Congress and the Trump Administration have undertaken a wide range of immigration policies that could have measurable consequences for state and local government budgets. While federally driven, these policies – if they discourage tax filing, reduce federal financial support, and remove economic contributors from communities – could strain the finances of many states and localities.
Discouraging tax filing
The “One Big Beautiful Bill Act” (PL 119-21) limits tax benefits for families with mixed immigration status – where some members are US citizens and others are not – as well as families with all undocumented members. For example, the child tax credit (CTC) will now require both the qualifying child and at least one parent to have Social Security Numbers (SSNs), which undocumented immigrants cannot obtain.
Contrary to some perceptions, an estimated 5.4 million undocumented immigrants pay taxes using individual taxpayer identification numbers (ITINs). But if their households lose eligibility for key tax benefits, they may become less likely to file. This will impact US citizens too: an estimated 2.7 million US citizen children live in single- or two-parent households where the parents are undocumented.
Additionally, the Trump Administration’s Department of Homeland Security (DHS) has asked the Treasury Department to deputize special agents in the IRS Criminal Investigation (IRS-CI) division to help DHS with deportations. And, in April, the IRS and DHS reached a memorandum of understanding that allows the IRS to provide taxpayer information to Immigration and Customs Enforcement (ICE). Several high-ranking IRS officials have resigned or been placed on leave over their objections to the data sharing. As of August 12th, court filings confirm that the IRS has responded to requests for tax filers' information.
Taken together, the loss of federal tax benefits and fear of being targeted or deported may reduce tax filing by undocumented immigrants and mixed-status families. One independent estimate suggests that the IRS information-sharing alone could cost the federal government $147 to $479 billion over the next 10 years.
At the state and local level, the net fiscal impacts are more complex because there are key considerations of how the costs of public goods are allocated and what time periods or generations to consider. However, many estimates suggest that in the long term, immigrants overall pay more in taxes than they receive in government benefits compared with native-born Americans.
Reducing federal financial support
President Trump signed two executive orders in January and April to withhold federal money from “sanctuary” cities, counties, and states, which broadly refer to those that may limit immediate cooperation with federal immigration authorities. Federal grants comprise a significant share of state and local revenues, and billions of dollars are at stake in federal funding allocated for states and localities across the country.
The courts are currently debating the legality of these orders. In further attempts to pressure those jurisdictions, the federal government is suing many, with ongoing cases in California, Chicago, Denver, the state of Colorado, Rochester, New York, and others.
Removing economic contributors from communities
Immigration helps national and local economies in myriad ways. As of 2022, there were 8.3 million undocumented immigrants working in the US, with large shares in construction (1.5 million), restaurants (1 million), agriculture and farms (320,000), landscaping (300,000), and food processing and manufacturing (200,000).
If undocumented immigrants find it challenging to continue working their jobs (due to employers’ reluctance in hiring them or out of fear of being deported while at their jobs, for example), or if they feel compelled to shift to informal labor markets, those industries would be especially vulnerable. President Trump implied as much when he announced an exemption for farms and hotels from immigration raids, though the Administration reversed course shortly after.
Recent evidence suggests a large reduction in undocumented immigrants’ labor could also lead to job losses and worse working conditions for US-born employees, especially in fields like construction or child care. Jobs held by immigrant workers and US-born workers tend to be complementary: for example, with fewer immigrant roofers available, there will be fewer jobs available for US-born electricians and plumbers.
Immigrants contribute to their communities through deep social ties as well. As immigration enforcement efforts ramp up, local communities across the US have been reckoning with both the economic consequences and the community impacts.
What this could mean for state and local governments
Altogether, if enforced to the fullest extent, federal immigration actions may push out many undocumented immigrants as well as an estimated 4.7 million mixed-status families with US citizens, and those who remain may find it challenging to file their federal or state-level tax returns or be forced to find informal employment and housing.
There are some early warning signs. Worries about detention and deportation have risen sharply among all immigrants, including lawfully present immigrants and naturalized citizens. This stress is taking a toll on their health; they are withdrawing from day-to-day activities like driving to work or seeking medical care. Delayed care could put stress on hospitals, with long-term financial impacts for states and localities.
It is too soon to conclude how much federal immigration actions will impact state and local budgets and economies. However, states are already seeing sluggish tax revenue growth and anticipating further federal spending cuts. Policymakers may wish to prepare so that they can continue to provide adequate services and supports to their communities.
