The Problem With State-Funded Higher Education

Friday, April 5, 2013

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.

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