A controversial foreign-labor program developed by the Department of Homeland Security (DHS) and managed by U.S. Immigration and Customs Enforcement (ICE) is creating an incentive for employers to hire foreign students rather than U.S. citizens or permanent residents while potentially costing the Social Security and Medicare programs over $4 billion in lost revenue every year. The program, known as the Optional Practical Training Program (OPT), allows foreign students to remain in the country and obtain employment for up to six years in any profession. The program was created by regulation, and is not monitored by Congress or the Department of Labor (DOL), leading to significant impacts on the U.S. labor market.
As explained in a previous report, the office within ICE tasked with overseeing OPT, known at the Student and Exchange Visitor Program (SEVP), has failed to uphold a regulatory requirement that requires the government to ensure that employers are paying foreign student workers a wage that is commensurate with the wages offered U.S. workers. But because of a significant exemption for foreign students in the tax code, even if employers of foreign students are paying a fair wage, OPT can still create an incentive for employers to hire foreign students instead of U.S. workers.
Foreign students employed through these programs (and their employers) are exempt from Social Security, Medicare, and unemployment taxes. creating an incentive to hire them over U.S. citizens or permanent residents.
Specifically, under the Federal Insurance Contributions Act (FICA) (26 U.S.C. 3121(b)(19)), the government exempts from taxation the employment of any foreign student “for the period he is temporarily present in the United States”. These FICA payroll taxes fund Social Security and Medicare programs, which provide benefits to retirees, the disabled, and children. A little over 7.6 percent of one’s gross wages goes toward FICA and one’s employer matches this percentage. The FICA tax accounts for just under $1.5 trillion in revenue for the federal government.
Additionally, employers are exempted from paying the Federal Unemployment Tax Act (FUTA) (26 U.S.C. 3301), a payroll tax to fund unemployment benefits, for any employee who is a foreign student. The tax, paid by the employer, is 6 percent of the first $7,000 that an employee makes in a year.
Hiring employees who are not subject to this taxation is a benefit to the employer and a loss in federal revenue — a loss that DHS did not calculate when standing up these programs.
According to DHS, a “few hundred comments” labeled the 2016 rule creating STEM OPT as “corporate welfare”; one commenter wrote it was “unethical” to exempt foreign students when foreign workers under the H-1B program are not exempt, and another wrote that the exemption would have “the effect of discouraging Americans from pursuing study in STEM fields”. One commenter pointed out that DHS “offered nothing in the proposed rule to deal with the wage savings enjoyed by the employers of OPT workers”.
The Biden administration is asking Congress to increase funding for the Social Security Administration by more than $1 billion over its current operating costs. To meet this request, Congress may want to consider eliminating the FICA tax exemption for foreign students. DHS should consider narrowing the scope and size of OPT, or eliminating the program altogether, so that the impacts on taxation and the labor market are reduced or eliminated.
How Big Is the Issue?
Though the discussion above is focused on the STEM OPT version of optional practical training, the potential tax impact is not limited to that program. As of 2023, there are 539,382 foreign students authorized to work through the practical training program. This is over half a million people holding jobs in the United States without any FICA taxes being taken out of their paychecks.
The most popular version is simply called Optional Practical Training (OPT), which allows foreign students to work for up to a year after graduation. There are currently 276,452 foreign students who have received employment authorization to work under the OPT program.
The practical training programs have grown so quickly that the number of foreign students employed through them in 2023 was larger than the collective total of those employed from 2009 through 2013.
Another version is the STEM OPT program which is actually an extension of the OPT program and allows for an additional two years of work authorization (a total of three years) for foreign students who obtain degrees in a field that meets DHS’s definition of science, technology, engineering, or mathematics. There are currently 122,101 foreign students who have received employment authorization to work under the STEM OPT program. Foreign students can obtain a second three-year period of work authorization if they obtain a second degree, for a lifetime total of six years.
Finally, there is Curricular Practical Training (CPT), which allows foreign students to work while still enrolled in classes, prior to graduation. There are currently 140,829 foreign students who have received employment authorization to work under the CPT program.
