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 of immigration, 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.

Interest and Other Financial Obligations Relating to Past Government Activities

Often, tax revenues are insufficient to pay for the full cost of government benefits and services. In that case, government will borrow money and accumulate debt. In subsequent years, interest payments must be paid to those who lent the government money. Interest payments for the government debt are in fact partial payments for past government benefits and services that were not fully paid for at the time delivery.

Similarly, government employees deliver services to the public; part of the cost of the service is paid for immediately through the employee's salary. But government employees are also compensated by future retirement benefits. Expenditures of public sector retirement are thus, to a considerable degree, present payments in compensation for services delivered in the past. The expenditure category "interest and other financial obligations relating to past government activities" thus includes interest and principal payments on government debt and outlays for government employee retirement. Total government spending on these items equaled $468 billion in FY 2004.[9]

While direct benefits, means-tested benefits, public education, and population-based services will grow as more immigrants take up residence in the United States, this is not the case for interest payments on the debt and related costs. These costs were fixed by past government spending and borrowing and are largely unaffected, at least in the intermediate term, by immigrants' entry into the United States. While an increased inflow of low-skill immigrants will lead to an increase in most forms of government spending, it will not, in the short term, cause an increase in interest payments on government debt. To assess the fiscal impact of low-skill immigrants, therefore, the present report follows the procedures used by the National Academy of Sciences in The New Americans. That is, the report ignores the costs of interest on the debt and similar financial obligations when calculating the net tax burden imposed by low-skill immigrant households.[10]

On the other hand, while low-skill immigrant households do not increase government debt immediately, over the long term such households will, on average, increase government debt significantly. For example, if a low-skill immigrant household generates a net fiscal deficit (immediate benefits received minus taxes paid) of $20,000 per year and roughly 10 percent of that amount is financed each year by government borrowing, then the immigrant household would be responsible for adding roughly $2,000 to government debt each year. After 50 years, the family's contribution to growth in government debt would be around $100,000. While these potential costs are significant, they are outside the scope of the current paper and are not included in the calculations presented here.

Pure Public Goods

Economic theory distinguishes between "private consumption goods" and pure public goods. Economist Paul Samuelson is credited with first making this distinction. In his seminal 1954 paper "The Pure Theory of Public Expenditure,"[11] 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 is a lighthouse: The fact that one ship perceives the warning beacon does not diminish the usefulness of the lighthouse to other ships. Another clear example of a governmental pure public good would be a future cure for cancer produced by government-funded research. The fact that non-taxpayers would benefit from this discovery would neither diminish its benefit nor add extra costs to taxpayers. By contrast, an obvious example of a private consumption good is a hamburger: When one person eats it, it cannot be eaten by others.

Direct benefits, means-tested benefits, and education services are private consumption goods in the sense that use of a benefit or service by one person precludes or limits the use of that same benefit by another. (Two people cannot cash the same Social Security check.) Population-based services such as parks and highways are often mentioned as "public goods," but they are not pure public goods in the strict sense described above. In most cases, as the number of persons using a population-based service (such as highways and parks) increases, either the service must expand (at added cost to taxpayers) or the service will become "congested" and its quality will be reduced. Consequently, use of population-based services such as police and fire departments by non-taxpayers does impose significant extra costs on taxpayers.

Government pure public goods are rare; they include scientific research, defense, spending on veterans, international affairs, and some environmental protection activities such as the preservation of endangered species. Each of these functions generally meets the criterion that the benefits received by non-taxpayers do not result in a loss of utility for taxpayers. Government pure public good expenditures on these functions equaled $628 billion in FY 2004. Interest payments on government debt and related costs resulting from public good spending in previous years add an estimated additional cost of $67 billion, bringing the total public goods cost in FY 2004 to $695 billion.

An immigrant's entry into the country neither increases the size and cost of public goods nor decreases the utility of those goods to taxpayers. In contrast to direct benefits, means-tested benefits, public education, and population-based services, the fact that low-skill immigrant households may benefit from public goods they do not pay for does not add to the net tax burden on other taxpayers. This report therefore follows the same methods employed by the National Academy of Sciences in its analysis of the fiscal impact of immigration in The New Americans and excludes public goods from the count of benefits received by low-skill immigrant households.[12] (For a further discussion of pure public goods, see Appendix D.)

