“One Big Beautiful Bill” was passed by Vice President JD Vance’s vote after it tied on the Senate floor.
Among many other things, the bill included a tax on remittances, which refers to the money immigrants send back to their home countries. This tax was intended to discourage illegal immigration while also raising revenue for the government. Although the tax is only 1%, its impact is not negligible: in aggregate, $100 billion in remittances were sent from the United States in 2024.
In Connecticut, 16% (one in six) of the state’s population is foreign-born immigrants. Based on national averages, over half of them are expected to send remittances back to their home country. When applied to Connecticut’s population, this means that over 300,000 people in this state alone are likely sending remittances.
These remittances are crucial to many of the countries receiving them. For example, they account for around 25% of GDP in Honduras, El Salvador, and Nicaragua, as well as about 20% in Guatemala. Since a significant portion of American remittances is sent to these Central American countries, it is vital to understand how the tax will affect all aspects of their economies and communities. Given their dependence on remittances, any policy affecting these flows has significant consequences.
While there are ways in which the tax may offer marginal long-term economic benefits for receiving countries, it is ultimately designed in a way that harms impoverished families and disproportionately penalizes immigrants who are positive contributors and play by the rules.
The tax will have two direct effects: it will reduce the amount of remittances sent and channel them through informal networks. The tax makes it more expensive to send money to a relative, thus making people decide against it. However, instead of not sending the money, people may send it informally. Formal remittances are either sent through a Money Transfer Operator (MTO) or a typical bank, making them easy to tax. However, informally sent remittances are typically delivered in cash by hand– either by the sender, a relative, or a paid contractor. This not only makes informally sent remittances impossible to tax, but also makes them untrackable—and thus easy to use for illicit activity. In fact, the tax was set at only 1% because policymakers feared that if it were any higher, it would encourage the use of informal channels.
A tax on remittances is not always bad for the countries receiving them. Although remittances often help families in need, they can be damaging to economies, especially those of countries with high poverty rates. When strategically utilized, a tax can mitigate many of the negative impacts of remittances.
For example, a tax only on remittances sent through MTOs can help increase investments while limiting illegal activity. Investments are an economically productive way to spend remittances, yet due to the dire situation of people receiving them, only 1% of remittances are allocated toward this purpose. The other 99% is used for consumption (usually of necessities), which creates a long-term reliance on remittances while also having inflationary impacts.
Taxing remittances sent through MTOs incentivizes senders to use banks instead, giving banks more money to finance loans, which people can use for investments. Additionally, money sent through MTOs can be picked up in cash with limited identification, allowing illegal operations to use them. For example, drug smugglers can bring substances into the country, sell them, and then send the profits back to their home country to help fuel the cycle. A tax on MTOs would disrupt this illegal activity and make it less profitable. However, such smugglers would still be able to continue their activity by either paying the tax or finding a way to send money illegally.
The tax included in the bill, though, was not just for MTOs, but for all remittances sent from the United States. This may still contribute to reducing reliance on remittances abroad in the long term, but it will also harm families living in poverty in the short term. Unlike a tax only on MTOs, this offers almost no untaxed alternative for senders (though there are a few rare exceptions). To be fair, the tax is small, but given the value of American dollars in the receiving countries, the financial loss is far from negligible. The primary intent of the tax is to discourage illegal immigration, and it was initially planned to be levied only on undocumented immigrants. However, the bill was later amended, and in doing so, the tax now reflects a broader—and arguably less focused—policy choice, drifting from the original rationale. Additionally, for the undocumented immigrants who are affected, the tax will only penalize those who send money through legal channels while failing to address those who bypass the system entirely.
Overall, when a policy is enacted, it is essential to remember the original intentions. If the point is to discourage illegal immigration, then it would make more sense to levy the tax exclusively on undocumented immigrants, even if that means raising the percentage of the tax. If the purpose is to specifically discourage shady activity funded by the remittances of undocumented immigrants, then a tax only on remittances sent through MTOs might be more effective. Lastly, if the goal is to mitigate the adverse economic effects on the receiving countries, the most effective approach may be to influence the policies adopted by those countries, encouraging them to prioritize economically productive spending and take measures to prevent illegal activity.
Because of this tax’s lack of precision and focus on a specific issue, hard-working American immigrants and their families may be harmed, including the nearly 600,000 in Connecticut.
Arjun Arora is a rising senior at Rye Country Day School.
(Except for the headline, this story has not been edited by PostX News and is published from a syndicated feed.)
