Committee for a Responsible Federal Budget

A Budgetary Look at Immigration Reform

May 6, 2013 | Budget Process| Economics

As lawmakers gear up to debate immigration reform in the weeks and months ahead, it will likely coincide with the ongoing budget debate in Washington, meaning that there will be heightened attention paid to the legislation's economic impact and budgetary impact. While CBO has not yet analyzed the immigration legislation recently introduced in the Senate, they have released a report outlining the methods used to estimate the effects of immigration reform legislation in 2006 that illustrates how an immigration bill may be scored.

How CBO Scores Immigration Reform

While CBO’s conventional scoring methods do not incorporate macroeconomic changes in legislation, the anticipated change in the U.S. labor force from the Comprehensive Immigration Reform Act of 2006 would have been significant enough that JCT and CBO relaxed their usual assumptions, thus partially using an approach known as dynamic scoring. They incorporated the direct effect of a large increase in the labor force of 3.4 million workers by 2016 and therefore assumed greater employment, total wages, and tax revenues. CBO also incorporated the expected increase in population (7.8 million by 2016) into its spending projections. While cost estimates differed from normal scoring conventions, not all macroeconomic effects of the immigration bill were accounted for, only the dynamic effects of an increased labor force and population.

Left out of the 2006 estimate was the full range of dynamic effects, such as changes to private savings, capital flows, and interest rates. To show these other possible macroeconomic effects from the bill, CBO produced a separate analysis that relaxed even more assumptions and provided two alternative estimates: a high investment assumption and a low investment assumption. Under both assumptions, CBO estimated the legislation would increase GDP – by 1.3 percent on average under the high investment scenario, and by 0.8 percent under the low investment scenario from 2012 through 2016.

In 2007, the last time Congress considered comprehensive immigration reform, a large part of the debate centered on the cost estimate of the bill. CBO’s analysis of the Comprehensive Immigration Act of 2007 estimated it would increase the deficit by about $18 billion from 2008-2017. Outside of that window, CBO estimated the legislation would increase the deficit by “several billion dollars a year.” While CBO notes that analysis for new legislation will likely build upon the improvements CBO has made to its estimating techniques, the general approach will be similar.

Economic Impact

Until the new legislation is scored, we can gain a better understanding from experts across the political spectrum who have examined the potential economic impact of immigration reform. Since reform efforts failed in 2006 and 2007, several studies have looked at the economic impact, many of which argue immigration reform could reduce future deficits if full dynamic scoring were used. A 2012 study by Raul Hinojosa-Ojeda found that under one scenario, comprehensive immigration reform could lead to a 0.84 percent annual increase in GDP growth, amounting to $1.5 trillion in additional GDP over 10 years. Hinojosa-Ojeda bases his estimates on the experience of legalization under the 1986 Immigration Reform and Control Act, which raised wages and spurred increases in educational, home, and small business investments by newly legalized immigrants. Another study by experts at the Center for American Progress found that, depending on the parameters, immigration reform could result in $0.8-$1.4 trillion in GDP growth over 10 years.  

Additional research suggests that immigration reform could have a positive impact on wages and employment. One paper by economist Giovanni Peri found that immigration from 1990 to 2006 increased real wages by almost 3 percent. Several other economic analyses have also found that immigration may increase wages and have a net positive impact on employment for native workers in the long run. More recently, Peri published another study that looked at the impact of highly-skilled immigrants and found that foreign scientists and engineers in the H-1B visa program contributed to 10 to 20 percent of the yearly productivity growth in the U.S. during the period 1990-2010, enabling GDP per capita to be 4 percent higher than it otherwise would have been. 

A 2007 research review by CBO found most efforts to estimate the fiscal impact of immigration in the United States have concluded that, in aggregate and over the long term, tax revenues generated by immigrants, legal and unauthorized, exceed the cost of the government services they use. This is in large part because many immigrants pay payroll taxes, but most of those who are unauthorized are prohibited from receiving federal benefits from programs like Social Security, food stamps, Medicaid (other than emergency services), and Temporary Assistance for Needy Families (TANF). CBO estimates that half to three-quarters of unauthorized immigrants pay taxes. According to Stephen Goss, chief actuary for the Social Security Administration, undocumented workers contribute about $15 billion a year to Social Security through payroll taxes, but only take out $1 billion. Goss also says that undocumented workers have contributed up to $300 billion, or more than 10 percent, of the $2.7 trillion Social Security Trust Fund.

Source: The Hamilton Project

Scoring the 2013 Legislation

Still, a lot still remains uncertain about the effects of comprehensive immigration reform in the current Congress. Many unauthorized immigrants who currently do not pay taxes work in the cash economy and will not begin to pay taxes, even if given legal status. Depending on the timing of the path to citizenship, spending will increase in the long term as immigrants who become citizens would be entitled to government benefits such as Social Security and Medicare. The current Senate bill would offer a 13-year pathway to citizenship for the 11 million unauthorized immigrants currently in the U.S. and therefore push much of the spending increase into the second decade and beyond. That said, immigrants tend to be younger and healthier and can help to offset some of the effects of our aging population in the next few decades.  And by the time they are using Medicare and Social Security benefits, their children will be working and paying into these programs.  Another important (and new) element in an analysis of the 2013 legislation’s budget impact will be the number of legalized immigrants who become eligible for health insurance subsidies under the Affordable Care Act.

For many of these reasons, outside estimates of the Senate framework have ranged.  One new study by the Heritage Foundation's Robert Rector and Jason Richwine argues that the net cost to taxpayers of new legal immigrants over the course of their lifetimes would be $6.3 trillion, due to their ability to benefit from Medicare, Medicaid, health insurance subsidies, and Social Security. However, this is an update to Rector's 2007 study that faced criticism from experts on both the right and the left for exaggerating estimates with faulty assumptions and failing to account for inflation. On the other hand, former CBO Director Doug Holtz-Eakin estimates immigration reform can reduce the federal deficit by $2.5 trillion.

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While much of the debate on immigration reform will focus on other issues related to the policy goals of the proposed legislation, it’s important that lawmakers be mindful of the intersection these reforms might have with any potential deficit reduction proposals. Although much is uncertain about the future of immigration reform, it's likely that reform will have a significant economic impact in the long term.