The Issue
Polling consistently shows that Americans are concerned about the surge in immigrants from across the globe entering the county in recent years. While there are many legitimate reasons for those concerns, it is also true that a larger population drives higher economic output.
The issue is complex from a public finance perspective: On the one hand, higher GDP increases tax receipts for all levels of government, including the federal government. On the other hand, higher levels of immigrant population increase government outlays. According to a recent report by the Congressional Budget Office (CBO), the projected “surge” in immigration would result in almost a trillion dollars of more revenue for the federal government than it would cost in expenses over the next decade from 2024 to 2034.[1] However, going beyond the headline reveals that much more is behind this trillion-dollar estimate.
CBO Report’s Immigration Projections
The CBO estimate is primarily based on its projection that the surge in immigration between 2021–26 will result in a U.S. population that is nearly nine million greater than its pre-2020 projection (Figure 1).[2] This is entirely driven by the increase of “the other-foreign-national category,” primarily including:
- People who entered the U.S. illegally.
- People who entered legally but remained after their legal status expired.
- People who are on parole or awaiting proceedings in immigration court.
The CBO expects that immigration after 2026 will return to historical norms of approximately 200,000 per year.[3]
In comparison, Figure 2 illustrates total net immigration to the U.S. during the same period — including lawful permanent residents and people who are eligible to apply. Figure 2 shows a similar surge and a return to the same total net immigration of slightly over one million per year after 2026.
Figure 1 — Net Immigration of Other Foreign Nationals in CBO’s Baseline and Counterfactual Projections
Note: CBO classifies U.S. population in four categories: U.S. nationals (e.g., U.S. citizens), lawful permanent residents (LPR+) (e.g., green-card holders), INA non-immigrant (e.g., student exchange visitors and foreign officials), and other-foreign-nationals. This CBO study only includes other-foreign-nationals.
Figure 2 — Net Immigration
Estimated Revenue and Costs
In addition, CBO’s revenue estimates are based on some questionable assumptions. First, the CBO assumes that about half of immigrants newly entering the U.S. will be legally employed within six months of their arrival. Yet, there are significant restrictions on immigrants’ ability to work legally while in the U.S. For example, those here claiming asylum, but whose case has not been adjudicated, are not allowed to work unless granted special permission. However, that permission is routinely granted after about six months.
The CBO also estimated that among the newly arrived immigrants who work, their average compliance rate with the tax system would be 85% of the general population for income taxes and 90% of the general population for payroll taxes.[4] Clearly, the CBO’s estimates that half of those eligible will go through the employment authorization process and 90% would start having payroll taxes deducted from their paychecks as opposed to working for cash in the underground economy, typically unreported economic activities that are otherwise taxable, could be well off the mark.[5]
It is also important to note that the CBO included a significant caveat: While immigration will likely benefit the federal government’s finances, it will likely take a toll on state and local budgets. The effect of increased revenues to state and local governments is not as direct or sizable as the effect on increased payroll taxes for the federal government. Also, the costs associated with a larger immigration population fall more heavily on state and local governments. As CBO stated in its report, researchers generally conclude that increased immigration tends “to raise the federal government’s revenues more than its costs but increase state and local governments’ costs more than their revenues.”
The CBO report also points out that increases in immigration produce net costs for state and local governments mainly on education, health care, and housing. State and local governments shouldered approximately 90% of elementary and secondary education costs, with the rest coming from the federal government. As such, school-aged children who are part of the surge will add costs to the public school system.
Also, on average, states pay 35% of the Medicaid costs. Excluding immigrants’ immediate eligibility for emergency benefits, over two-thirds of states — 35 states — extend full benefits to children under Medicaid or the Children’s Health Insurance Program (CHIP) with no waiting period.
From a revenue perspective, the CBO’s review of existing studies indicates that state and local governments generally collect 50–60% of revenue that the federal government collects from immigrants. The specific revenue effects may be affected by several factors: the surge population’s characteristics, state policies, jurisdictions’ readiness of receiving immigrants, and any additional accommodations.
Population Growth Drives Economic Growth
However, the important point the CBO report drives home is the link between population and GDP. Those who long for a less crowded America must also recognize that fewer people also mean fewer people buying groceries, eating at restaurants, buying cars, and building or renting homes. Although this projected one-time immigration surge leads to a short-term increase in the level of GDP, policymakers need to focus on several longer-term issues, including drivers of economic growth and meaningful measures for standard of living.
If the level of immigration returns to the pre-2020 level after 2026, as projected by the CBO, the level of GDP will be elevated, but there may not be effects on GDP growth going forward. Following 2026 and onward, economic growth will need to be determined by growth of capital and the population. As such, although the short-term immigration surge is striking, designing a sensible immigration policy is more critical to sustain economic growth. Policymakers also need to bear in mind the policies’ impacts on the federal budget, especially the entitlement programs, such as Social Security and Medicare.
Calculating the Benefits of Economic Growth
In terms of a country’s standard of living, using GDP as the measure can be misleading. A more meaningful measure of the benefits from economic growth is captured by GDP per capita, that is GDP divided by the total population. This measure approximates improvements in the standard of living within a country as the population and economy grow. All else being equal, a larger population requires a larger GDP to hold GDP per capita constant. If GDP rises by more than the population increases, this indicates that output per person has increased. The CBO study does not report GDP per capita. Instead, CBO described how the “surge” in migration impacted its federal budget baseline and economic projections. The baseline and economic projections are important inputs to the federal budget process. The responsibility of providing accurate baseline and economic projections is given to CBO under current law.
Notes
[1] As the cited Congressional Budget Office’s (CBO) report, “Effects of the Immigration Surge on the Federal Budget and the Economy,” describes the immigration’s projected increase as a “surge,” the report’s language has been maintained throughout this brief.
[2] The CBO study indicates that pre-2020, there were about 200,000 in the other-foreign-national category who immigrated to the U.S. annually. The projected surge between 2021—26 exceeded this rate by 8.7 million people. The agency constructed a counterfactual scenario in which the surge did not occur and those in the other-foreign-national category immigrated at 200,000 people per year. The CBO study based its economic and budget estimates on the differential of the two scenarios. It is important to note that from 2027 onward, the two scenarios are the same (Figure 1).
[3] The CBO’s return to normalcy in the immigration numbers could obviously be dramatically affected by the election results. If former President Donald Trump is true to his promises, immigration could fall well below one million per year. One factor that has significantly reduced the number of people entering the country is that the Biden administration reversed its policy of allowing people to claim asylum between ports of entry in May 2023. Whether a Harris administration would allow asylum claims between ports of entry is an unknown at this point.
[4] This includes the surge population who are authorized to work, and who are not authorized to work but participate in the labor force.
[5] Note that the tax compliance rate for the general population is not 100%. According to the IRS’ most recent tax gap statistics, the aggregate voluntary compliance rate for federal taxes is 85% for tax years 2014–16. The detailed compliance rate varies significantly by sources of income. The compliance rate for income subject to substantial information reporting and withholding — mostly W-2 income — is almost fully met (IRS, “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2014–2016,” Publication 1415, October 2022, https://www.irs.gov/pub/irs-pdf/p1415.pdf).
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