The Economic and Fiscal Consequences of Immigration

Perhaps the only other national policy topic garnering anything like the attention surrounding federal tax reform and budget matters is the issue of immigration – a topic that has been on a steady boil since last year’s presidential primaries.  The MCFE was fortunate to have as its annual meeting luncheon speaker a distinguished scholar who is on the front lines of both issues.  Kim Rueben is a Senior Fellow and Director of State and Local Finance Initiatives at the Urban-Brookings Tax Policy Center – an organization at the center of the discussion surrounding the potential implications of federal tax reform.  But in addition to her considerable work on tax policy, fiscal policy, and state finances she serves on a National Academy of Sciences panel studying the economic and fiscal consequences of immigration – a topic of major interest to Minnesota’s business community specifically and state policy makers generally.

Rueben began by highlighting some of the preliminary findings from the Tax Policy Center’s (TPC) simulation model on the fiscal and distributional impacts of the federal tax reform framework proposed by the White House and Congressional leadership.  She began by noting the biggest challenge in modeling the effects of this reform is that so many important details are still unknown, forcing the Center to make assumptions based on previous statements and plan outlines from lawmakers about the details and goals of reform.  Based on these assumptions and using static scoring, TPC estimates the proposal would cost $2.4 trillion over the first 10 years – $900 billion more than the Senate’s proposed budget provides for, with the overall revenue raisers on the personal income tax side and the tax cuts on the business side.  With respect to the distributional impacts, TPC finds that the biggest gains in after tax income would predominantly flow to the top 5% while the biggest tax increases would go to what might be described as middle to upper middle class taxpayers in the $100,000 - $250,000 income range.  She noted future model runs will incorporate both more details as they become available and dynamic scoring estimates.

But the primary focus of her luncheon address was on the economic and fiscal consequences of immigration, based on her work with the National Academy of Sciences panel – an effort generating important new data about and understanding of the nature of immigration and its impact both nationwide and in the states.  The panel studied how immigration patterns have changed, how it affects the national economy, and how it affects public revenue and spending at both the state and national level.

Rueben shared several interesting facts regarding the current state of immigration:

• Over the past 20 years the immigrant share of the population has increased from 9% to 13%.
• Today, nearly 1 in 4 Americans are either immigrants or U.S. born children of immigrants.
• Unauthorized immigration is higher than it was 20 years ago, but has stopped growing since the Great Recession.The total unauthorized immigrant population now totals about 11.1 million.
• Recent immigrants are more educated than immigrants of the past.In 1970, 51% of all immigrants came to the United States without a high school diploma.Today it’s 26%.Over that same period the percent of immigrants with at least a Bachelor’s degree has gone from 20% to 38%.
• The immigrant population has become more dispersed across the country.The foreign-born share of the Midwestern population has increased from 3% to 7% since 1970 (4.5 million).  Minnesota’s share of the U.S. immigrant population has increased from .5% to 1.5% over this same period.

What struck Rueben the most about these data and trends are their implications for the workforce of the future.  “I didn’t realize how much our labor force growth is going to depend on immigrants going forward,” she remarked.  As the U.S. labor force growth slows with the aging of the population, immigrants and their children will account for the vast majority of future labor force growth.

Turning to the economic effects of immigration, Rueben highlighted research findings that show high skilled immigrants have a positive effect on economic growth and productivity.  High skilled immigrants raise patenting levels per capita and have also been found to feature greater rates of entrepreneurship.  They increase the affordability and availability of a variety of consumer goods and services and demonstrate a greater willingness to relocate to respond to employment opportunities making labor markets more efficient.

Importantly, she observed, the evidence shows these beneficial economic outcomes do not come at the expense of native populations.  The effect immigration has on native wages and employment is actually very small, Rueben noted, because immigrant labor demonstrates more of a complementary effect rather than a substitution effect on the pre-existing labor force.  Immigrants tend to be employed in jobs that are different than native populations.  To the extent any negative effects were found, they were typically among groups that were the closest substitute to lowest skilled immigrants like native born high school dropouts and prior immigrants.

For the same reason, she continued, there was little evidence of effects on overall employment levels of native workers – with the possible exceptions of influencing the number of hours worked by native teens and employment rates of prior immigrants.  On the other end of the immigrant wage/skill continuum, studies have found a generally positive impact of skilled immigrants on the wages and employment of both college and non-college-educated natives, with some adverse effects on natives in some narrowly defined fields.  What is rather clear, she concluded, is that immigrants should not be the scapegoat for the labor and wage effects of globalization and technological change.

With respect to fiscal impacts on federal and state budgets, studies demonstrate both some positive and negative effects – and also some irony with respect to proposed federal immigration policy reforms.  Rueben observed how fiscal impacts can be determined by examining the difference between immigrants’ contributions to government revenues and expenditures from their consumption of public services.  At the national level, immigrants tend to have a lower fiscal contribution than natives and a higher contribution to expenditures influenced heavily by education delivery because immigrants tend to have more children than the native population.  But the magnitude of the fiscal burden, she observed, depends on whether you assume an average or marginal cost approach to these calculations.  If one assumes immigrants should share in the responsibility of the government deficits incurred before their arrival (average cost) then immigrants – 18% of the population – account for 22% of the deficit.  If one assumes they should only be responsible for the differences between revenues and expenditures they themselves have added (marginal cost), then that same 18% of the population accounts for only 4% of the deficit.

At the state level, the story is more complex.  The net impact of immigration on fiscal balance sheets is influenced heavily by both the demographics of the immigrant population and state policies.  In Minnesota, the net difference between revenues and expenditures for first generation immigrants vs. “natives” (defined as persons who are neither immigrants nor children of immigrants) is -$7,250 on an average cost basis and -$5,550 on a marginal cost basis.  Much of that is a function of educating children as first generation immigrants have nearly twice as many kids per individual as “native” households.  However, second generation households (i.e., children of immigrants) generally contribute most to the bottom line of state and local fiscal balances.

Overall, the fiscal story is one of negative short run effects, particularly at the state level where education dollars are generated and spent.  In the longer term, the fiscal impact of immigrants is positive for the federal government though it remains negative at the state level due to education costs.  As Rueben noted, taken together national and state level analyses should raise questions of why the clear “fiscal winner” in immigration – the federal government – is taking such an aggressive approach to immigration reform and why it is not showing more support in investing in immigrant children who are the source of its fiscal returns.

Limiting immigration, Rueben concluded, is likely bad for our economic future.  Reflecting on the tax and fiscal policy panels earlier in the day she remarked that so much of the math behind the tax reform and budget proposals is dependent on achieving rates of economic growth significantly above recent norms.  But few people seem to recognize those high growth rates will require a lot more people in the workforce, which makes anti-immigration policies self-defeating from a growth perspective.  “Immigration is one of the positive things going on in this country right now” she remarked – a truth we probably can’t recognize soon enough.