Summary: Total Expenditures

As Table 1 shows, overall government spending in FY 2004 came to $3.75 billion. Direct benefits had an average cost of $7,326 per household across the whole population, while means-tested benefits had an average cost of $4,920 per household. Education benefits and population-based services cost $5,143 and $5,765, respectively. Interest payments on government debt and other costs relating to past government activities cost $3,495 per household. Pure public good expenditures comprised 18.5 percent of all government spending and had an average cost of $6,056 per household. Excluding spending on public goods, interest on the debt, and related financial obligations, total spending came to $23,154 per household across the entire population.

Taxes and Revenues

Total taxes and revenues for federal, state, and local governments amounted to $3.43 trillion in FY 2004, with an average cost of $29,919 per household across the whole population. A detailed breakdown of federal, state, and local taxes is provided in Appendix Table 3. The biggest revenue generator was the federal income tax, which cost the taxpayers $808 billion in 2003, followed by Federal Insurance Contribution Act (FICA) taxes, which gathered $685 billion. Property tax was the biggest revenue producer at the state and local levels, generating $318 billion, while general sales taxes gathered $244 billion.

Summary of Estimation Methodology

This paper seeks to estimate the total cost of benefits and services received, and the total value of taxes paid, by households headed by immigrants without a high school diploma. The fiscal analysis presented in this paper 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 government. 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 might 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 33 separate tax and revenue categories and over 50 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 Appendices A and B and in Appendix Tables 4 and 5. The present section will briefly summarize the procedures used.

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.

Federal and state income taxes were calculated based on data from the CPS. FICA taxes were also calculated from CPS data; both the employer and employee share of FICA taxes were assumed to fall on workers.

Sales, excise, and property tax payments were based on consumption data from the Consumer Expenditure Survey. 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.

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.

As noted, a fundamental rule in the analysis was that the estimated expenditure for each program for the whole population had to equal actual government outlays for that program. Similarly, total revenue for each estimated tax had to equal total revenue from the tax as reported in government budget documents.

CPS data are problematic in this respect since they generally underreport both benefits received and taxes paid. 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.

Estimating Taxes and Benefits for Illegal Immigrant Households

By most reports, there were some 11 million illegal immigrants in the U.S. in 2004.[13] About 9.3 million of these individuals were adults.[14] Roughly 50 to 60 percent of these illegal adult immigrants lacked a high school degree.[15] About 90 percent of illegal immigrants are reported in the CPS.[16] This report covers only those illegal immigrants reported in the CPS and does not address the remaining 10 percent not counted by the Census Bureau.

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 (roughly one million individuals) might raise the aggregate net tax burden imposed by low-skill immigrant households by roughly 4 percent; these additional costs are not addressed in this paper.[17] If there are more than 11 million illegal immigrants in the U.S., then the number of illegal immigrants who reside in the U.S. but do not appear in the CPS would be greater than one million and the costs to the taxpayer would be proportionately greater. Again, any such potential costs are not included in the analysis in this paper which is limited to the legal and illegal immigrant households that appear in the CPS.[18]

Of the 4.5 million low-skill immigrant households analyzed in this report, an estimated 41 percent were headed by illegal immigrants.[19] 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 are 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 do not rely on a household's self-report of receipt of benefits but imputes receipt to all households that are apparently eligible based on income level. The most notable example of this practice is the Earned Income tax Credit. Although 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, the analysis reduces the EITC benefits received by low-skill immigrant households by the portion of those households 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. [20] 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 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, at least 50 percent, and perhaps 60 percent of illegal immigrant adults lack a high school degree.[21] 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 9 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 admitted 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 1998, recent immigrants were almost four times more likely to lack a high school degree than were non-immigrants.[22]

As the relative education level of immigrants fell in recent decades, 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.[23]

Characteristics of Low-Skill Immigrant Households

In 2004, there were 4.5 million households in the U.S. headed by immigrants who lacked a high school degree (or low-skill immigrant households). These households contained 15.9 million persons or roughly 5 percent of the U.S. population. As Table 2 shows, low-skill immigrant households had, on average, more persons (3.6 per household) and more children (1.2 per household) when compared to households headed by persons with a high school degree or more (with 2.6 persons and .06 children per household). Low-skill immigrant households have roughly the same number of workers per household as better educated households, but the average annual earnings per worker in low-skill immigrant households ($18,490) was roughly half the earnings per worker in households headed by persons with a high school degree or better ($38,713).