The programs have no annual cap, and the number of foreign students who have obtained work authorization has grown significantly. As of 2017, there were 488,442 foreign students who obtained work authorization through a practical training program. This means that within six years, the program grew by more than 50,000 foreign workers. Without a change, these programs will likely continue to grow in size, creating a more significant impact on the labor market each year.
For example, when DHS created the STEM OPT version in 2008, it estimated that only “about 12,000 students will apply … in an average year” and, even then, called it “a significant expansion” of available workers. This would turn out to be a wild underestimate. In 2016, the year STEM OPT was launched, there were 41,782 STEM OPT employment authorizations. The 122,101 work permits issued via the STEM OPT program as of 2023 represents explosive, unanticipated growth that calls into question DHS’s rationale and justification for establishing the program in the manner that it has.
In the final, 2016 version of the STEM OPT rule, DHS must have realized its original estimates were off, and so added a new estimate of “almost 50,000 in year one” that would “grow to approximately 92,000 in year 10”. DHS estimated by that by 2026 (i.e., year 10), “[T]he low estimate is about 80,000 and the high estimate is approximately 112,000.” Again, this has proven to be an underestimate. In 2019, there were 135,960 foreign students in the STEM OPT program, only three years after the program’s launch. The numbers were affected by the pandemic, but are currently rebounding.
What’s the Impact on FICA Taxes?
Public comment resulted in an entire section in the STEM OPT rule on taxes as they relate to the program. DHS noted that a “significant number” of commenters argued that the program would create an incentive to hire foreign students over U.S. workers, and recommend that DHS seek changes to the tax code before moving forward with the rule.
In response to public comments, DHS did acknowledge that because foreign students are exempt from these taxes:
[T]he employer saves an amount equal to 6.2 percent of the F-1 nonimmigrant’s salary up to the taxable wage base ($118,500 in 2016) and an additional 1.45 percent of the total salary that, in the aggregate, would have been the employer contribution to the Social Security and Medicare trust funds. The F-1 nonimmigrant similarly saves a deduction from his or her salary in the same amount that would have been the employee contribution.
DHS did not come up with an estimate of the tax impact created by their foreign student employment programs, but it did reference one estimate that was made by the Center for Immigration Studies in 2015, which found that the loss in revenue might be over $4 billion over the course of five years. That estimate was developed by late Center Fellow David North by running the tax exemptions based on a $50,000 salary for the total number of foreign students employed through a practical training program during the years 2009 through 2013. The total number of foreign students employed during that five-year period was just over 524,000. As noted above, the practical training programs have grown in size so quickly that there was a comparable number (539,000) of foreign students employed through a practical training program in 2023 alone.
Running the same analysis based on today’s numbers indicates that over $4 billion in revenue (that would otherwise be collected from U.S. citizen workers and their employers under FICA alone) was exempted just in 2023. The rough math: A $50,000 salary with the 12.4 percent Social Security tax rate (employee and employer combined) and the 2.9 percent Medicare tax rate (employee and employer combined) is 15.3 percent, or $7,650. That amount times 539,382 foreign students is over $4.1 billion.
Barring any changes to the foreign student program, another $4 billion in FICA tax exemptions will likely occur in 2024. And another $4 billion in FICA tax exemptions the following year, and so on. The number might be higher or lower depending on the salaries paid to foreign students, but DHS never attempted to run any estimates. This estimate does not include an estimate on the costs for the unemployment tax exemptions, meaning the overall loss in revenue is likely even larger.
Congress likely never contemplated that over half a million foreign students would one day be receiving work permits when it wrote the exemption into the tax code decades ago.
In response to comments on the 2016 rule that stood up the STEM OPT program, DHS simply wrote, “[T]he amount of revenue affected by these payroll tax exemptions does not approach the $4 billion over five years … cited by certain commenters.” DHS did not provide its own calculation of the costs despite the fact that federal rulemaking is required to include a cost-benefit analysis for “economically significant” rules; the STEM OPT rule was determined to fit this definition.
