The COVID-19 pandemic has wreaked havoc on the remittance market. Vulnerable migrant workers, who are now unemployed, can no longer afford to send money transfers to developing countries, leaving their families reeling without a vital lifeline to help them survive. The downturn has hit the economies of many low and middle-income countries across Europe, Central Asia, Sub-Saharan Africa, and beyond.
According to Pew Research, people in the United States alone earned and transferred $159 billion in remittances in 2018. In 2020, however, it’s a different story as lockdown measures have prevented people from going to work, with the unemployment rate hovering at 11.1% as of June. The effects reach far beyond the borders of the 50 states.
Remittance Tax Landscape
Even before the crisis, a debate was raging about whether or not Uncle Sam is entitled to a cut of the money migrants in the US send overseas each year, often to poverty stricken regions of the world. Currently, considering that the billions of dollars sent in remittances aren’t directed towards goods and services in the US, it isn’t subject to a sales tax or any other type of tax, for the most part.
Neither the federal government nor most states impose a tax on overseas money transfers. Oklahoma is the only exception as it is the sole US state to collect fees on money transfers and could serve as a model for what a remittance tax would look like.
Oklahoma charges $5 on money transfers up to $500 and attaches a 1% fee on higher amounts that are sent from the state, which hits the immigrant community right in the wallet. Technically it’s a fee, not a tax, because the sender can claim a refund on their taxes the following year. Roughly $13.1 million in money transfers was sent from Oklahoma in the 2018-2019 period, which was up from $12.8 million in the 2016-2017 period.
While Oklahoma’s share of the immigrant community may be small, it could inspire other states to follow in its footsteps. The state of Georgia is currently considering a similar fee, according to the Center for Immigration Studies. Meanwhile, a 2% national tax could generate revenue of more than $3 billion based on the average remittances originating from the United States.
With the US currently facing a recession, we thought it was an appropriate time to explore whether a remittance tax could provide a much-needed jolt to the economy.
The Argument for a Remittance Tax
Those in favor of a remittance tax believe that while money transfers benefit the receiving country, the United States is the loser in the equation. If the $150 billion in remittances each year from the United States were directed into the local economy instead, it would be taxed, as explained in a report by the Federation for American Immigration Reform (FAIR). Since that’s revenue that the local governments could use, instead, they’re pressured to find other ways to tax citizens in order to fund public services.
Spencer Raley, FAIR’s Director of Research in Washington, D.C. and one of the writers of the report on remittances, told Sharemoney,
“Income spent in local U.S. communities act as a vital source of sales and excise tax that help maintain city and state services such as roads, emergency services, and even schools in some situations. When migrants remit a large portion of their incomes, they spend less in their local communities, and thus contribute fewer dollars in state and local taxes. Yet they continue to use public services at largely the same rate as everyone else.”
The addition of a remittance tax would give states and local governments the opportunity to capture some of the money that’s being sent overseas. While some argue that this would result in a double tax for migrant workers, Raley maintains,
“Such a measure would not serve as an inappropriate ‘double-tax,’ as those funds would be subject to additional state and local taxes if spent in the United States.”
While remittances from the United States abroad average $150 billion each year, the money transfers into the country are much more modest, at $6.6 billion, FAIR points out in the below illustration.
Source: FairUS.org
Of course, most of the remittances sent from the United States go to developing nations, such as Vietnam and Nigeria. Families rely on the income for the most basic of needs, from healthcare to education to housing to groceries. Raley suggests that the COVID-19 crisis serves as a wake-up call, as it has “exposed how the reliance on remittances by foreign countries is unstable and harmful to long-term national growth.”
He argues that countries should use the crisis “as an opportunity to enact meaningful reforms that increase their economy’s self-reliance instead of remaining dependent on remittances from foreign countries.” If they don’t, they will be no better off the next time a crisis rolls around.
Remittance Tax: The Argument Against
Immigrants who send money from the United States to their families overseas argue that they already pay a tax on the money they earn. They question why they would have to pay another layer of tax only because the recipients of the funds live outside of the country.
This is the argument of Rafael Villalobos Jr, a Washington resident and US citizen who regularly sends funds home to his family in Mexico, and was spotlighted by NPR in 2017. Villalobos is a community college administrator and says he already pays income tax. He is looking for ways to save money on remittances because for his family on the other side of the border, every dollar counts — especially when it comes to buying groceries.
Villalobos is not alone. Remittance payments are known to reduce the rate of poverty amongst the receiving countries. In Sri Lanka, for example, this income even helps young children to gain more weight vs. those in households who do not receive that income. In fact, it’s not uncommon for migrant workers to set conditions on the funds they send, requiring that the money be directed in ways that will help the entire household, such as helping to pay for expenses like education, healthcare and housing.
Economists at the World Bank are similarly opposed to the tax for a slew of reasons, chief among which is that it would result in a double taxation for tax-paying migrants, echoing Villalobos’ sentiment. The economists’ list of reasons is extensive and includes the fact that the G20 has committed to lowering the average cost of sending international remittances, not raising it. Worse, since the millions of households around the world that depend on remittance payments would feel the pinch the most, migrant workers could flock to unregulated channels to send the money, which presents a national security issue.
The World Bank economists also argue that the amount of funds raised through a remittance tax would not be enough to move the needle and administrative costs alone could offset any income generated by the tax. They point to countries that have attempted to tax remittances like Vietnam, Tajikistan and the Philippines, all of which have since reversed course in one way or another.
In a report on how to keep remittances flowing during the COVID-19 pandemic, Brookings writes that “taxes on remittances should be avoided by source and recipient countries.”