Low wage levels in low-skill immigrant households lead to high levels of poverty: Over 30 percent of persons living in low-skill immigrant households were poor in 2004 compared to the overall poverty rate of 12.7 percent in the U.S. population.

Low-skill immigrant households are larger and younger than are households headed by non-immigrant dropouts: Only 17 percent of low-skill immigrant households are elderly compared to 43 percent of households headed by non-immigrant dropouts. Because they are younger, low-skill immigrant households have more workers per household than similar non-immigrant households, but the average wage per worker is actually slightly higher in low-skill non-immigrant households ($20,828 per worker among non-immigrants compared to $18,490 among immigrants).

Costs of Benefits and Services for Low-Skill Immigrant Households

The focus of this paper is the benefits received and taxes paid by households headed by immigrants without a high school diploma. (Throughout the paper, these households are also called low-skill immigrant households.) In 2004, there were 4.54 million such households in the U.S. Appendix Table 4 shows the estimated costs of government benefits and services received by these households in 51separate expenditure categories. The results are summarized in Chart 2.

Overall, households headed by immigrants without a high school diploma (or low-skill immigrant households) received an average of $30,160 per household in direct benefits, means-tested benefits, education, and population-based services in FY 2004.

Means-tested aid came to $10,428 per household, while direct benefits (mainly Social Security and Medicare) amounted to $4,891. Education spending on behalf of these households averaged $8,462 per household, while spending on police, fire, and public safety came to $2,746 per household. Transportation added another $809, and administrative support services cost $1,195. Miscellaneous population-based services added a final $1,529.

It is important to note that the costs of the immediate benefits and services outlined in Chart 2 are a composite average of all low-skill immigrant households. They represent the total costs of benefits and services received by all low-skill immigrant households divided by the number of such households. It is unlikely that any single household would receive this exact package of benefits; for example, it is rare for a household to receive Social Security benefits and primary and secondary education services at the same time. Nonetheless, the figures are an accurate portrayal of the governmental costs of low-skill immigrant households as a group. When combined with similar data on taxes paid, they enable an assessment of the fiscal status of such households as a group and their impact on other taxpayers.

Taxes and Revenues Paid by Low-Skill Immigrant Households

Appendix Table 5 details the estimated taxes and revenues paid by low-skill immigrant households in 31 categories. The results are summarized in Chart 3. As the chart shows, total federal, state, and local taxes paid by low-skill immigrant households came to $10,573 per household in 2004. Federal and state individual income taxes comprised only 15 percent of total taxes paid. Instead, taxes on consumption and employment produced the bulk of the tax burden for low-skill immigrant households.

The single largest tax payment was $2,878 per household in Federal Insurance Contribution Act tax. (Workers were assumed to pay both the employee and employer share of FICA taxes.) On average, low-skill immigrant households paid $1,815 in state and local sales and consumption taxes. The analysis assumed that a significant portion of property taxes on rental and business properties was passed through to renters and consumers; this contributed to a $1,618 property tax burden for the average low-skill household. The analysis also assumed that 70 percent of corporate income taxes fell on workers; this contributed to an average $873 corporate tax burden for low-skill immigrant households. Low-skill immigrant households are frequent participants in state lotteries, with an estimated average purchase of $686 in lottery tickets per household in 2004.

Balance of Taxes and Benefits

On average, low-skill immigrant households received $30,160 per household in immediate government benefits and services in FY 2004, including direct benefits, means-tested benefits, education, and population-based services. By contrast, low-skill immigrant households paid only $10,573 in taxes. Thus, low-skill immigrant households received nearly three dollars in benefits and services for each dollar in taxes paid.

Strikingly, as Chart 4 shows, low-skill immigrant households in FY 2004 had average earnings of $28,890 per household; thus, the average cost of government benefits and services received by these households not only exceeded the taxes paid by these households, but actually exceeded the average earned income of these households.

Net Annual Fiscal Deficit

The net fiscal deficit of a household equals the cost of immediate benefits and services received minus taxes paid. As Chart 5 shows, if the costs of direct and means-tested benefits, education, and population-based services were counted, the average low-skill household had a fiscal deficit of $19,588 (expenditures of $30,160 minus $10,573 in taxes).