Instead, DHS noted that the $4 billion revenue impact “did not take into account that (1) employers incur other costs if they choose to hire an individual who is an F-1 nonimmigrant, and (2) many F-1 nonimmigrants are not tax exempt”. To be clear, there are not many costs for an employer hiring a foreign student through the STEM OPT program, and only a small number of foreign students are not tax exempt. In its analysis, DHS put the cost to employers at $723 the first year, and $1,056 the second year for each foreign student employed. The most significant costs to the employer, here, are E-Verify-related, at nearly $1,179 over the course of two years, by DHS’s estimate.
This isn’t all that honest of an estimate, however, because the STEM OPT program limits foreign students to finding employment with employers that are using E-Verify, and in fact requires the foreign student to list their chosen employer’s E-Verify identification number on their employment authorization application. In other words, these employers are already enrolled in E-Verify before any foreign student begins work. While it is possible that some employers are enrolling in E-Verify specifically so that they can hire a foreign student who had a good interview, DHS never gets that far into its analysis.
In any event, whatever cost an employer might incur in hiring a foreign student, it likely wouldn’t be as large as the tax benefit derived from hiring the foreign student over a U.S. citizen.
Similar to how DHS underestimated the size and growth of the STEM OPT program, Congress likely never contemplated that over half a million foreign students would one day be receiving work permits when it wrote the exemption into the tax code decades ago.
How to Fix This
After dismissing the public’s concerns about the STEM OPT rule, and after failing to provide any real analysis of the fiscal, economic, or wage impacts of their program, DHS simply concluded, “[I]f those tax exemptions are in fact problematic, they must be addressed by Congress.” In other words, DHS really wasn’t sure what the impact would be. DHS’s underestimate of the size of the program indicates that the actual impact has become much more significant than DHS had anticipated.
One option would be for Congress to eliminate tax exemptions relating to foreign students. For this to happen, however, Congress would have to first recognize that the optional practical training programs exist and, in effect, give them some legislative legitimacy that they currently operate without. Skeptics of these programs might not want Congress getting involved, however, because it would likely make it more difficult for DHS to address the issue unilaterally through regulatory changes.
A proposal developed by ICE under the Trump administration would have narrowed practical training to a one-time training period of six months for any foreign student wishing to receive training in their field of study.
Alternatively, DHS could recognize that the optional practical training programs have grown much larger than it had originally anticipated and reduce the size of the program so that any negative impact on the labor market is similarly reduced.
A proposal developed by ICE under the Trump administration would have narrowed practical training to a one-time training period of six months for any foreign student wishing to receive training in their field of study. The rationale for tightening the program this way was based on a number of assumptions.
First, it was determined that there is no type of job in the United States that requires training for three or six years (as the program currently operates) and that a sufficient amount of training could easily be conducted within six months. Put differently, ensuring that this optional practical training program was actually for training purposes, as the name implies, rather than a massive foreign worker program, was the goal.
Second, it was determined that DHS is, of course, unable to change tax laws on its own and that Congress was unlikely to make changes to the tax code any time in the reasonably foreseeable future. DHS explained its inability to change tax laws in the regulation that created the STEM OPT program, writing that DHS is “unable to amend the rule to accommodate reforms related to payroll taxation or to take other measures affecting federal tax policy or rules”.
Third, it was concluded that employment lasting six months or less would have a smaller impact on the labor market, reducing concerns about the impact of the tax exemption. A smaller, more manageable program would also reduce concerns about SEVP failing to conduct wage analysis, as required by the regulation that stood up the STEM OPT program, and also reduce significant national security concerns that SEVP had been unable to detect.
Likely, any school wishing for longer training could develop a non-paid, internship-type of training that could occur while the foreign student was still in school. DHS should also consider limiting OPT to educational programs where training is required of all students, both U.S. and foreign students, as a condition of graduation. Such a requirement would make it clear that the training truly is an integral part of the degree for all graduating students, rather than simply a cheap labor program only used by foreign students wishing to extend their stay in the United States.
Alternatively, DHS could scrap the practical training program altogether and defer to Congress on whether or not to expand foreign worker programs. A program created by Congress would be more likely to include appropriate oversight, sufficient funding, and DOL involvement. Ultimately, a change along these lines would likely result in greater transparency and better protections for U.S. workers.