Why Do Taxpayers Subsidize Public Colleges?


True, state support for higher education does constitute a subsidy for the upper middle-class. Think of it as a tool to recruit and retain human capital.

Why do taxpayers subsidize public colleges? Dimitrios Halikias and Richard V. Reeves with the Brookings Institution ask that question in a new paper. Four-year colleges, they noted, are dominated by children of the upper-middle class, who can afford the cost of attendance better than most. Why should states expend scarce resources to benefit the well-to-do?

One justification for the subsidies, the authors suggest, is that higher education provides public benefits in addition to the private returns that accrue to the students themselves. They identify two benefits in particular. Universities act as ladders for social mobility, allowing students from less affluent families to improve their lot in life. And they function as laboratories for research, expanding knowledge in ways that benefit the higher population.

A stronger case can be made for public support of institutions that provide one of those two benefit, say Halikias and Reeves. Institutions that do both, they call Leaders. Institutions that do neither, they term Laggards. Those that out-perform in providing mobility, they dub Ladders, and those that excel in research they refer to as Labs.

Drawing upon data from Mobility Report Cards, which rank colleges by their ability to attract low-income students and push them up the income ladder, and university research prowess based on the Carnegie Classification of Institutions of Higher Educationthey assigned each of the nation’s 342 selective, four-year, non mission-oriented universities to one of the four buckets. (They exclude Historically Black Colleges and Universities, liberal arts colleges, and military-oriented institutions. The University of Virginia, which I would classify as research institution, does not appear on the list. Neither does the College of William & Mary, which they presumably count as a liberal arts college.)

According to this methodology, Virginia has three Leaders — and not the ones who usually appear on lists of top universities. As can be seen in the table above, in order of social mobility, they are Old Dominion University, Virginia Commonwealth University and George Mason University. These institutions admit relatively large percentages of students from the lower-income quintile and relatively low percentages from the upper income quintile.

Particularly questionable from the Halikias-Reeves perspective are the low-mobility, low-research laggards: Christopher Newport University, Radford University, Longwood University and James Madison University. Indeed, LU and JMU have the distinction of ranking the lowest in the country by this measure.

Bacon’s bottom line: Regardless of what you might think of the authors’ methodology — it has its weaknesses, as I’m sure administrators of LU and JMU would be quick to point out — but it does raise a really important question. Why do states subsidize college tuition for all? If states must be in the game of subsidizing higher education, why not make all dispensations means tested?

I’m of two minds. As one who espouses libertarian principles, I see no justification to subsidize higher ed. Insofar as there is merit to the logic of the idea of social benefits to the subsidies, then one might make an argument for means-tested financial aid. On the other hand, I’m a taxpayer. I’ve paid large sums to the Commonwealth of Virginia over my lifetime, and a reduced-cost education first for me and then for my children is one of the few perks I’ve received in return (other than benefits like roads, state police and state parks available to anyone.) So, color me conflicted.

There is one important argument, however, that Halikias and Reeves neglected — at least in a Virginia context. Access to a superior system of higher education is a big draw to anyone considering moving to Virginia. If we want to attract human capital, there are few things more enticing than good K-12 schools and affordable, quality colleges. We give tax breaks and subsidies to businesses to lure them into the Old Dominion. Likewise, we subsidize higher education in order to recruit and retain the smartest and best educated employees… who, incidentally, pay the most in taxes. Unlike incentives for out-of-state businesses, Virginia citizens have been paying taxes all along — some for their entire lives.

Virginia often is criticized for spending less on higher-ed subsidies than the national average, and considerably less than our neighbor to the south, North Carolina. In an ideal world, no state would subsidize higher education, colleges would do a better job of controlling their costs and keeping tuition low, and private philanthropists would donate more money to scholarships. But we live in the world we live in, and eliminating state support for higher-ed would severely undercut Virginia’s economic competitiveness and its prospects for economic growth.

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43 responses to “Why Do Taxpayers Subsidize Public Colleges?

  1. All right, LarryG, you’ve been banging away on this very point for some time now. I’ve thrown you a nice, slow pitch right over the plate…

  2. Hmmm… Under the heading above of “Related” posts, I notice something I posted back in 2011 — “Want to Cut Costs? Start by Slashing Subsidies for Sorry-Ass College Students.” I still hew to that sentiment.

  3. Hey.. I give you HUGE CREDIT for taking on the issue!! Congrats and THANKS – and yes.. you apparently have “got” the issue!

