The Heritage Foundation’s report this week that suggests legalization for unauthorized immigrants will result in a $6.3 billion fiscal deficit is an important conversation starter about the need for welfare reform. But the mere fact that legalizing the status of unauthorized immigrants in the United States will increase some costs for taxpayers should not, by itself, stand in the way of immigration reform, as John Locke once noted. Nonetheless, the report significantly overestimates the fiscal costs of legalization in at least seven ways.
1. Using a 51-year time frame: $6.3 trillion sounds huge, but when you break it down annually, it is a much smaller figure of $123 billion. Heritage has criticized the Congressional Budget Office for not evaluating fiscal impact beyond 10 years, which is true. But that’s for a good reason. To forecast fiscal and economic conditions 10 years into the future is extremely difficult in the first place and rarely very accurate—predicting 5 decades into the future is totally impossible. For example, what if high-paying jobs in the future don’t require a college degree, as the Bureau of Labor Statistics predicts? What if we reform entitlements? What if income mobility increases? Does anyone honestly think that anyone in 1953 could have predicted the economic condition of the U.S. in 2003, let alone the economic condition of a subset of that population 50 years from now?
2. Ignoring economic growth: Economists are virtually unanimous that immigrants create economic growth that results in increased tax revenues, but Heritage explicitly ignores this factor in its analysis. The White House Council of Economic Advisers found in 2007 that “annual wage gains from immigration are between $30 billion and $80 billion” to natives. The same year, Economist Giovanni Peri found that wages for workers with at least a high school degree grew by 2 percent due to immigration between 1990 and 2004. In 2012, UCLA economist Raúl Hinojosa-Ojeda incorporated economic growth into his analysis and found legalization would raise GDP by $1.5 trillion over 10 years. Economist Douglas Holtz-Eakin’s admittedly rudimentary analysis found that economic growth due to immigration reform would reduce the deficit by $2.5 trillion.
3. Ignoring effects of progressive taxation on the poor: Progressive taxation means that the government shifts that tax burden onto the rich, but that doesn’t mean that the poor don’t incur the costs of taxation. In tax policy, Heritage argues that all income taxes targeting the rich ultimately impact the poor. For instance, in 2004, Heritage concluded that the Bush tax cuts for higher-earners “boost the incomes of all Americans.” This admits that although the poor don’t pay many taxes directly, they incur the costs of taxes indirectly. Heritage should note this in its report.
4. Including U.S. citizen children: James Pethokoukis at the American Enterprise Institute rightly notes that 40 percent of the spending the report describes is on U.S. citizens, the children of unauthorized immigrants. Heritage justifies including these Americans because the National Research Council’s 1997 estimate of the costs of illegal immigration included them. The problem is that the NRC’s estimate was of the impact of illegal immigration in general—not the cost of a policy change, legalization, as Heritage’s report is supposed to be estimating.
5. Doesn’t actually estimate the cost of legalization: Not only does Heritage’s number include the cost of U.S. citizen children who would receive services regardless of legalization, but it also includes the cost of “population-based” services, like police, fire, and parks that would be spent regardless of whether there was a change in policy. More than 20 percent of the cost comes from these services alone.
6. Ignoring enforcement costs: The Heritage report ignores the fiscal costs of continuing enforcement-only policies and certainly not ramping them up as the report recommends. College of William and Mary professor of economics Rajeev Goyle estimated in 2005 that if we could find all 11 million deportable immigrants, the cost of mass deportation to be $206 billion over 5 years, or $41 billion annually. Five years later, the Center for American Progress put the number at $285 billion over 5 years. Immigration and Customs Enforcement (ICE) has found that it costs at the margin $12,500 to deport a single person. This translates to $144 billion, ignoring the capital costs.
The economic cost of deporting 11 million immigrants also includes also the lost productivity from the flood of workers leaving. Even a strong enforcement effort that reduces the number of unskilled workers by 28 percent would lower GDP by $80 billion per year or 0.5 percent of the income of U.S. households, according to economists Peter Dixon and Maureen Rimmer. In 2012, Raúl Hinojosa-Ojeda found that the number would likely be $2.6 trillion in lost GDP over 10 years (Prof. Goyle found the same number in 2005). In 2012, the Department of Agriculture looked at the economic impact of cutting the unauthorized population in half over 15 years. It found that it would reduce U.S. wages by 1 percent, $150 billion.
7. Not analyzing the whole bill: Heritage only looked at the impact of legalization—it ignored the fiscal impact of all the other portions of the bill, including admitting far more highly-skilled individuals and guest workers who are ineligible for welfare benefits. These effects could very well offset any fiscal deficit that remains.
It is true that America has a redistribution problem, but that doesn’t mean that immigration reform will hurt the economy or the government’s budget. It just means that if we reform both welfare and immigration, the gains will be that much greater.