At $19,588, the average annual fiscal deficit for low-skill immigrant households was nearly twice the amount of taxes paid. In order for the average low-skill household to be fiscally solvent (taxes paid equaling immediate benefits received), it would be necessary to eliminate all Social Security and Medicare, all means-tested welfare, and to cut expenditures on public education roughly in half.

Age Distribution of Benefits and Taxes among Low-Skill Immigrants

Charts 6 and 7 separate the 4.5 million low-skill immigrant households into six categories based on the age of the immigrant head of household. The benefits levels on Chart 6 include direct benefits, means-tested benefits, public education, and population-based services. These benefits start at a moderate level of $14,295 for households headed by immigrants under 25, then rise sharply to $34,371 for households with heads between 35 and 44. This increase is driven by a rise in the number of children in each home. As the head of household ages over 45, the number of children in the home falls; benefits dip slightly, and then shoot up sharply to $37,537 after the household head reaches 65. Tax payments vary less by the age of the householder than do benefits, rising slowly to a peak for immigrant householders in their late 40s and early 50s, and then dropping sharply after retirement.

The critical fact shown in Chart 6 is that for each age category, the benefits received by low-skill immigrant households exceed the taxes paid. At no point in the life cycle does the average low-skill immigrant household pay in more in taxes than it takes out in benefits.

The gap between benefits and taxes is least for households with heads under age 25, but even these young households receive $1.70 in benefits and services for each $1.00 in taxes paid. In all other age categories, low-skill immigrant households receive at least two dollars in benefits for each dollar in taxes paid. Among elderly low-skill households, more than eight dollars in benefits are received for each dollar in taxes paid.

These figures belie the notion that government can relieve financial strains in Social Security and other programs simply by 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 costs 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.

Chart 7 shows the net fiscal deficits (benefits minus taxes) for each age category. Fiscal deficits rise from $5,930 per year for young immigrant households, to between $16,000 and $20,000 in middle age and then surge up to $32,686 for elderly low-skill households.

Net Lifetime Costs

Receiving, on average, $19,588 more in immediate benefits than they pay in taxes each year, low-skill immigrant households impose substantial long-term costs on the U.S. taxpayer. Assuming an average 60-year adult life span for heads of household,[24] the average lifetime costs to the taxpayer will be nearly $1.2 million for each low-skill household, net of any taxes paid.[25]

This calculation assumes that a low-skill immigrant comes to the U.S. in his mid-twenties with a spouse and that both remain in the U.S. for an average of 60 years. Even if low-skill immigrants return home rather than remain in the U.S. permanently, thereby reducing costs, this argument merely underscores how costly low-skill immigrants are to the U.S. taxpayer. The less time these immigrants spend in the U.S., the lower the cost to the taxpayer. Moreover, most current immigration reform proposals would grant legal status to illegal immigrants, increasing their access to welfare and Social Security. These proposals would substantially increase the time that these immigrants remain in the U.S.

Aggregate Annual Net Fiscal Costs

In 2004, there were 4.54 million low-skill immigrant households. As shown in Chart 5, the average net fiscal deficit per household 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 (the deficit of $19,588 per household times 4.54 million households). This sum includes direct and means-tested benefits, education, and population-based services. Over the next ten years, the net cost (benefits minus taxes) to the taxpayer of all low-skill immigrant households will approach one trillion dollars.

Future Retirement Costs of Low-skill Immigrants

As Chart 7 shows, low-skill immigrants at each age create a net burden on taxpayers. However, the fiscal burden becomes most severe among elderly households, where the net annual fiscal deficit soars to $32,686 per household per year. This amounts to roughly $15,000 per year for each elderly low-skill immigrant.

There are currently 8 million non-elderly adult immigrants in low-skill immigrant households.[26] Assuming normal mortality rates, perhaps 7 million of these individuals will live to age 67.[27] After reaching age 67, the normal life expectancy would be approximately 18 years. With an average net cost of roughly $270,000 over 18 years, the net future retirement costs of the 7 million low-skill immigrants would be around $1.9 trillion.

There are two important assumptions behind this calculation. First, it assumes that current low-skill immigrants will remain in the U.S. or, at least, receive government benefits through old age.[28] Second, the calculation assumes that illegal immigrants will, over time, become entitled to government benefits. (This question is discussed in the policy issues section below.) If adult illegal immigrants do not obtain entitlement to Social Security and other government benefits, then the long-term cost to taxpayers will be significantly reduced. This emphasizes the basic point that the longer low-skill immigrants remain in the U.S., and the more access they have to government benefits, the greater the cost to U.S. taxpayers.

