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Tax effects of undocumented workers

🕐 4 min read

One of the most frequently used arguments against undocumented immigration is that it represents a huge drain on state and local governments due to the need to provide health care, education and other social services. However, there is another side to the equation.

We recently measured the net effects of undocumented workers on the Texas economy. We looked at multiplier effects through the economy as well as the costs involved with undocumented workers such as health care, education, social services and law enforcement. The total net economic benefits (including indirect and induced effects) of undocumented workers in Texas were found to include $663.4 billion in total expenditures and almost $290.3 billion in output (gross product) each year, as well as more than 3.3 million jobs.

These effects represent approximately 17 percent of gross product in Texas. While a very large percentage, it is not surprising when you consider that it reflects the facts that (1) about 11.5 percent of all private-sector workers in Texas are presently undocumented and (2) many of them work in export-oriented industries.

This economic activity generates substantial tax benefits to the federal government, the state of Texas and local governmental entities. However, these undocumented residents and their families also have needs that impose costs on the public sector. The overall fiscal effect has long been a key issue in policy debate. As part of our recent study of the undocumented workforce (available for free download at, we looked at fiscal issues from both the benefit and the cost perspectives. We hope these numbers can shed a little light in an area where often there seems to only be heat.

While many people seem to think that being undocumented equates to not paying any taxes, this is simply not the case; undocumented workers pay taxes through various mechanisms such as retail sales. The economic activity they generate also brings in revenues, a fact that is often overlooked in political discussions. We estimate that the direct activity of undocumented workers in Texas provides taxes to federal, state and local governments totaling $13.5 billion per year. Note that these amounts are adjusted for the estimated compliance levels with regard to income taxes and other levies typically paid through payroll withholding. In addition to these sizable amounts, the increase in economic activity associated with these workers generates additional fiscal revenues of an estimated $32.2 billion per year in indirect and induced taxes.

The total tax effect of the undocumented workforce in Texas thus includes estimated overall (direct, indirect, and induced) gains of $45.7 billion per year, including $23.2 billion to the federal government, $15 billion to the state of Texas and $7.6 billion to local entities.

On the other side of the equation, we measured the costs of the undocumented population based on the best available information from various sources, including the Congressional Budget Office. We included both the costs associated with the children of undocumented workers who were born in the United States and the allocated incremental expenses associated with the general provision of public services (such as police and fire protection), and we updated any estimates to reflect current prices and population estimates. The total cost of the Texas undocumented population was found to be $12.8 billion per year, including $3 billion to the federal government, $3.1 billion to the state and $6.7 billion to local entities.

Subtracting these costs from the total fiscal benefit yields an estimate of the net fiscal effect of the undocumented population. We estimate that the total net fiscal effect of the Texas undocumented population includes net benefits of $32.9 billion: $20.1 billion to the federal government, $11.8 billion to the state and $0.9 billion to local governments.

It should be noted, however, that many local governmental entities likely experience a net deficit from the presence of undocumented workers. This phenomenon occurs because much of the revenue is derived from sales taxes, which primarily flow to cities, while many of the expenses are incurred by school districts and public health care facilities, which typically rely on property taxes for much of their revenue. The overall fiscal surplus is quite substantial and certainly would permit intergovernmental transfers to eliminate any shortfalls, but this is an issue that should be addressed in future policy discussions.

Immigration policy is and likely will remain a source of controversy, with complex issues and no solutions that simultaneously please all stakeholders. While there are many considerations, the fact is that undocumented workers in Texas generate millions of jobs and billions in tax revenue. Restrictive immigration policy will cause substantial economic and fiscal losses, and optimal policy should be crafted to increase efficiency and preserve and enhance the fiscal surplus.

M. Ray Perryman is president and CEO of The Perryman Group. He also is the Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

Ray Perryman
Dr. Ray Perryman is President and CEO of The Perryman Group, an economic research and analysis firm based in Waco, Texas. His firm has served the needs of more than 2,500 clients, including two-thirds of the Global 25, over half of the Fortune 100, the 12 largest technology firms in the world, 10 US Cabinet Departments, the 9 largest firms in the US, the 6 largest energy companies operating in the US, and the 5 largest US banking institutions.

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