    Let’s start with this:

    Should taxpayers subsidize any and all income levels to “afford” any/all College choices?

    then next..

    Is it better for taxpayers to help one kid make MORE money while leaving the other kid under-educated and under-employed .. who needs lifelong entitlements ..OR is it better to give LESS to the kid who wants a higher paying job and give more to the kid who will then get enough education to become a taxpayer themselves rather than an entitlement-taker?

    Nothing is ever so simple as above.. I admit.. and “helping” those at the lower tiers is not easy nor successful if it does not begin in K-12 and continue through college.. kids from lower-income cultures are high-maintenance no matter how you cut it… I admit!

    so I’ll shut up now and listen a little.. yes a novel concept for me sometimes!

    • I am reminded of Hippolyte Taine’s characterization of the Robespiere’s Jacobins whose excited zeal resulted in France’s 1792 Reign of Terror:

      “Some … are shrewd…(their) sole object is to furnish the public with words instead of things; others (are) ordinary scribblers of abstractions, or even ignoramuses, (who), unable to distinguish words from things, imagine that they are framing laws by stringing together a lot of phases.”

      We see a lot of this sort of stuff these days. Indeed, it’s typical. And rampant within the Academy.

    • Larry – you make some good points. But I fall off the horse when you talk about life-long entitlements. What are they? Who gets them? It’s my understanding that, with few exceptions, most of these programs are time limited. With Obama gone, states are imposing work requirements on food stamp recipients, with a sizable number of people walking away. I’ve read that a significant number of illegal aliens have stopped seeking food stamps. States are also able to put time limits on food stamps for adults.

      I’ve been told its hard to qualify for SS Disability, although many get it. TANF is time limited. And you’ve been complaining for years that many people don’t get Medicaid.

      I just don’t think the United States has welfare systems that make it easy to be subsidized for years. Can you provide some more information? Thanks.

      • TMT – TANF , MedicAid, food stamps, section 8 as well as earned income credits, deductions for child care, the child tax credit, free and reduced lunches, charity care in hospitals, and section 8 housing is not limited to moms and kids and to many others who while they cannot qualify for SSD , DO qualify for other entitlements..

        Did you know that 1/2 of the kids born are paid for with Medicaid, for instance?

        Do you know that more than a third of Medicaid pays for nursing homes for people who own their own homes and who in theory should have saved for their old age but did not and expect taxpayers to pay?

        • Larry, from what I know, most of these programs are effectively time limited in nature. I don’t think the old story of being on welfare for 20 years occurs much anymore. And now that Obama is gone, states can go back to putting pressure on recipients to move off many of these programs. Recently there have been news articles about a major drop in the number of people using food stamps.

          I don’t see tax deductions for child care expenses or the child tax credit as welfare. It’s just good tax policy in my eyes.

          But the elephant in the room are the large number of people who earn their living either as a government employee or a contractor providing services to dependent people. Of course, people are needed to provide services and they must be paid. But a helluva lot of people with degrees are dependent on the continued existence of dependency. A good argument can be made that these people put a lot of pressure on governments to retain these services that that you suggest could be diminished substantially if we provided for free community college. How do you answer this?

  4. You both (as well as authors of Brookings study) have it “ass backwards”.

    We are NOT using public money to subsidize students education!

    We are using vast amounts of public monies to subsidize the bad habits of students, and the private interests of professors who don’t teach and college administrators and crony capitalists who live on the fatty pork universities raise off the backs of students, their parents, and taxpayers, to feed their own private self interests.

  5. Here is a part of Bernie’s rationale for free tuition in state colleges. …
    He has spoken that as the world progresses … more education is required. A high school degree was enough 50 years ago … no longer true. It isn’t all about the job, but the requirements to thrive in a now different world.

    “In a highly competitive global economy, we need the best-educated workforce in the world. It is insane and counter-productive to the best interests of our country and our future, that hundreds of thousands of bright young people cannot afford to go to college, and that millions of others leave school with a mountain of debt that burdens them for decades.”

    MAKE TUITION FREE AT PUBLIC COLLEGES AND UNIVERSITIES.
    This is not a radical idea.
    Germany eliminated tuition because they believed that charging students $1,300 per year was discouraging Germans from going to college. Chile will do the same. Finland, Norway, Sweden and many other countries around the world also offer free college to all of their citizens. If other countries can take this action, so can the United States of America.