The Balance of Tax Payers and Tax Consumers

Chart 9 outlines net tax flows within society. The concept of net tax flow is important; a low-income household may pay taxes but if the cost of benefits the household received exceeds taxes paid, the household is a net tax consumer.

Most government activity is financed by upper middle class, working age families. These families are the primary net tax payers within society. They receive no welfare and generate enough taxes to pay for the public education and population-based services received by their families. In addition, these families generate surplus taxes that pay for: 1) Social Security, Medicare, and other benefits for the elderly; 2) welfare, public education, and other services for lower-income working age families; and, 3) national defense, other public goods, and interest on government debt.

When upper middle class families age and then retire, tax payments fall and benefits from Social Security and Medicare increase. At this point, benefits begin to exceed taxes paid and most middle class families will transition from being net tax payers to net tax consumers. A small number of elderly householders with assets will generate enough tax revenue to cover their Social Security, Medicare, and other services; these households will continue to contribute a tax surplus to fund other government functions.

On the other hand, low-skill households are net tax consumers even during their working years. It is important to note, these families are rarely idle; they consistently work and pay taxes. However, the taxes they pay are seldom, if ever, sufficient to cover the cost of the government benefits they receive. In consequence, these households must be continually subsidized by other taxpayers.

Low-skill immigrants are among these problematic households. On average, they are a net fiscal burden throughout their working years, and after retirement they become an even greater tax burden. Politicians should be wary of any policy that will increase the future number of net tax consumers. Immigration policy, in particular, should be focused on increasing the number of positive taxpayers and reducing the future number of tax consumers.

Do Low-Skill Immigrants Contribute to the Solvency of Social Security?

It is often argued that low-skill immigrants have a positive impact on U.S. taxpayers because they pay taxes into the Social Security trust fund. It is true that low-skill immigrant households pay, on average, around $2,900 per year in Social Security (FICA) taxes; however, the average Social Security and Medicare benefits they receive actually exceed the FICA taxes paid. Of course, low-skill immigrant households receive many other government benefits as well, receiving ten dollars in total government benefits for each dollar they pay in Social Security taxes.

Even if low-skill immigrants were net contributors to the Social Security trust fund, it would be a serious mistake to look at Social Security in isolation from other government taxes and expenditures. A household that pays a small amount in Social Security taxes but consumes many times that amount in benefits funded by other tax sources does not contribute to the fiscal health of government. In the final analysis, taxpayers, including many Social Security recipients, will face higher taxes in order to subsidize low-skill immigrant households.

Education as a Social Investment

Advocates for low-skill immigration sometimes argue that education is a social investment "that cannot be counted as a cost to any particular group of people."[29] Consequently, they suggest that public education should not be counted among the benefits received by low-skill immigrants at taxpayer expense. Most studies of immigration do not agree. The National Academy of Sciences, for example, explicitly included education among the benefits counted in its fiscal analysis of immigration.[30]

To pay the costs of educating the children of low-skill immigrants, U.S. taxpayers must sacrifice income and forgo the wants and needs of their own families. This represents a financial loss to taxpaying families, just as paying for welfare benefits for low-skill immigrant households is a financial loss. The taxpaying family has less income for its own needs as a direct result of the presence of the low-skill immigrant household in the U.S.

While recognizing that public education is a real cost to taxpayers, it is also true that paying for the education of children of poor parents who are lawful permanent residents is a prudent policy choice. Publicly financed education for children in low-skill families will increase the wages earned and taxes paid by those children as adults, thereby reducing the fiscal drag (benefits in excess of taxes) that their children will impose on society in future years.

But to say that it is fiscally prudent to pay for the education of children who are lawful permanent residents does not mean that it is fiscally prudent to allow low-skill immigrant parents and their children to enter the country and become residents in the first place. A major element in determining whether it is fiscally wise to admit low-skill immigrants into the U.S. as residents is the substantial educational costs that will be required to prevent their children from becoming future financial liabilities to society.

