Undocumented immigrants, like everyone else in the United States, pay sales taxes. And they also pay property taxes—even if they rent. Plus, as ITEP points out, “the best evidence suggests that at least 50 percent of undocumented immigrant households currently file income tax returns using Individual Tax Identification Numbers (ITINs) and many who do not file income tax returns still have taxes deducted from their paycheck.” In sum, according to ITEP, “the 11.4 million undocumented immigrants living in the United States pay billions of dollars in local, state and federal taxes, and their tax contributions would increase under immigration policy reform.”

ITEP’s estimates zero in on the current and possible future tax contributions of undocumented immigrants at the state and local level:

  • Current contributions: Undocumented immigrants paid $11.8 billion in state and local taxes 2012. This ranged from roughly $3.2 million in Montana (home to only 6,000 undocumented immigrants) to $3.2 billion in California (with an undocumented population numbering 3.1 million). The average effective state and local tax rate of undocumented immigrants in 2012 was 8 percent (compared to 5.4 percent for the top 1 percent of all taxpayers).
  • Executive Action: The Obama administration’s executive actions would grant a reprieve to 5.2 million undocumented immigrants. The state and local tax contributions of this group of immigrants would increase by $845 million per year once the actions were fully in place. This would raise the effective state and local tax rate of this group from 8.1 percent to 8.7 percent.
  • Legalization: Granting LPR status to all 11.4 million undocumented immigrants would increase their state and local tax contributions by $2.2 billion per year. Their average effective state and local tax rate would rise to 8.7 percent—roughly the same as other, documented taxpayers in similar economic situations.

These estimates should be kept in mind as commentators and Members of Congress continue the endless debate over “what to do” with the 11 million undocumented immigrants now live in the United States. In spite of their undocumented status, these immigrants—and their family members—are adding value to the U.S. economy; not only as taxpayers, but as workers, consumers, and entrepreneurs as well. If they had legal status, they would contribute even more. On the other hand, the only alternative—deportation—would be costly and destructive. Common sense should dictate which route to take.

Photo Courtesy of Stock Monkeys.