The Remittance Tax Proposal Is Both Complex and Dangerous

The administration’s attempt to increase tax revenue while disincentivizing illegal immigration comes in the form of a refundable remittance tax. The proposal, included in the reconciliation bill, would introduce a 3.5 percent excise tax on remittance transfers overseas, but would include a carveout excluding U.S. citizens or nationals from paying said tax. This exception would entitle the sender to a refundable tax credit unless a “qualified” remittance transfer provider is able to verify users’ citizenship status, which would exempt the transaction from any tax altogether.

Such a proposal would do little more than complicate the tax filing process, introduce new privacy security risks, and burden transfer platforms with legal liability and compliance costs.

By introducing a U.S. citizen carveout, the proposal would further complicate the tax preparation and filing process for U.S citizens. They would have yet another tax credit to calculate when filing their taxes. Further complications in the tax filing process increase the cost of tax preparation services and increases the risks of audits for taxpayers. Additionally, the refund coming in the form of a tax credit means that the government is getting a zero percent interest loan from citizens from the time the tax is collected to when their refund is processed.

Additionally, the bill would require platforms to undertake the citizenship verification process for those who claim to be citizens. They would then submit users’ personal information for verification to the Internal Revenue Service (IRS). Forcing platforms to submit sensitive personal documents exposes taxpayers to data breaches and cyberattacks, undermining their safety and privacy. This is especially true, given the IRS’s poor data security record.

For any of the platforms processing these transfers, compliance costs will rise significantly. Platforms would need to hire extra staff to process user data in order to satisfy the reporting requirements. They would also need to make significant investments into added cybersecurity infrastructure. Any data breaches will have significant reputational repercussions.

While these investments can be worthwhile for companies who operate exclusively in the money transfer spaces, companies that had it as a secondary or ancillary services (such as grocers, pharmacies, and other small businesses) might decide to stop providing this service altogether. That means that Americans will see their offerings reduced. They will also face fee increases, as companies will necessarily pass a portion of these compliance costs to consumers, especially as they will have less competitive pressure to keep prices low.

At the end of the day, this excise tax and citizenship verification proposal will unnecessarily complicate tax preparation for all residents regardless of their citizenship status. It will expose Americans to privacy and safety risks. It will also increase the costs of money transfer services. All of this will have the effect of crowding out small businesses and other companies from the market. This is a misguided proposal that Congress should avoid making a reality.