Further, while it is true that education will help raise the incomes of children of low-skill parents, expectations concerning the potential gains from education can be overblown. When a child of poorly educated parents receives subsidized public education, four fiscal outcomes are possible:

There is no increase in wages, and the child remains in the same deep fiscal deficit as his parents;
The child's income increases, and the magnitude of his fiscal deficit is reduced relative to that of his parents, but the child remains in fiscal deficit when becoming an adult;
Education raises the child's income to the point where he becomes a positive fiscal contributor (taxes exceed benefits over a lifetime); or,
Education raises the child's or subsequent generations' income to the point that they not only become positive fiscal contributors, but are able to repay the initial fiscal losses from the parents' generation.

Simplistic accounts of the gains from education often suggest that schooling will enable children of poorly educated parents to readily achieve at least the third outcome. Given the regressive nature of the distribution of benefits and the progressive nature of taxation, this seems unlikely. On average, an individual must achieve a fairly high income to become a net fiscal contributor. This does not mean that investment in education is unwise. It simply means that society should be realistic about its expectations with respect to what education can achieve.

Expectations that children of low-skill immigrants will be able to generate fiscal surpluses (taxes in excess of benefits) that would compensate for the fiscal costs of their low-skill parents are particularly problematic. To accomplish this, it would be necessary for children in the second generation to pay very high taxes. Since the first generation of low-skill immigrant families, on average, produce a net fiscal deficit of $19,588 per year over a lifetime, it would be necessary, in the simplest sense, for their children to generate a fiscal surplus of roughly the same amount each year to compensate for losses in the first generation.[31] Since the average household in the U.S. receives over $23,000 each year in immediate benefits and services, it would probably be necessary for a household to pay over $40,000 in taxes to generate a yearly fiscal surplus of $20,000. Only very high income households would pay that much in taxes.

The National Academy of Sciences (NAS) study of the fiscal impact of immigration found that the net taxes paid by the descendents of low-skill immigrants did not make up for the severe initial fiscal losses in the first generation. Like the present study, the NAS report showed the fiscal impact of immigrants without a high school degree was negative: benefits received exceeded taxes paid. With generous assumptions concerning upward mobility, the study found the descendents of low-skill immigrants would pay more in taxes than they received in benefits, but these gains were never sufficient to offset the fiscal losses in the first generation. The net present value of the future fiscal impact of immigrants without a high school degree remained negative even when the assumed earnings and taxes of descendents over the next 300 years were included in the calculation.[32]

Moreover, even if the descendents of low-skill immigrants, after many generations, create enough fiscal surplus to repay the steep fiscal losses of the first generation, this does not mean that admitting low-skill immigrants as permanent residents with a pathway to citizenship is a lucrative "investment" in the future. Any "investment" that requires even 40 years to repay its initial cost is a remarkably unproductive use of resources. American citizens have thousands of more productive uses for their money, including, for example, investing more in the education of their own children.

Finally, it is important to remember that, in contrast to low-skill immigrants, immigrants with a college degree become positive fiscal contributors from the outset; the taxes they pay will exceed the benefits their families receive. Unlike low-skill immigrants, high-skill immigrants will not produce a generation of sharp fiscal losses, and their children are far more likely to do well in school and be strong fiscal contributors themselves when compared to the children of low-skill immigrants.

Possible Indirect Fiscal Effects

The analysis presented in this paper reflects the direct fiscal impact of low-skill immigrants. It reports the benefits received and taxes paid by those immigrants. However, there can be other indirect fiscal consequences of low-skill immigration. For example, low-skill immigrants augment the U.S. labor force and thereby expand the gross domestic product (GDP). Low-skill immigrants themselves capture most of the gain from this expanded production through their wages, and taxes on the immigrants' wages and consumption are already incorporated in the analysis.

But the owners of businesses that employ the low-skill immigrants also receive income from their investment in the enterprises in which the immigrants work. The difficulty is to determine whether the investment in enterprises employing low-skill immigrants represents a net expansion of the stock of investment or merely a reallocation of investment that would have existed without the presence of the immigrant labor. New net investment would result in new income, and this added income would be taxed by government in a variety of ways. Even though the low-skill immigrants would not pay these taxes themselves, their employment would have triggered the extra tax revenue.

In the extreme case, one might assume that all the investment associated with low-skill immigrant labor represents a net increase in capital stock. Since low-skill immigrants earn about two percent of all wages in the U.S. economy, this might coincide with a two percent increase in business profits and capital income. If this were the case, the result would be a roughly $11 billion increase in federal state and local revenue from a variety of different taxes; this indirect tax gain would amount to roughly $2,500 per low-skill household.[33] This should be considered a very preliminary estimate.

