How Increasing Immigration Can Reduce the Deficit

And why the Congressional Budget Office does a poor job of making those estimates.

Congress' official number-crunching agency is using a flawed method of calculating the economic benefits of greater immigration—potentially leading lawmakers to have a skewed understanding of how more immigration can help reduce federal deficits.

That's the argument made in an interesting new report by the Penn Wharton Budget Model, a fiscal policy think tank housed at the University of Pennsylvania, which claims that the Congressional Budget Office (CBO) is wildly underestimating how handing out more green cards to high-skilled immigrants could reduce the deficit by hundreds of billions of dollars.

Specifically, the Penn Wharton analysis reviews the CBO's score of one portion of the America COMPETES Act, a sprawling Democratic proposal that rolls together a whole bunch of unrelated policies from manufacturing subsidies to wildlife trafficking. As Reason has previously reported, the bill is a mess. However, there are two worthy immigration-related proposals included in it, and the important one for the Penn Wharton analysis has to do with giving out more green cards to would-be immigrants with advanced degrees in science, technology, engineering, or mathematics (STEM).

When the CBO scored that part of the bill—Section 80303, if you're following along at home—it found that allowing more STEM workers to immigrate to the U.S. would slightly add to the deficit because the CBO's model assumes that a larger population means higher federal spending on health insurance programs like the subsidies delivered via the Affordable Care Act.

However, as the Penn Wharton report highlights, the CBO's method of calculating the impact of greater immigration "excluded effects on taxable compensation and therefore on income and payroll tax revenues." In other words, the CBO did not estimate how immigrants would inevitably contribute tax revenue to the federal government and instead looked exclusively at how immigrants would be consumers of federal spending.

That's not the CBO's fault. Under the rules that guide its work, the CBO is instructed to use so-called "conventional" estimates for most pieces of legislation, and conventional estimates do not account for the possibility that the size of the economy will change in response to certain policies. Under a different method of making estimates—known as "dynamic scoring"—the CBO is allowed to take into account economic growth and other factors, but that method was not used to score the America COMPETES Act (and is generally not used for evaluating immigration proposals).

"Because conventional budget estimates hold employment unchanged relative to current law, such estimates do not fully capture the budgetary impact of proposed changes in immigration policy," the Penn Wharton report notes.

What happens when dynamic scoring is used to estimate the fiscal impact of handing out more green cards to highly skilled immigrants? Instead of causing a small net increase in the budget deficit, the Penn Wharton analysis found a huge reduction in the long-term deficit. While federal spending would still increase by about $4 billion over the decade, federal revenues would increase by $133 billion in the same period. That's due to "additional collections of individual income taxes (about two-thirds of the total) and payroll taxes (about one-third of the total) that would result primarily from an expansion of the U.S. labor force."

That's a huge difference. And it reflects what other research has shown: More legal immigration grows the economy, helps fund government programs, and doesn't strain entitlement or welfare programs.

As the Penn Wharton analysis points out, this is more than a debate over the proper way to score a piece of legislation. Underestimating the fiscal benefits of immigration can have a material impact on the passage of legislation, because "the estimated effect of a proposal on the deficit is especially salient in the legislative process," the Penn-Wharton report points out. "Proposals that are estimated to increase deficits are subject to additional points of order and other procedures that affect their consideration by Congressional committees and by the full House or Senate."

Fixing America's broken immigration system is going to be hard enough without Congress relying on faulty economic estimates that hide, among other things, how greater legal immigration can help reduce the budget deficit.