Econ 101 on Illegal Immigrants

S&P offers a novel perspective on immigration reform, taking into account the workers' contributions and impact on taxes, growth, and spending

From Standard & Poor's RatingsDirect

With heated political rhetoric and large demonstrations in the news, illegal immigration is now Topic A in the U.S. The focus: The debate now in Congress about what action should be taken to control the steady inflow of undocumented workers. The need to secure the nation's borders as part of the war on terror has led to renewed concern in the U.S. about the scope and cost of illegal immigration.

While Standard & Poor's Ratings Services believes that elements of these two issues -- national security and illegal immigration -- overlap, they're essentially separate problems with their own dynamics.

With the issue raising controversy nationwide, S&P has attempted to answer some of the crucial questions involved in the illegal-immigration debate, and its costs and benefits in the most affected states and municipalities along the U.S.-Mexico border.

What is the scope of undocumented immigration in the U.S.?

According to most estimates, about 11 million undocumented immigrants are now in the U.S., with about 56% coming from Mexico and 22% from other Latin American countries. Many Latino immigrants end up settling or working in California, Texas, and Arizona, although noticeable numbers now reside in the South, Midwest, Northeast, and Rocky Mountain states.

Approximately two-thirds have been in the U.S. for 10 years or fewer. Recent statistics from the Pew Hispanic Research Center indicate that undocumented immigrants account for about 4.9% of the civilian labor force, or 7.2 million workers out of a total U.S. labor force of 148 million.

What are the strategies for dealing with the influx of undocumented immigrants?

The approach spearheaded by Rep. F. James Sensenbrenner, Jr. (R-Wisc.), and approved by the House of Representatives in December, 2005, is considered "too harsh" among its strongest critics. Its provisions include subjecting anyone who aided undocumented immigrants to federal prosecution and jail terms of up to five years, criminalizing current undocumented immigrants, expediting procedures for deporting them, and militarizing the U.S.-Mexico border with added guards and a 700-mile-long high-tech fence. The House bill also contains no provision for guest-worker status.

In the Senate, a more moderate version of immigration reform proposed by Senators John McCain (R-Ariz.) and Edward Kennedy (D-Mass.) calls for guest-worker approval for 400,000 people, modifies the stiffest penalties for aiding illegal immigrants, and sets a path for them to eventually become citizens. This Senate version also contains less-dramatic provisions to boost border security. However, the Kennedy-McCain bill failed to garner enough support within the Senate to survive.

In an effort to achieve a compromise, Senate Republicans reached an agreement on Apr. 6 on a proposed bill that would still include an eventual path to guaranteed citizenship for undocumented immigrants who have been in the country for at least five years. In addition, the bill would grant temporary working visas to those who have been in the country for two to five years. These workers would be allowed to apply for citizenship, but would have no guarantee of obtaining it. Finally, undocumented immigrants who have been in the country would be required to leave and could apply for worker status, but would not be guaranteed to obtain it.

We believe that the House bill's get-tough approach is unlikely to survive in its present form. While the Apr. 6 Senate compromise is a step forward in the approval of immigration reform, the bill will face an uphill battle as the Senate and the House hash out significant differences in their approaches to the proposed worker program and an eventual path to citizenship.

What are the costs of undocumented immigration in the U.S.?

There are real costs for some states and municipalities, especially for health care and education. But Standard & Poor's believes that a serious misallocation of these costs among various levels of government is at least as much of a problem as their overall magnitude.

Each year, for example, the U.S. Social Security Administration maintains roughly $6 billion to $7 billion of Social Security contributions in an "earnings suspense file" -- an account for W-2 tax forms that cannot be matched to the correct Social Security number. The vast majority of these numbers are attributable to undocumented workers who will never claim their benefits.

If those funds could be earmarked for local support, they would make a sizable dent in education costs. Local school districts are estimated to educate 1.8 million undocumented children. At an average annual cost of $7,500 (averages vary by jurisdiction) per student, the cost of providing education to these children is about $11.2 billion. That means roughly half of the education costs for undocumented immigrant children could be met if these Social Security funds could be redirected.

While this specific reallocation of funds may never occur, the principle, in our opinion, remains valid: Taxes from the spending of undocumented workers can help offset the costs those workers generate. Past studies have shown that even in a state like California, which has the highest number of undocumented immigrants, those immigrants generate approximately one-third to one-half of their estimated costs to the state through sales taxes and other assorted fees. In short, these costs are real, but they could also be more manageable.

What are the credit implications for the states and municipalities most affected by illegal immigration?

Standard & Poor's has yet to see a direct effect on states' and localities' credit quality as a result of undocumented immigration costs. The impact is difficult to evaluate because no clear correlation exists between the two. Many localities that attract high numbers of undocumented immigrants, such as California, Texas, Florida, and New York, also enjoy relatively low unemployment rates, healthy income growth, and increasing property values, all of which contribute to stable financial performance.

A more complete analysis must also consider these workers' contributions beyond payroll and income taxes. Undocumented immigrants are consumers who contribute to both the economy's overall growth with their purchases and to state and local sales taxes. Many undocumented immigrants also pay real estate taxes, either directly as homeowners or indirectly as renters. Those taxes are a prime source of funding for state and local governments.

What might the consequences be if illegal immigration was severely restricted and guest worker status made more difficult to achieve?We believe that the first and most noticeable effect would be on the business sectors that most heavily employ these workers -- among homebuilders, where undocumented workers provide much of the semiskilled labor, and in agriculture, where unskilled workers frequently work quite cheaply. Nursing home and some health-care workers might also be affected. (Some employers in these fields now shield themselves from penalties for using undocumented immigrants by doing their hiring through middlemen and subcontractors who are willing to take the risk -- and often a sizable chunk of the immigrants' pay to make it worth their while.)

We would expect to see costs for employers in these industries to gradually rise as the pool of cheap labor diminished. Those higher costs would likely be passed along to consumers, resulting in pricier homes, produce, and medical care, although the inflationary impact would likely be small. Indeed, one of the strongest arguments against large numbers of undocumented workers is that although they serve to keep prices down in the industries where they work, they do so by depressing wages.

Would a more lenient immigration law increase stable immigration patterns? Or would it make the situation more volatile by attracting even higher numbers of immigrants?

This is a central question in the current debate. No one can yet know if a program that points undocumented workers toward citizenship will serve to boost the number of immigrants coming to the U.S. What we do know, however, is that part of the answer to that question will depend on how well the Mexican economy fares. If it can create enough jobs to meet the demands of its burgeoning population, immigration policy made in Washington may become a far less contentious issue than it is now.

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