    In fact, it’s what many of our colleges and universities used to do. The University of California system offered free tuition at its schools until the 1980s. In 1965, average tuition at a four-year public university was just $243 and many of the best colleges – including the City University of New York – did not charge any tuition at all. The Sanders plan would make tuition free at public colleges and universities throughout the country.

    STOP THE FEDERAL GOVERNMENT FROM MAKING A PROFIT ON STUDENT LOANS.
    Over the next decade, it has been estimated that the federal government will make a profit of over $110 billion on student loan programs. This is morally wrong and it is bad economics. Sen. Sanders will fight to prevent the federal government from profiteering on the backs of college students and use this money instead to significantly lower student loan interest rates.

    Who can disagree with that?

    • Having paid for my college education; helped pay off my wife’s student loans; jointly paid for my daughter’s college education and still providing money for my son to go to school part time, I strongly disagree with paying higher taxes or the Nation borrowing more money to make college free on a going forward basis.

      I’d give Bernie some credibility if he also said any college receiving federal money must put its staff, including professors and administrators, on the federal pay schedule. Full professors can get as high as GS15. One more way to fleece taxpayers to buy votes.

  6. “free” college in Europe is for MINIMAL college not what people in this Country want.. the soup-to-nuts version.

    German does not pay for room and board.. that’s on the students…

    That’s what I do support because it provides taxpayers with with more employed taxpayers – and those who want “more” still are more than free to add their own resources to get more.

    TMT -aren’t you’re cutting off your nose to spite your face when you oppose expenditures that will SAVE taxpayers money.. penny-wise and pound foolish.

    You seem to be opposed to expenditures that not only help others but also help you longer term.. you got yours.. screw others.

    and your obsess over “illegals” when in the overall scheme of things – they don’t harm.. they actually contribute MORE to taxes and FICA than they get back.. unless the vaunted “middle class” who are never satisfied.. with what they get.

    • Larry – social spending programs never go away. I support taxpayer-funded programs that provide short-term services that have a track record of making long-term improvements. For example, Fairfax County provides parenting classes for teenage parents and early childhood intervention for kids that have speech problems. These programs don’t last long and do seem to provide results. But funding college would not be limited to the basics. We’d soon have another unaffordable entitlement. Colleges would hire more administrators; salaries would increase; and the program would soon be unsustainable.

      You are already effectively calling for tax increases to expand Medicaid and bail out WMATA. What next?

      Fairfax County Public Schools officials have admitted in community meetings that one of the biggest causes of its annual, faster-than-inflation budget growth is due to the many children of illegal immigrants who need extra, expensive services. The County spends $14,400 per student and, of course, more on students with greater educational needs.

      Are most illegals hardworking? Yes. Do most pay some form of taxes?? Yes. Do many pay state and local taxes equal to $14,400 per year? No.

      The economic problems with illegal immigration are the benefits of cheap labor are largely privatized and the costs passed on to the public and they also depress wages for our native less educated and less skilled. The Tax Code should be amended to allow only deductions for only 3/4 of the wages paid to anyone who has not used E-Verify and 1/2 of the wages paid to anyone not proven to be eligible to work in the United States. Tax fraud cases would enforce the immigration law. Owners of big construction companies would wind up in jail, just like Al Capone.

      • TMT – spending programs that actually result in people becoming employed and reduce their need for entitlements are not “spending” program but rather investments with actual quantifiable returns to taxpayers.

        Your approach is to limit it or remove it on the premise that some people get something they don’t deserve.

        Based on your premise – we shut down all of our programs like public education because “illegals” are getting something they do not “deserve”. That’s what I mean “cutting off your nose to spite your face” or “penny wise pound foolish”.

        illegals comprise a tiny amount of people getting stuff they do not deserve. They are not eligible for most social programs.. not Social security even though they pay FICA..not MedicAid..not TANF… no subsidized housing .. yet you’d deny help to anyone based on your concern about this small number.

        You worry about the 14K per student. How many people who are NOT illegal pay that much in real estate taxes that ARE legal? where doe the extra money to pay the 14K come from? Isn’t it a subsidy from other taxpayers without kids?

        we all pay for education no matter how many kids we have.. If those without kids took your view – they’d not pay except when their own kids were in school.. right?

        I do NOT support “spending programs” . I support programs – like education for people – who would not be able to afford it and in the rest of society paying for it – it benefits all of us.

        What kind of society and economy would we have if we required each parent to pay ALL of the costs of educating their kids?

        Would you support that ? Is that what you mean by “spending programs that never go away”? Everyone would pay for their own kids education?

        We go back to a 3rd world view of education?

