One of the most frequently used arguments against undocumented immigration is that it represents a huge drain on the State and local governments due to the need to provide health care, education, and other social services. However, there is another side to the equation.

As noted in a prior column, we recently measured the net effects of undocumented workers on the Texas economy. We looked at multiplier effects through the economy as well as the costs involved with undocumented workers such as health care, education, social services, and law enforcement. The total net economic benefits (including indirect and induced effects) of undocumented workers in Texas were found to include $663.4 billion in total expenditures and almost $290.3 billion in output (gross product) each year, as well as more than 3.3 million jobs.

These effects represent approximately 17% of gross product in Texas. While a very large percentage, it is not surprising when you consider that it reflects the facts that (1) about 11.5% of all private sector workers in Texas are presently undocumented and (2) many of them work in export-oriented industries.

This economic activity generates substantial tax benefits to the federal government, State of Texas, and local governmental entities. However, these undocumented residents and their families also have needs that impose costs on the public sector. The overall fiscal effect has long been a key issue in ongoing policy debate. As part of our recent study of the undocumented workforce (available for free download at www.perrymangroup.com), we looked at fiscal issues from both the benefit and the cost perspectives. Hopefully, these numbers can shed a little light in an area where often there seems to only be heat.

While many people seem to think that being undocumented equates to not paying any taxes, this is simply not the case, and undocumented workers pay taxes through various mechanisms such as retail sales. The economic activity they generate also brings in revenues, a fact which is often overlooked in political discussions. We estimate that the direct activity of undocumented workers in Texas provides taxes to federal, State of Texas, and local governments totaling $13.5 billion per year. Note that these amounts are adjusted for the estimated compliance levels with regard to income taxes and other levies typically paid through payroll withholding. In addition to these sizable amounts, the increase in economic activity associated with these workers generates additional fiscal revenues of an estimated $32.2 billion per year in indirect and induced taxes.

The total tax effect of the undocumented workforce in Texas thus includes estimated overall (direct, indirect, and induced) gains of $45.7 billion per year, including $23.2 billion to the federal government, $15.0 billion to the State of Texas, and $7.6 billion to local entities within the state.

On the other side of the equation, we measured the costs of the undocumented population based on the best available information from various sources (including the Congressional Budget Office). We included both the costs associated with the children of undocumented workers who were born in the US and the allocated incremental expenses associated with the general provision of public services (such as police and fire protection), and updated any estimates to reflect current prices and population estimates. The total cost of the Texas undocumented population was found to be $12.8 billion per year, including $3.0 billion to the federal government, $3.1 billion to the State of Texas, and $6.7 billion to local entities within the state.

Subtracting these costs from the total fiscal benefit yields an estimate of the net fiscal effect of the undocumented population. We estimate that the total net fiscal effect of the Texas undocumented population includes net benefits of $32.9 billion, including $20.1 billion to the federal government, $11.8 billion to the State of Texas, and $0.9 billion to local governments within Texas.

It should be noted, however, that many local governmental entities likely experience a net deficit from the presence of undocumented workers. This phenomenon occurs because much of the revenue is derived from sales taxes, which primarily flow to cities, while many of the expenses are incurred by school districts and public health care facilities, which typically rely on property taxes for much of their revenue. The overall fiscal surplus is quite substantial and certainly would permit intergovernmental transfers to eliminate any shortfalls, but this is an issue that should be addressed in future policy discussions.

Immigration policy is and likely will remain a source of controversy, with complex issues and no solutions that simultaneously please all stakeholders. While there are many considerations, the fact is that undocumented workers in Texas generate millions of jobs and billions in tax revenue. Restrictive immigration policy will cause substantial economic and fiscal losses, and optimal policy should be crafted to increase efficiency and preserve and enhance the fiscal surplus.