Raising Public-College Tuition

A number of states are in quite desperate financial straits. They have huge debt, and like members of the eurozone, cannot lighten their debt load by inflating their currency or by improving their trade balance by devaluation. It is natural that they should be raising fees, such as college tuition. Whether this is the best way to reduce debt is a separate question, but probably an academic one; the pattern of revenue enhancement and cost reduction that a state embraces depends on the political balance in the state, rather than on what is efficient or otherwise in the public interest.

As Becker points out, there are external benefits to higher education. In the narrowest terms, college-educated persons (especially college graduates) have significantly higher incomes than the non-college-educated population, and those higher incomes generate higher tax revenues, which finance government expenditures that are used to finance government programs that largely benefit other people. The amount of the external benefits cannot actually be measured, however, because the decision to attend college is not random; generally, it is the intellectually abler who attend college, and their higher incomes are the combined result of their personal characteristics and the increased skills that college imparts to them. Nevertheless there is little doubt that college does generate external benefits, which creates a case for subsidy.

Whether it is a good case is a separate question. Because college contributes to higher earnings, which are not taxed until earned (that is, the asset, consisting of future expected earnings, that is obtained by attending college is not taxed), attending college is attractive to anyone who has sufficient intelligence and discipline to benefit from it, and he or she can borrow to finance tuition and living expenses.

In any event, there is no case at all from an overall social standpoint for subsidizing students who would pay full college tuition, without the inducement of a subsidy; the subsidy does not induce students to obtain a college education who otherwise would not because they could not afford to; it is a windfall to their families. Private colleges recognize this. They charge very high tuition (though not high enough to cover all their costs—but they have other sources of funds, such as alumni donations), but grant scholarships or loans to students whose families can't afford the tuition. Charging low tuition to everyone, as public colleges do for residents of the state in which the college or university is located), does not make economic sense; it merely as I said provides windfalls to families willing and able to pay the full tuition. As Becker points out, this results in regressive redistribution of income, because families that can pay full tuition are wealthier than the average taxpayer, who pays for the costs of public colleges that tuition doesn't cover.

This situation presents a case for a virtuous tax increase (raising a fee for a public service is the equivalent of a tax): the increase helps to close the state's fiscal gap; the burden of the increased tax is borne entirely by the well-to-do; and some of the higher revenue can be used to subsidize students unable to afford the higher tuition.

There is still an argument against the tuition increase, which resembles the economic argument for the moratorium on increasing the federal income tax rate even on taxpayers who have very high incomes—even incomes of a million dollars or more a year (a proposal for eliminating the Bush tax cuts for those taxpayers was made by liberals but rejected by Congress). The argument is that any tax increase will reduce private spending (consumption and investment) unless the tax revenues are used to increase such spending; and given the still very shaky state of the U.S. economy, any measure that reduces such spending is suspect. Well-off families will have to allocate more of their income to their children's education, and so will reduce their other spending. The revenue from the higher tuition will flow into the state's coffers, but the question is whether the effect of that flow in stimulating investment and consumption will be greater than the decline in personal spending by persons paying the higher tuition. Conceivably, increasing tuition could retard economic recovery, though it is nevertheless a sensible long-term measure of fiscal reform because there is no reason to subsidize tuition of persons able and willing to pay it without subsidy.

I said earlier that the combination of tax (or fee) increases and spending cuts that states are adopting in an effort to alleviate their debt burden depends on the balance of politically effective interest groups. Well-to-do families will fight efforts to increase college tuition across the board. So of course will the state universities and other public colleges. Low tuition, made up for by public subsidies, helps state and city colleges and universities attract students who would otherwise go to private colleges and universities. Increasing tuition may increase state college revenues, assuming that demand is inelastic (meaning that the percentage fall in demand because of the higher price is less than the proportionate increase in price, so that revenue rises) within the range of the increase, but it will reduce the quality of the student body.

The proposed tuition increases raise the broader question whether states should be in the position of providing higher education, rather than leaving it to the market to private. In fact state universities have been weaning themselves from state support. At prestitgious public universities such as the University of Michigan, state subsidies now account for only about 10 percent of the university's budget. The fact that a state legislature can raise state university tuition at will, or stated otherwise reduce subsidy at will, creates the kind of financial uncertainty that has brought English universities low. Universities supported by diverse financial sources are more stable, which is the main reason for the trend toward public universities' seeking private support. The recession-driven tuition increases will accelerate this trend. That would be a good thing.