How would legalizing undocumented workers change federal and state tax revenue estimates?
Executive summary
Legalizing undocumented workers is widely projected to raise federal, state, and local tax revenues through higher wages, greater wage reporting and tax compliance, and expanded payroll tax collections; multiple analyses estimate increases ranging from tens of billions to more than a hundred billion dollars annually depending on assumptions [1] [2] [3]. However, the size and timing of those gains are uncertain because behavioral responses — employers’ payroll practices, individual filing choices, wage shifts, and short-term program costs — can push estimates in opposite directions [4] [5].
1. How legalization increases tax receipts: the basic channels
Economists and tax analysts point to three principal mechanisms by which legal status would boost revenues: higher reported wages for formerly undocumented workers (raising income and payroll taxes), improved tax compliance and filing rates when workers obtain Social Security numbers, and reduced employer under‑the‑table payments so withholding and employer-side taxes are collected more fully — all effects emphasized in the Institute on Taxation and Economic Policy’s national accounting of undocumented taxpayers [6] [1] [7].
2. Orders of magnitude: what prominent studies estimate
ITEP’s 2024 tabulation finds undocumented immigrants paid $96.7 billion in federal, state, and local taxes in 2022 and projects that providing work authorization would increase that amount by roughly $40.2 billion per year (to about $136.9 billion) by raising wages and compliance [1]. Other advocates and research centers provide broader ranges: Americans for Tax Fairness cites an estimated $40–$137 billion of additional annual revenue from work authorization depending on scenarios [2], while the Center for Migration Studies and other macro estimates project larger ten‑year gains that imply annual tax effects in the order of hundreds of billions depending on economic spillovers [3] [8].
3. Timing matters: short‑run costs versus long‑run gains
Several sources stress that legalization’s fiscal story unfolds over time: immediate gains from increased withholding and filings may be partly offset by transitional costs (administration, benefit access, program enrollment) and delayed wage adjustments, while long‑run productivity and consumption effects can further lift revenues [5] [8]. The American Immigration Council and earlier Center for American Progress work estimate modest first‑year federal revenue increases (a few billion) growing over several years as wages and formal employment rise [5].
4. Uncertainties and offsetting behavioral responses
Not all credible analyses point unambiguously upward: Yale’s Budget Lab warns that certain policy changes — such as IRS‑ICE data‑sharing or fear of enforcement — could reduce filings or push more work off the books, producing short‑term federal revenue losses estimated in some scenarios at roughly $12–$39 billion in 2026 and as much as $147–$479 billion over 2026–35 under extreme assumptions [4]. These studies highlight that employer incentives, immigrant trust in tax confidentiality, and the design of legalization rules critically shape actual tax outcomes [4].
5. Geographic and programmatic detail: state differences and payroll taxes
State and local impacts vary: ITEP reports $37.3 billion went to state and local governments in 2022 and finds six states collected more than $1 billion each from undocumented workers — so legalization’s windfall would be concentrated in states with large undocumented populations [1]. A substantial share of current payments are payroll taxes (Social Security, Medicare) that undocumented workers already help fund despite being largely ineligible for benefits, meaning legalization changes both receipts and longer‑term program access debates [1] [7].
6. Political and reporting agendas to watch
Different organizations frame numbers to support policy goals: advocacy groups emphasize larger economic and tax windfalls to argue for legalization [2] [3], while analyses from enforcement‑oriented committees or skeptical outlets may highlight costs, program burdens, or short‑term enforcement risks (p1_s12 is a known Republican Budget Committee source though not detailed in provided excerpts) — readers should note that methodological choices (wage uplift assumptions, inclusion of macro spillovers, time horizon) drive large variance across estimates [5] [1].
7. Bottom line
Legalizing undocumented workers is consistently modeled to increase tax revenues—somewhere between tens of billions to potentially more than a hundred billion dollars annually depending on assumptions about wage growth, compliance, and macro effects — but the magnitude and timing are sensitive to behavioral responses, policy design, and enforcement interactions, so any fiscal projection must state its assumptions transparently [1] [2] [4].