Again the difficulty with this calculation lies in the assumption that all the capital invested in the employment of low-skill immigrants represents a net increase rather than a reallocation of capital stock. Because of the uncertainty involved in this calculation, these indirect revenue figures have not been included in the main fiscal tabulations presented in this paper.

Conversely, there may be other indirect effects that substantially increase the fiscal drain created by low-skill households. An additional indirect fiscal effect would occur if the presence of immigrant workers in the U.S. reduced the wages or employment of competing non-immigrant workers. For example, Harvard professor George Borjas has estimated that the very large influx of immigrant workers between 1980 and 2000 lowered the wages of the average non-immigrant worker by 3.2 percent. In particular, the disproportionate influx of low-skill immigrants was estimated to reduce the wages of low-skill native workers by 8.9 percent. [34]Although Borjas's study is prominent in the analysis of the labor effects of immigration, the author acknowledges that his analysis may overstate the negative consequences of immigration because it fails to allow for new capital inflows in response to immigration and does not reflect the possibility that high tech immigrant workers may be important agents for generating beneficial technological change.

Nonetheless, to the extent that low-skill immigration does reduce the wages and employment of competing low-skill non-immigrants, it could have a considerable indirect negative fiscal impact. If the wages of low-skill, non-immigrants fall in response to rapid inflows of low-skill immigrants, then the taxes paid by these non-immigrants would fall and their means-tested government benefits would increase. While the fiscal impact of this could be large, it lies outside the scope of the present paper.

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 gross domestic product (GDP). While it is 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.

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.

To determine the impact of low-skill immigration on the post-tax incomes of non-immigrants, it would be necessary to examine the effect of such immigration on: the wages and employment of low-skill and other non-immigrant workers, property income, consumer prices, and government tax rates and deficits. These are important questions, but lie beyond the scope of the current paper.

Policy Issues

Each year roughly 1.5 million legal and illegal immigrants enter and take up residence in the U.S. This immigrant flow is disproportionately poorly educated because illegal immigration primarily attracts low-skill workers and the legal immigration system favors kinship ties over skill levels. As a result there are currently 4.5 million low-skill immigrant households in the U.S., containing 15.9 million persons, roughly 5 percent of the U.S. population. At each age level, low-skill immigrant households receive substantially more in government benefits than they pay in taxes. Overall, low-skill immigrant households impose a net cost of $89 billion per year on U.S. taxpayers.

The fiscal cost of low-skill immigrants will be increased in the future by government policies that increase: the number of low-skill immigrants, the immigrants' length of stay in the U.S., or the access of low-skill immigrants to government benefits. Conversely, fiscal costs will be reduced by policies that decrease these variables.

Clearly, immigration policy has enormous fiscal implications. Consistent with principles for immigration reform laid out elsewhere,[35] immigration policy should be changed to reduce the costs of low-skill immigration to the taxpayer:

Enforce the current law against employing illegal immigrants. Illegal immigrants are predominantly low-skilled. Over time, they impose large costs on the taxpayer. In 1986, the U.S. gave amnesty to 3 million illegal aliens in exchange for a prohibition on hiring illegals in the future. While amnesty was granted, the law against hiring illegals was never enforced in more than a token manner. As a result, there are now 11 to 12 million illegal immigrants in the U.S. Because the majority of illegal immigrants come to the U.S. for jobs, serious enforcement of the ban on hiring illegal labor would substantially reduce employment of illegal aliens and encourage many to leave the U.S. Reducing the number of low-skill illegal immigrants in the nation and limiting the future flow of illegal immigrants will reduce future costs to the taxpayer.
Do not grant amnesty to illegal immigrants. Granting amnesty to illegal immigrants would, over time, confer entitlement to welfare, Social Security, and Medicare for the amnesty recipients. This would be ruinously expensive to U.S. taxpayers. Similarly a modified amnesty such as the Z visa program proposed by President Bush, would, almost certainly, over time result in entitlement of the Z visa holders to welfare, Social Security, and Medicare; such a plan would be nearly as expensive as forthright amnesty. Amnesty in any form would impose serious fiscal costs.
Any guest worker program must be truly temporary and not a gateway to welfare entitlements.[36] A program that involves long-term residence and permits access to welfare, Social Security, Medicare, and public education would be enormously expensive to the U.S. taxpayer. For example, if the "guest worker" brings school-age children with him, each child will generate, on average, $9,600 in public education costs that must be funded by U.S. taxpayers. Similarly, even if the guest worker's low-income family were formally barred from receiving welfare assistance, in reality, such families would be likely to receive aid simply because welfare agencies would be reluctant to deny services to families that appear to be in need of aid. Finally, bringing a family into the U.S. would make it far less likely the guest worker would actually return home; continued residence in the U.S would increase fiscal costs.

