The Immigration Debate Studies on the Economic, Demographic, and Fiscal Effects of Immigration (1998) / Chapter Skim
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2 An Economic Framework for Assessing the Fiscal Impacts of Immigration
2 An Economic Framework for Assessing the Fiscal Impacts of Immigration
Pages 13-65
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From page 13... ...
Such anti-immigrant measures have been fueled in part by a growing number of studies that attempt to quantify the fiscal impact of immigration. Closely linked to literature on rates of immigrant participation in welfare and other social services, these studies try to carefully account for the taxes contributed and benefits received by immigrants at the federal, state, or local level.
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From page 14... ...
Immigration is a special case primarily because it can be influenced more easily by policy choices. In the second section we set out our basic economic framework for assessing the fiscal impacts of population growth.
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From page 15... ...
In the fourth subsection we explore some special concerns in using this general framework for fiscal impact studies of immigration relating fiscal trade-offs across periods and different levels of government. Multiple Generations and the Composition of the Work Force The first three elements of the model involve the composition of the population across time.
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From page 16... ...
Gp: Spending on Public Goods In studying the fiscal impact of population growth and immigration, two characteristics of government spending on public goods are particularly relevant. First, relatively few of the goods produced by the government sector are pure public goods, in the sense that the cost of providing the same level of the good is invariant to the size of the population.
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From page 17... ...
17 11 o a' v: a' o cut ¢ EM 4= v, ca .
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From page 18... ...
Thus, the introduction of a "bad" peer group requires additional resources to keep the quality of schooling the same for the original population.) Second, studies on the fiscal impact of immigration must recognize that some public services are investments from the government's and the native taxpayer's perspectives in the sense that current expenditures on these services increase future tax receipts from the immigrant populations.
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From page 19... ...
, yielding total tax revenues T = TOW + okra + TIC + fleece. In the United States, most tax revenues come from personal income taxes, payroll taxes, corporate income taxes, general sales taxes, excise taxes, and property taxes, each of which can be viewed as a combination of the taxes introduced above.
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From page 20... ...
The first critical step in this endeavor involves explicitly defining both the benefits and the costs of population changes. Fiscal impact studies have implicitly used different combinations of benefit and cost definitions, resulting in impact estimates that differ both in size and in interpretation.
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From page 21... ...
- (2') .1 Because the stated purpose of most fiscal impact studies of immigration is to calculate the net fiscal impact of immigration on U.S.
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From page 22... ...
is usually the appropriate definition of benefits. Still, fiscal impact studies have also been commissioned by local and state governments that may be more interested in the final impact on balance sheets rather than the degree to which immigrants are actually paying for additional tax revenues.
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From page 23... ...
involve expense today, but the government sector will receive additional tax revenues in the future as a direct result of the expense. Thus, spending on education for J
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From page 24... ...
The total tax benefit of population growth in any particular generation involves the calculation of tax payments as the generation passes through all age groups, especially through M into E, parallel to the multi-period calculation on the expenditure side. Finally, from the perspective of both the government and the native taxpayer, the fiscal impact of immigration is linked closely to the future path of current tax bases.
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From page 25... ...
. Fiscal impact studies will therefore differ depending on whether they are undertaken from a local, state, or national perspective.
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From page 26... ...
Generally, a multi-period calculation of expected tax revenues from the new population is appropriate, but local governments cannot as easily count on the new population remaining in its jurisdiction throughout the population's life cycle. In addition, the migration of current tax bases must be considered.
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From page 27... ...
From the perspective of the government, the resulting tax base change alters the size of total tax revenues. We return in this discussion to the view of government as a unitary sector, with the understanding that the factors discussed above in the second section are important when considering the fiscal impact on particular levels of government.
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From page 28... ...
. If all four population groups increase in the same proportion, and if the consumption and savings behavior of the new population is identical to that of the original population, then capital (K)
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From page 29... ...
If, in addition, the marginal cost of providing public consumption and investment services to additional agents is constant and equal to average cost, then Pc, Pi, Xy, and XNY also rise in exact proportion to the population. Because Pp and rD remain unaffected by increases in the population, uniform population growth then has the net fiscal benefit of helping to fund the "fixed cost" of pure public goods and payments on the debt.
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From page 30... ...
Because savings increase, future tax revenues from rK also increase. Therefore, from both the government and the original taxpayer perspective, increasing returns to scale technology means that uniform population growth will have a positive net fiscal impact in both the current and the future period.3 The opposite is true for the case of decreasing returns to scale.
