The Problem With State-Funded Higher Education

The Center on Budget and Policy Priorities released a report a couple of weeks ago detailing how much each state has cut higher education funding in the last five years. The story is straightforward: most states have cut funding for public colleges and that has coincided with substantial tuition increases for students that attend four-year public colleges. Indeed, this has been the basic story of rising tuition in public colleges for the last couple of decades.

Some have reflexively argued that we should just reverse this trend: increase state taxes so as to continue funding public colleges. Thomas Hedges had a post to that effect just a few days ago here on Policy Shop. This sort of advocacy fits in nicely with the general left-liberal line of late, which states that we need only turn back the clock to get back to the Golden Era of Public Colleges. The underlying assumption of these various points is that the way we funded college in the past was the ideal way to do so. I don't think so.

Using state taxes to fund public colleges is an exceptionally regressive policy on two fronts. First, college students -- both entrants and graduates -- are disproportionately middle-income and upper-income (especially traditional students), as I explained in a prior post. Consequently, across-the-board public tuition subsidies direct more money to the upper classes than the lower classes, something other college financing regimes -- income-based repayment, means-tested grants, to name just a couple -- do not do.

Second, state taxes are generally regressive, which is to say lower-income people pay higher percentages of their income in state taxes than upper-income people do. According to a Citizens for Tax Justice report from last year, the lowest 20% of households paid state and local taxes equal to 12.3% of their income, while the top 1% of households paid just 7.9% of their income towards such taxes. The regressivity of state taxes holds across all income groups: the higher up you are on the income distribution, the lower your effective state tax rate is.

So raising state taxes to increase funding to public colleges ends up favoring those higher on the distribution quite a bit. It disproportionately taxes those on lower-end in order to disproportionately direct money towards those on the higher-end. In theory, you could restructure state tax policy to make it more progressive, but that is not the reality of what state tax policy looks like in the status quo. If we assume states will not significantly overhaul their tax regimes, then raising revenue to subsidize public colleges will in fact be regressive on the revenue side of things. Even if they do overhaul their tax regimes, the across-the-board tuition subsidy will be regressive on the spending side of things.

The easiest way to counteract the regressivity on the revenue side is to take states out of the funding mix and replace them with the federal government. Federal taxes -- income taxes especially -- are already fairly progressive. So shifting from state to federal funding replaces regressive revenue streams with progressive revenue streams. With states almost universally scaling back higher education funding, pressuring the federal government to pick up the slack might be a more plausible strategy than trying to get all of these states to reverse course.

On the spending side, eliminating regressivity is considerably harder. It is just a brute fact that there are more middle-income and upper-income kids in college than lower-income kids, and this will doubtlessly continue to be the case so long as we have such extreme economic inequality. Absent creative funding approaches, any direct funding of higher education will therefore put more dollars into the pockets of those who are already better off. Without getting into those creative funding approaches here, one very sensible short-term policy to ease the burden of raising tuition in a progressive manner is to simply expand the Pell Grant program.

The consensus position on the left-liberal side of things that the way forward on this issue is to increase state funding of public colleges is ultimately misguided. That is the way we have done things in the past, but that does not mean it is the best way to do things going forward. When we take into consideration the distributive impact of such a policy, it should become clear that other ways of financing higher education are much better.