Granting U.S. citizenship to guest workers' children born in the U.S. would raise fiscal costs. If a child born to a guest worker is granted U.S. citizenship, that child immediately becomes entitled to Medicaid coverage and a full range of other welfare benefits. Further, granting the child citizenship makes it less likely that the guest worker parents will actually leave the U.S., and thereby increases taxpayer costs. The law establishing the guest worker programs should clearly stipulate that children born to guest workers would be treated in the same manner as children of diplomats—that is, they would citizens of their parents' country of origin rather than the United States.

In 2006, the Senate passed the Comprehensive Immigration Reform Act (S. 2611). If enacted, S. 2611 would have created a massive "temporary guest worker" program for low-skill workers. In this program, the workers would have been neither "temporary" nor "guests." Instead, the "guest workers" would have been entitled to legal permanent residence (LPR) with access to welfare and ultimately to U.S. citizenship.[37] Such a program would have greatly increased the number of low-skill immigrants in the U.S. at enormous cost to U.S. taxpayers.
Eliminate birthright citizenship for children of illegal immigrants.[38] When an illegal immigrant gives birth within U.S. borders, the government automatically confers U.S. citizenship on the child. This practice generates considerable costs for U.S. taxpayers and creates practical difficulties against attempts to remove the illegal immigrant parents.

There are currently 3 million U.S.-born children of illegal immigrants in the U.S.;[39] such children are typically called anchor babies. Under current immigration law, when an anchor baby reaches age 21, he can petition to have his parents granted legal permanent residence and the government must, with few exceptions, grant the request. The green card category of parental "immediate relatives" is uncapped. When the illegal immigrant parent is granted legal permanent residence, he soon becomes eligible for welfare and can begin to earn eligibility to receive extensive Social Security and Medicare benefits.[40] In effect, under current law, having a child as an illegal immigrant within U.S. borders is a nearly automatic pathway to welfare, Social Security, Medicare, and eventually citizenship for an illegal immigrant. The fiscal implications of this policy are enormous.
Reduce the number of legal permanent residence visas based on kinship and increase the number of visas allocated to high-skilled workers.[41] Under current law, the visa lottery and visa preferences for adult brothers, sisters, and parents tend to bring a high proportion of low-skill immigrants into the U.S. While low-skill immigrants create a fiscal burden for U.S. taxpayers, high-skill immigrants will tend to pay more in taxes than they receive in benefits. The legal immigration system should be altered to reduce the number of low-skill immigrants entering the country and increase the number of new entrants with high levels of education and skills in demand by U.S. firms. The visa lottery and all preferences for brothers, sisters, parents, and relatives other than spouses and minor children should be eliminated and replaced by new skill-based visas. Parents would be able to visit children in the U.S. as guests but not as legal permanent residents with access to welfare.

Conclusion

The United States offers enormous economic opportunities and societal benefits. Hundreds of millions more people would immigrate to the U.S. if they had the opportunity. Given this context, the U.S. must be selective in its immigration policy. Policymakers must ensure that the interaction of welfare and other financial transfer programs with immigration does not expand the fiscally dependent population, thereby imposing large costs on American society. Current immigration policies with respect to both legal and illegal immigration encourage the entry of a disproportionate number of poorly educated immigrants into the U.S. As these low-skill immigrants (both legal and illegal) take up residence, they impose a substantial tax burden on U.S. taxpayers. The benefits received by low-skill immigrant households exceed taxes paid at each age level; at no point do these households pay more in than they take out.

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.

Current legislative proposals that would grant amnesty to illegal immigrants and increase future low-skill immigration would represent the largest expansion of the welfare state in 30 years. Such proposals would increase poverty in the U.S. in the short and long term and dramatically increase the burden on U.S. taxpayers.

Robert Rector is Senior Research Fellow in Domestic Policy Studies and Christine Kim is a Policy Analyst in Domestic Policy Studies at The Heritage Foundation.

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 of immigration, 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 and highways 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

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