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From page 31... ...
that involve zero fixed costs; that is, we focus on cases in which the marginal cost of extending public services to new populations is not constant. Clearly, if marginal costs rise as populations increase, the net fiscal impact of population growth becomes negative, and if marginal costs fall as populations increase, the net fiscal impact of growth is positive (assuming that all other neutrality conditions hold)
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From page 32... ...
will be lower and the fiscal impact of the population growth will be negative. We concentrate here, however, on the first two cases and will assume for now that the new population consumes and saves exclusively in the domestic economy.
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From page 33... ...
Overall income and tax revenues rise in the current period, but the elderly among the original population will be worse off (because of lower rents) , whereas workers in the M generation will be better off.
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From page 34... ...
Because socioeconomic background is a crucial predictor of a child's success, we may also expect the children of high-skilled parents to be disproportionately likely to be high skilled themselves. If so, this factor augments the beneficial fiscal impact of today's high-skilled workers in future periods.
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From page 35... ...
and disproportionately higher spending on transfer payments. Overall, whether the net fiscal impact of a disproportionate increase in E is positive or negative is an empirical issue.
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From page 36... ...
Disproportionately Large Increases in } Finally, suppose that the entire population growth occurs in J Because the only taxes on the young are based on their consumption, tax revenues in the current period will grow less than the population growth rate.
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From page 37... ...
Probably the most difficult task facing those conducting fiscal impact studies of population growth in general and growth of generation J in particular is to adequately treat expenditures on education. The difficulties arise from a lack of agreement in the education literature on the nature of the education production process as well as the presence of diverse and complicated public funding mechanisms.
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From page 38... ...
To estimate the cost of extending public education to particular immigrant groups, these studies must explicitly or implicitly take a position on both peer effects and financial inputs. Given the unresolved state of the education debate, completeness may require studies to consider the fiscal impacts under several different assumptions about the role of both financial resources and peer effects in the education production process.
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From page 39... ...
As we discussed in the second section, the difficulty for evaluation depends on which government's perspective the fiscal impact study takes. For example, determining the future fiscal benefit of providing public education to the new population becomes less of an issue when the study takes a local government perspective, because, from that perspective, it is likely that most future tax benefits will accrue to other districts due to migration of future workers.
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From page 40... ...
Furthermore, our analysis indicates that much of the data and calculations necessary to make a thorough accounting of the fiscal impacts are not yet available in the literature. Violations of Condition (6~: Age Composition of Immigrants The age distribution of immigrants is an important determinant of the net fiscal impact of immigration at all levels of government.
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From page 41... ...
For example, the age density for the immigrant population is linked mechanically to the family composition (size, number of children, marital status) of the newly arrived immigrant cohort.
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From page 42... ...
Mortality and Remigration Rates As highlighted in the third section of this chapter, fiscal impact calculations need to follow these new immigrants through the life cycle, unless the immigrants leave due to mortality or return migration. Unfortunately, there are few data on remigration rates, especially for recent immigrant waves, available in the i71989-1991 are anomalous years.
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From page 43... ...
would negatively bias the estimate of the net long-term fiscal impact of an immigrant cohort. Implications for Public Services and Age-Based Transfer Payments As discussed in the third section and illustrated in Table 2-3, the main agebased expenditure programs are public education for generation J and Social Security (and Medicare)
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From page 44... ...
The expenditures on public schooling for immigrants depend on three factors: the number of immigrants less than 18 years of age, their probability of attending publicly funded schools, and the average or marginal expenditures per immigrant child who does attend. Newly arrived immigrant cohorts have a higher percentage of young, whereas the set of all immigrants has a lower percentage of young than does the native population.
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From page 45... ...
However, this assumption is likely to be incorrect, given the costs of bilingual education and the crowding and peer group externalities that may be generated by having concentrated immigrant populations. The Impact of Family Composition on Income-Based Transfers and Tax Benefits Family structure and composition, although closely related to the age distribution, are of particular interest when examining the fiscal impacts of population growth, partially because of tax and transfer program rules and partially because family structure relates to other important behaviors.
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From page 46... ...
Violations of Condition (5~: Differences in Human Capital In the third section we consider the factors relevant in assessing the fiscal impact when the new population differs in skill level or human capital, suggesting how these factors might be potentially significant. Here we draw on findings in the literature demonstrating that immigrants to the United States do in fact differ from natives both in the human capital they bring with them and in their propensity to invest in human capital once here.
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From page 47... ...
The literature on the human capital of immigrants is extensive and has been reviewed elsewhere (Borjas,1994~. We summarize below some of the main facts from this literature that are pertinent to the fiscal impact of immigration.
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From page 48... ...
Of course, lack of English fluency affects the fiscal impact calculation not only through the job market, but also through the need to provide bilingual education for young immigrants, although there is debate regarding whether such special educational treatment is beneficial (see Chavez, 1992:297-298~. Labor Market Outcomes for Immigrants For fiscal studies, the most relevant measure of labor productivity is the hourly wage.
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From page 49... ...
