There would be a huge raid on the U.S. Treasury if the Senate's comprehensive immigration bill (S.744) were to become law. It would be retroactive in nature and I estimate it would cost the Treasury roughly $36 billion.
In all the talk of the Gang of Eight about illegals "paying back taxes", talk which is gossamer in nature, I have seen nothing about the very real prospect that should amnesty be enacted, literally millions of previously illegal aliens would suddenly be eligible to file retroactive tax returns that in some cases would bring a family headed by an illegal as much as $15,000.
The $36 billion would be a one-time cost to the Treasury, and would be in addition to many more tens of billions that would be paid, year after year, to the low-income former illegals claiming Earned Income Tax Credits and Additional Child Tax Credits (EITC), as I described in a recent blog.
What's behind the $36 billion Treasury raid?
It would be produced be a lethal combination of three elements: 1) the proposed amnesty; 2) existing tax laws and IRS policy decisions; and 3) the characteristics of the illegal aliens (low earnings and many children). The amnestied aliens would not have to do anything illegal to get these funds, but they (or their helpers) would need to file one of the Internal Revenue Service's most challenging forms, the 1040X (more on that later).
These are the program ingredients:
- The Amnesty. S.744 would grant provisional legal status, immediately, to perhaps eight million illegal aliens; they would secure work authorization cards and legitimate Social Security numbers.
- IRS Policies. With a good Social Security number in hand, the former illegals would then be in a position to file 1040X forms for (usually) three previous years in which they had earnings, but did not have the genuine SSN, and hence could not apply for Earned Income Tax Credits. After an amnesty, they would be eligible to file for past benefits that they had not been eligible for earlier.
My source of this information is an impeccable one, Jan Ting, who is both an immigration and a tax lawyer, who served as an assistant commissioner of the old INS and who is now on the CIS Board.
- Characteristics of the Amnestied. Most illegals have work histories, as they usually came to the United States for economic reasons; most of their incomes are modest ones; and many have children. Thus, they potentially fit perfectly into the Earned Income Tax Credit system, which is designed to help the working poor and does so through a complex formula. One gets more money from EITC with a larger family (up to a maximum for a spouse and three children), and one's refund is larger at the middle of an income spectrum. For singles, the best income for EITC is in the $6,200-$7,800 range; their benefit was $475 in 2012. For those with a spouse and three children the best range is $13,000-$17,100, and that benefit (the maximum in the program) is $5,891.
The maximum EITC benefit level for a married couple with no children is $475, for a couple with one child it is $3,169, and for a couple with two it is $5,326. These benefit levels creep up each year. If the alien, in the case with three children, made less than $13,000 or more than $17,100 the benefit would have been less.
If a family with two or three children had about the right income in each of the three prior years they could file a set of retroactive EITC claims for a total of $15,000 or more. They might be able to secure even more in the check because of the Additional Child Tax Credit program, had they not filed for it earlier.
The $36 billion Estimate. So how much would the new (and retroactive) eligibility of the illegals cost the Treasury? While such prognostications tend to be rough and ready, here are the numbers:
Let's assume that seven million of the eight million or so expected beneficiaries have one or more years of earning histories in which they did not claim EITC. Let's further assume that five of that seven million are now over 25 years of age (the EITC threshold) and were old enough to have earned some money after age 25 in prior years, and, in fact, file back income tax returns.
Let's also assume that virtually none of them were either too old for EITC (65-plus), and that virtually none of them made too much money to qualify for the program. (The maximum income that produces an EITC check is $50,270 for a family with three children; since the program would produce only a $2 benefit at this level, it is unlikely that an application would be made for it.)
So maybe five million former illegals would file for these previously unavailable benefits. What would the average check be?
Let's make two more heroic assumptions: 1) that the newly-amnestied EITC families would have the financial and family characteristics of the 17 million of so EITC filers in 2010 and 2) that the average level of benefits would be about 10 percent above those of 2010 by the time that the applications are filed. (Data on 2010 EITC filings come from the Treasury's "Statistics on Income Bulletin, Fall, 2012"; see Table 4.)
The estimates spelled out above produce an average EITC check of about $2,400 for the former illegals, and three of them would come to $7,200; and that times five million is $36 billion.
The 1040X Form. I have had more exposure to this form than I would like. As a volunteer, I provide free income tax counseling to graduate students, many from overseas, at a major DC-area university each year. Often, conscientious foreign students will find that they have filed a 1040 form (which is for citizens and green card holders) when they should have filed the form1040NR (for nonresidents); they then ask for help with the correction form, the 1040X, which, in these cases, means that the students owe more to IRS, not vice versa.
Unlike the basic 1040, which I think is well-designed, the 1040X is really hard to follow, and it will be a substantial challenge to most of the newly amnestied aliens, who, on average, have much, much less education than the grad students (who, in turn, are justifiably puzzled by the document).
The difficulty with the form, and the associated concepts and calculations, presumably will have a dampening effect on the number of such forms that will be filed. But you can be sure that notaries and others will provide that service, for a fee. And that some of these helpers will fudge the system to maximize the refunds.
What bothers me most about all this is the casual talk by supporters of S.744, who say blandly that "the illegals will pay back taxes" because of provisions in the law. As my colleague, Jon Feere, has pointed out, only a tiny minority of the newly amnestied will actually have to pay any back taxes at all, and many of those would be pushed into the EITC benefit program, which would limit or eliminate the amount of money owed to Washington.
Contrary to what the White House says, amnesty will not be good for America financially.