As Tax Day approaches, a small but fast growing segment of the population will be filing federal returns on their payments of income, Social Security and Medicare taxes, but with absolutely no expectation that they will eventually be able to turn to those health care and retirement programs for benefits.
These largely invisible taxpayers are undocumented immigrants, some of the 11.2 million people who are illegally living in the U.S. and lack green cards to work. They are part of the massive underground economy, with about half of the 8 million who are employed working off the books, and the rest securing jobs under false pretenses.
Many of these illegal immigrants steal and use Social Security numbers in applying for work, or they obtain Individual Taxpayer Identification numbers (ITINs), which the Internal Revenue Service issues to people without Social Security numbers to allow them to file tax returns.
Employers who hire illegal immigrants are breaking a 1986 law. The law, trumpeted by President Ronald Reagan, led to the creation of the I-9 worker eligibility form. The Immigration Reform and Control Act required employers to verify that all newly hired employees present "facially valid" documentation verifying the employee's identity and legal authorization to accept employment in the United States That resulted in illegal immigrants acquiring fake documentation. In addition, the anti-discrimination provisions of the legislation discouraged many employers from aggressively enforcing the law.
While much of the national debate over immigration has focused on border security and undocumented workers taking the jobs of U.S. citizens, relatively little attention has been paid to the tax implications of the way illegal immigrants and employers do business. On the one hand, illegal immigrant advocates are highly critical of a government system that effectively taxes undocumented immigrants and provides little, if anything, in return.
Illegal workers pay most of their federal taxes through paycheck withholding, the same as legal workers. Like U.S. born workers, undocumented workers pay 15.3 percent of their wages in Social Security and Medicare taxes, but unlike native-born workers they will never get to claim those benefits unless they become legal citizens.
According to Social Security Administration data, undocumented workers pay between $6 billion and $7 billion into the Social Security trust fund each year. That comes on top of Medicare and unemployment insurance taxes the illegal workers pay on the more than $72 billion in wages employers reported paying to individuals without Social Security numbers in 2009—the latest data available from the Social Security Administration.
Undocumented immigrants also pay federal, state, and local sales and excise taxes on food, clothing, gasoline, cigarettes and alcohol as well as state and local property taxes.
They also tend to earn lower incomes when compared to the U.S. population. Using 2007 government data, an average undocumented immigrant family earned $36,000 a year, compared to the nearly $52,000 median income earned by an average household headed by a legal resident.
Because they are breaking the law and have no legitimate social security numbers, illegal immigrants are barred from collecting much of the tax support afforded to other U.S. families, namely the Earned Income Tax Credit, worth up to $6,000 for low-income working families. They also were not eligible for the 2008 stimulus package credit worth up to $600 after members of Congress faced a backlash for initially proposing they receive the credit.
“Because undocumented immigrants tend to have low levels of income and receive little direct government support, they spend most if not all of their income on goods that are often subject to consumption taxes,” Lipman wrote. “Undocumented immigrant families, therefore, pay a higher percentage of their income in consumption taxes than U.S. citizens whose income tends to be higher.”
Tax payments aside, illegal immigrants are getting those funds back many times over in the form of free education for their children, medical and social services and one federal tax credit that seems to have slipped through the cracks.
“You go down the list of just all the basic services that are provided by American society and it utterly defies any logic to say that illegal aliens could possibly be paying more in taxes than they’re receiving n benefits,” said Ira Mehlman, spokesman for the Federation for American Immigration Reform. Mehlman concedes that the current set-up involves illegal immigrants paying into Social Security, Medicare, and Unemployment Insurance without collecting those benefits, as well as paying sales and property taxes.
The government’s costs of providing basic public programs afforded to anyone in the U.S.—including public school education and emergency health care—far exceeds any tax benefit the government may reap from undocumented workers, Mehlman said. According to the latest Census data the average U.S. public school system spends about $10,000 per year per pupil.
“How do you pay $10,000 in taxes per year on a $15,000 or $20,000 income? You don’t—other taxpayers pay for it,” Mehlman said. “And most of these people work without health insurance, but that doesn’t mean they or their family members don’t get sick or injured. They just show up at the county hospital and the public pays for that.”
Critics also point to an increasing flood of undocumented workers collecting the Additional Child Tax Credit (ACTC), which reduces taxes owed by certain individuals with children. That tax credit didn’t exist when Congress passed a law barring illegal immigrants from claiming the Earned Income Tax Credit in 1996, so federal tax law doesn’t specifically prohibit undocumented immigrants with ITINs from collecting the ACTC.
The IRS paid out $4.2 billion in Additional Child Tax credits to undocumented workers in 2010 compared to $924 million in 2005—a clear indication that undocumented workers were exploiting the law, the Treasury Inspector General for Tax Administration concluded in a 2011 report. Also in 2010, the IRS received more than 1.6 million new ITIN applications.
Beyond those dueling points is the question of how much more the government might raise in revenues if Congress and the administration could work out immigration reform legislation that would provide illegal immigrants with a legal pathway to citizenship or at least to openly seek employment with benefits, similar to the guest worker programs in Europe.
With Republican presidential frontrunner Mitt Romney and President Obama miles apart on immigration reform, that is not likely to happen any time soon. And because states including Arizona and Alabama have passed legislation of their own making it almost impossible for businesses to hire undocumented workers, the immigration tax dilemma is likely to be with us for a long time.