Why a 1% remittance tax could cost more than it seems

People in the U.S. send a lot of money abroad: In 2024 alone, about $93 billion in formal remittances were sent overseas. A majority of those transfers were made in cash.

Remittance flows can go on to impact full economies. In 2023, remittances sent abroad accounted for around 20% of GDP in countries like El Salvador, Honduras, Nepal, and Lebanon.

But the GOP tax and spending bill passed last year is looking to crack down on those cross-border transfers. The new federal remittance tax imposes a 1% levy on certain physical remittance transfers, like cash and money orders.

How a 1% tax adds up

While a 1% tax may not sound substantial, it’s added on top of existing fees, which can drive up the price of sending money. There are many ways to send money abroad, including methods that may not be subject to the levy. But critics say the tax could hit unbanked individuals the hardest and further restrict access to the formal financial system.

Supporters say the tax could raise about $10 billion over the course of a decade and help deter illicit finance and illegal immigration. Critics argue it’s regressive and could push some transfers underground.

“Rather than helping stop illicit activity, it can actually help push transactions towards less regulated channels,” said Miranda Margowsky at the Financial Technology Association, which represents a network of fintech organizations, including companies that facilitate remittance transfers.

Last summer, the FTA sent a letter to Congress objecting to any tax on remittance transfers.

Concerns about access and trust

Others say the broader political climate could shape how people respond to policies like this.

“What could be an incredible opportunity to engage unbanked immigrants into the financial mainstream is going to clash against this real fear in the community,” said Pablo DeFilippi, executive vice president at the credit union network Inclusiv, which is looking to expand remittance options.

He said that fear could deter people from engaging with formal banking systems, even if it means absorbing higher costs to send money abroad.

To dive deeper into the new federal remittance tax, Marketplace’s Sabri Ben-Achour spoke with Nara Sritharan, a research analyst at AidData, which is a research lab at William & Mary. The following is an edited transcript of their conversation.

Sabri Ben-Achour: A 1% tax doesn't sound like a lot. Is it?

Nara Sritharan: Yeah, that's a great question. On paper, it really doesn't sound like much, but the key is that the 1% is added on top of existing fees. The average cost of sending money from the U.S., according to the World Bank, is already about 5.8%. With the tax, that rises to roughly 6.8% for those cash-based transfers only, of course.

So while the tax itself is 1%, it actually increases the total cost of sending by about 17%. That's a pretty meaningful jump. And in remittances markets, even small increases and costs can really change behavior.

Who sends remittances?

Ben-Achour: When we talk about remittances, we often think about immigrants sending money back home, but the reality is much broader than that. Who uses remittances, and how many people could this affect?

Sritharan: Yeah, so a lot of people use remittances. We usually do talk about migrants. In particular, we talk about migrants who are coming for work purposes, and they send remittances back. But in reality, a lot of average Americans send money to different places.

They have kids who are studying abroad, people are traveling, and they need to be able to send money wherever these people are. So it's a lot of people that will be impacted by this — regular people, businesses, and then, of course, the financial industry that now has to comply to these taxes.

Ben-Achour: One argument for this tax is that it could help curb illicit activity. But on the other hand, people, I presume, can get around this by sending money in other ways. How else would they send money?

Sritharan: Some will switch to digital transfers to try to avoid the tax, since it only applies to cash. Others — this is particularly migrants — they might cut back on their spending here in the U.S. so they can keep sending the same amount back home, because those payments are often not optional.

Some people will move into informal channels, and our research in places like Yemen, for instance, shows that when formal systems become more expensive, less reliable, or less accessible, people quickly shift to informal networks.

So the money doesn't really stop moving, it just moves differently. And that's where the irony comes in, because a policy like this one that's aimed at increasing oversight can end up pushing more of these flows outside the regulated system.

Inside informal channels

Ben-Achour: What do informal channels look like?

Sritharan: Yeah, if a person decided not to go through a digital transfer or a cash-based transfer, then the other way is informal channels, and those are plentiful. There are "mules" that can be family, it can be friends that's traveling and can take the money with them in the form of cash, jewelry, or other things.

There are hawala agents whose job it is to figure out how to get your money from here to another country without the money actually crossing the border. They settle all these payments way later and without it actually being on a piece of paper.

Of course, there's crypto — that's a way to move a little bit outside of the regulated system. So there are lots of other options, lots of other ways to move your money across border.

Other tools to curb illicit activity

Ben-Achour: If ultimately what people are worried about is illicit reasons for moving money around the world — I mean, if that is the concern — are there better ways to tackle that than attacks on remittances?

Sritharan: Yeah, so for instance, back in 2015, the UN came up with these sustainable development goals, and one of those goals is to reduce transaction costs for remittances down to 3%. So that's something that's internationally established, and they know that lowering transaction costs will draw people into formal channels, because it's cheaper than any other option. So, that would be the number one thing to do is simply just lower the transaction costs.

Another option could be to do more of a tiered system. So much higher transactions get more scrutinized than a lower, like, $200 transaction — which quite a lot of people send $200 here and there — so having a tiered system could be an option. And then, of course, expanding financial inclusion to the countries that are receiving money as well, because even though we have banking access here, the people who are on the receiving end may not be able to access banks.