The 3.5% tax on remittances: A blow of over $2.7 billion for undocumented Mexican migrants

Ramona Luna Mendoza, 58, works in the fields and cares for her parents in Santa Inés Ahuatempan, in the Mexican state of Puebla. In her youth, she and her sisters decided to migrate to Los Angeles, as other relatives had done before them. For decades, the Luna Mendoza sisters cleaned houses in the wealthiest neighborhoods. In her case, she sent much of the money she earned back home to her parents and children.

In 2007, she decided to return with them, but her sisters put down roots in Los Angeles and now they are the ones who send her $100 to $150 a week, about 2,000 to 3,000 pesos. That money, Ramona notes, helps them with household expenses, food, and to pay the young people who help her with the farm. But this source of income is now under attack due to President Donald Trump’s initiative to impose a 3.5% tax on remittances sent by undocumented migrants starting in 2026. “Of course it’s going to affect us because if they have to pay more, they won’t be able to send us the same amount,” Ramona explains by phone.

The House of Representatives approved Trump’s massive tax plan last week, which includes a 3.5% tax on remittances, down from the original 5% proposal. Pressure from various groups had an impact on the negotiation of the tax, which was hidden within thousands of pages with dozens of tax provisions that have come to be known by Trump’s nickname for it, “the big, beautiful bill.”

The industry behind financial transfers was one of the main critics of the remittance tax. They argued that the tax created an unfair burden on the 14% of households in the United States that are unbanked. “These services are not luxuries — they are essential tools for paying bills, supporting family members abroad, and managing daily finances,” the Financial Technology Association (FTA) stated in a joint letter to Congress sent earlier this month. Despite this reduction, the U.S. government expects to collect approximately $22 billion from 2026 to 2034, an average annual revenue of $2.7 billion.

The thousands of small businesses that include these transactions among their customer services will also be impacted. As costs rise, customers will stop visiting New York bodegas or Los Angeles stores that offer remittance services. Tax firms such as AKM Global predict a sharp increase in remittance transfers in the remaining months of 2025 until the new tax goes into effect on January 1, 2026, if it is adopted as is by the Senate.

The FTA has even expressed skepticism about what appears to be an imminent passage of the tax in the Senate, controlled by Trump’s party. The association states that remittance tax bills were introduced in roughly 15 state legislatures at the beginning of this year’s legislative sessions. “Most of these bills are dead [in fact or in practice] and it appears unlikely that any state will enact a bill this year. The state legislatures have recognized that remittance taxes are bad policy, are inconsistent with the existing money transmission framework, and are in any case unlikely to generate any meaningful revenue [particularly compared to cost of administration].”

The Trump administration believes this tax will raise $22 billion between 2026 and 2034. That figure, several experts have warned, could be significantly reduced for several reasons. One of these is that users would seek other methods or parallel services, such as cryptocurrencies, to send money home. This would create new obstacles for the government in its crackdown against illegal immigrants. The proposal, as it is written now, exempts U.S.-born citizens or those who have been naturalized from paying the tax. But immigrants, even those with a green card and permanent residency, will have to pay the fee.

Despite this impact, the reduction in the tax rate from 5% to 3.5% was hailed as a victory by the Mexican government. President Claudia Sheinbaum indicated that they will continue working to avoid the tax. “This reduction is not only important for Mexico; there are Central American countries where remittances represent 20% of the Gross Domestic Product. In our case, it’s around 3%; it’s important for all countries, even for India,” she said.

The Mexican ambassador to the U.S., Esteban Moctezuma, described the tax reduction as an achievement of the lobbying efforts that Mexican authorities conducted days earlier in Washington with both lawmakers and business leaders. “We still need to fully renew this measure, but if not, at least reduce it. The tax is already beginning to be seen as a regressive measure by many members of Congress. This news should encourage us; it is not a definitive victory, but we are moving in the right direction,” the diplomat stated in a message.

In 2024, Mexico’s revenue from remittances reached a historic $64.75 billion, of which approximately $62.5 billion came from the United States. Last year, remittances were equivalent to 3.5% of the country’s GDP.

Gabriela Siller, Director of Analysis at Banco Base, estimates that the tax’s impact will be approximately $2.3 billion, representing only 0.04% of total U.S. government revenue. A minimal figure for the U.S., but significant for Mexico. This expert thinks that the tax will most affect the states of Chiapas, Guerrero, Michoacán and Zacatecas, since remittances in those states represent more than 10% of state GDP. “It is highly likely that remittances will be sent through other channels, so the revenue collected and the contribution to U.S. GDP will be much lower. It is even possible that the measure will generate greater caution and limit the growth of migrant consumption in the U.S.,” she said.

According to the Center for Latin American Monetary Studies (Cemla), Mexican migrants residing in the U.S. send 16.7% of their labor income, while Guatemalans send 45%. Jesús Alejandro Cervantes González, director of Economic Statistics at this organization, explains that the ideal scenario would be to return to a tax-free environment. However, he clarified that if approved by the Senate, the measure would have limited effects for Mexican immigrants because they have more leeway to absorb the tax, compared to other immigrants residing in the U.S.

In a previous analysis, the banking group BBVA indicated that with a 5% rate, the impact for Mexico could be $1.5 billion; with a rate reduction to 3.5%, the impact would decrease to approximately $1 billion. The financial institution warns that those who cannot receive support from a family member or acquaintance with citizenship or residency, and who also lack access to the banking system, will likely seek alternatives through informal channels to send and receive these funds. “One of the main risks associated with the approval of a high tax on remittances in the United States is the creation of favorable conditions for the emergence of informal remittance mechanisms, which may be both legal and illegal,” the document states.

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