TABLE 2-15 Percentage Wage Differential Between Immigrant and Native Men by Age Group and Arrival Cohort (1970-1990) Year Cohort Age Group 1970 1980 1990 All Immigrants 1985-89 Arrivals 1980-84 Arrivals 1975-79 Arrivals 1970-74 Arrivals 1965-69 Arrivals 19 60-64 Arrivals 25-34 in 35-44 in 45-54 in 25-34 in 35-44 in 45-54 in 25-34 in 35-44 in 45-54 in 25-34 in 35-44 in 45-54 in 15-24 in 25-34 in 35-44 in 45-54 in 15-24 in 25-34 in 35-44 in 45-54 in 1990 1990 1990 1990 1990 1990 1980 1980 1980 1980 1980 1980 1970 1970 1970 1970 1970 1970 1970 1970 -12 -15.9 11.1 0.9 -9.2 -21.3 -24.9 -29.8 -11.4 -17.7 -26 -4.6 -5.9 -15.3 -21.1 1.1 -0.3 -6.7 -10.8 -15.2 -23 -28.6 -36.2 -18.6 -25.3 -34 -15.5 -24.1 -26.3 -11.8 -16.4 -20.7 -6.9 -2.5 -8.8 4.2 -0.2 1.1 SOURCE: Calculations based on Borjas (1994)
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From page 50... ...
This is especially important in fiscal impact studies because the selfemployed face different tax rates than do wage and salary workers, and they are likely to have different demographic and behavioral characteristics. The focus on hourly wages similarly ignores other important labor market characteristics such as labor force participation and hours of work.
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From page 51... ...
They have lower earnings and their children are likely to require more public education services. Their skill level, measured by hourly wages, is less relative to natives than it was before the 1960s, although it rose over the 1980s.
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From page 52... ...
stress the fact that younger cohorts of immigrants tend to use public services more than do older cohorts, holding years since migration constant. Borjas and Hilton (1996)
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From page 53... ...
He calculates these figures from the 1975 Survey of Income and Education. He finds that most immigrant cohorts receive less welfare money per capita than do natives, except for the newest cohorts.
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From page 54... ...
For example, Simon (1989:87) reflects on the fiscal impacts of immigrant savings behavior, but he reports that "this research has not yet been done." Because immigrants are younger than natives, Simon speculates that life-cycle considerations would lead them to save more than natives.
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From page 55... ...
As already noted, calculations of immigrant contributions to both current and future tax revenues critically depend on a better understanding of these behavioral traits. Violations of Condition (3~: Characteristics Impacting Expenditures and Taxes Our discussion in the third section suggest that the characteristics of the new population groups may cause the marginal costs of extending public services to be higher or lower than average expenditures for the native population.
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From page 56... ...
finds empirical support in the National Longitudinal Survey of Youth for the notion that "ethnic capital" plays an important role in the labor market and education outcomes of immigrant children, separately from the effect of parental human capital mentioned above. The role of culture, socioeconomic status, and parental human capital in determining differential rates of crowding in public schools, as well as in the use of other public services, are clearly significant and should play a prominent part in any fiscal impact study.
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From page 57... ...
It is not accidental that it is the states and localities that absorb the highest volume of immigrants, and especially illegal immigrants, that have commissioned reports calculating the net fiscal impacts of immigration on their appropriate level of government. (In the next section, we briefly review the recent fiscal impact reports commissioned by Los Angeles and San Diego counties, California, and Texas.)
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From page 58... ...
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From page 59... ...
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From page 60... ...
How these benefits ought to be dealt with depends on which perspective the researcher takes and the level of government considered. It is obviously legitimate for a study on the county-level fiscal impacts of immigration to exclude the "dilution" benefit from federal programs.
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From page 61... ...
Without better data, future fiscal impact studies of illegal immigration are likely to find this problematic as well. All the studies, in at least some of their calculations, assume that immigrants and demographically similar elements of the native population share the same propensity to use government services.
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From page 62... ...
Clearly, there is much work left to be done to acquire accurate estimates of the fiscal impacts of immigration at any level of government. Many gaps exist in our basic knowledge of the economic behavior of immigrants, both legal and illegal.
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From page 63... ...
Espenshade. 1996 "State and Local Fiscal Impacts of New Jersey's Immigrant and Native Households." Unpublished document, Princeton University, Princeton, N.J.
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From page 64... ...
1983 "The Incidence of the Property Tax: The Benefit View versus the New View." In Local Provision of Public Services: The Tiebout Model after 25 Years, G Zodrow, ed.
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From page 65... ...
1994. "Shifting the Costs of a Failed Federal Policy: The Net Fiscal Impact of Illegal Immigrants in California." Unpublished document, California Governor's Office of Planning and Research, Sacramento.
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