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Immigrants Cost Taxpayers, Then Pay More Than Most

New research shows immigrants ultimately make state and local governments more money on average than native-born Americans.

Immigrant boy waving an American flag.
Adult children of first-generation immigrants eventually contribute more than native-born Americans in federal, state and local taxes.
(AP/Jacquelyn Martin)
While the national debate rages over immigration, new research shows how much new immigrants cost state and local governments in the short-term -- and how much they pay off in the long-term.

Two studies, one by the Urban Institute and a larger one by the National Academies of Science (NAS), find that first-generation immigrants are costlier to state and local governments than native-born adults, but over time, those effects reverse. While first-generation immigrants cost an average of nearly $3,000 more per adult, the adult children of these immigrants eventually catch up and contribute the most on average to federal, state and local coffers.

Kim Reuben, a senior fellow at the Urban Institute, says the initial higher costs of new immigrants is in large part because of their children. "Education is expensive -- if you have more kids in general as a group compared to other groups, you're going to have higher costs," says Reuben, who co-authored the study and contributed to the NAS report. "But the answer isn't to not educate those kids because we also find that the people who contribute the most to society, even when you control for demographics, are these immigrant [kids]."

Demographic data show that immigrants tend to have more children than their native-born counterparts -- 0.52 dependent children versus 0.36 dependent children per adult -- who depend upon state and local education resources.

The NAS data also show impressive upward mobility between first- and third-generation immigrants, primarily due to higher educational attainment. In California, for example, the average annual income for first-generation immigrants is nearly $29,000. By the third generation, average income is more than $42,000. State and local governments begin reaping the rewards of their investments with second-generation immigrants. The NAS report concludes that this generation contributes more in taxes on a per capita basis during their working years than their parents or other native-born Americans do.

The initial cost of immigrants to state and local governments varies depending on tax structures. Both California and New York, for instance, have a progressive income tax structure. Therefore, the net difference between immigrants and natives was more than $4,500 per adult. Meanwhile, both Florida and Texas rely on regressive sales taxes and spend less on education than California and New York, making the difference a little more than $3,000.

Economists on both sides of the aisle tend to agree that immigrants can increase the lagging economic growth rate. Since 1980, the annual growth rate has topped 4 percent just nine times, most recently in 2000. In the 40 years prior, it topped 4 percent 23 times.

At a congressional budget hearing last month, economists agreed that immigration policy would be a key factor in increasing economic output. Jason Furman, former President Obama's economic advisor, noted that the larger size of immigrant families (compared to native-born adults) would help increase the size of the future labor force.

Piggy-backing off that comment, Douglas Holtz-Eakin, president of the right-leaning American Action Forum and former director of the Congressional Budget Office, said choosing the right immigration policy would dictate America's economic future. "Without immigration reform -- without getting new workers -- our working population would shrink," he warned. "We would be like Japan."

To Reuben, the data can help shape policy discussions for governments as they aim to grow their economies. In the past, she says, the baby boom and women entering the workforce has kept the United States from meeting the same workforce contraction issues that has plagued Japan and some European nations. Now, future growth depends on immigration. That's because starting in 2020, any positive growth in the U.S. labor force is projected to come from immigrants and their children, according to the NAS report. "They are driving our labor force forward," Reuben says.

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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