        • @TMT – I DO see YOUR POINT! the current College tuition conundrum is a good example.

          But I’m not arguing that we continue it or even expand it… I’m arguing that it needs changing…fixing.. because , yes.. it does not do what it was intended to do and in the end it costs more and more money…

          but an argument to fix something is not an argument in favor of expanding it.

          I notice that you do not call for an end to the current tuition system.. even though it clearly is a disaster.

          I’m arguing that it subsidizes way more people than it should and for things that ought not to be subsidized for anyone at all anyhow.

          THEN – we DO change the program to be more like Germany’s with “free” college DEFINED as NOT soup-to-nuts at a “brand name” big time sports College – but instead – only Community College and only for occupational certificates or 2 years toward an education targeted to jobs in demand in the economy – and ONLY THEN to those who demonstrate academic performance AND a genuine means-tested need. AND I would – as a compromise to your view – LIMIT any such program to ONLY U. S. citizens.

          So I would then expect you to agree and/or come up with an alternative approach rather than just opposing any change at all on the premise that it will only lead to more spending.

          how do we reform and change if folks like you refuse to do it at all?

  7. I’m with CA&W — this was the original motivation: the need for an educated electorate, Jefferson’s “citizen farmer” — and God knows we need a better educated electorate these days. Moreover today, that education is not only needed for voting, but also for jobs. In this competitive global economy (which it remains regardless of Mr. Trump’s know-nothing objections), a better-educated workforce is an essential investment in our national economy.

    It took until the middle or late 19th century for most States to provide for free secondary education for all children. The reasons for it, the rationale, did not cease to apply after high school; the tax dollars tapered off, though, as the benefits of going away to a residential college are more than just education and more than just the responsibility of the State. But education was, and continues to be, a huge responsibility of any democracy, as well as any nation preparing its citizens to work in the global economy. This is one responsibility we must continue to take seriously.

  8. I think the issue comes in where people feel that it is ok to do some subsidizing, but how much? Is it really effective to subsidize those who aren’t prepared for college and don’t have the skills to make a 4 year degree that pays off in the end? That means STEM or other types of programs. Phys Ed. just doesn’t cut it.

    • re: ” Is it really effective to subsidize those who aren’t prepared for college and don’t have the skills to make a 4 year degree that pays off in the end? That means STEM or other types of programs. Phys Ed. just doesn’t cut it.”

      I totally agree and that seems to be UVA’s focus also as they have demonstrated success for low-income minorities success !!

      But hey… speaking of standards..what about sports? Should we put the same strict standards on sports that we say should be on others that lack academic skills?

  9. well again – the idea that we’d subsidize most any variant of “college” for any income level – is precisely why we have the escalating tuition problem!

    the institutions bake this free-money-for-all into their prices!

    beyond that – the basic idea of “affordability” is that there are folks who cannot afford at all and as a direct consequence cannot go. We’ve bastardized the meaning of “affordability” when we subsidize the most expensive option for college for kids and families with more than 100K in income.

    Europe/Germany DO subsidize college but they do so on a really limited basis.. it’s more like our Community Colleges were “technical” workforce-targeted education is “free” … and only as a day student.. If you want more than that – an on campus gig or more than a basic degree – its on you!

    Our goal in this country should be the same as Germany. That goal should be to increase the number of kids who are educated to 21st century standards necessary to be employed at a job that has sufficient salary to care for their family and be taxpayers themselves.

    We’ve perverted the entire concept by defining “affordable” to be 4-year soup-to-nuts.. on campus housing, and preferably a “brand” name with a significant sports program.

    “free subsidized tuition” for everyone should be ONLY the cost of Community College AND .. ONLY on a means-tested basis where that “help” reduces the higher your income much like the subsidies for Obamacare or the earned income credit or child tax credit work – i.e. they REDUCE the higher your income then go away completely at higher incomes.

    What we ought to be incentivizing is allowing people to go to college to become employable future taxpayers – not allowing Mom and Dad to buy that fancy SUV or pool in the backyard, or cruise trips, etc.

    • We’ve perverted the entire concept by defining “affordable” to be 4-year soup-to-nuts.. on campus housing, and preferably a “brand” name with a significant sports program.

      I would change one word — “affordable” into “entitled.”

      We’ve perverted the entire concept by defining “entitled” to be 4-year soup-to-nuts.. on campus housing, and preferably a “brand” name with a significant sports program.

  10. 1. Is there data that show how many people move to Virginia for the sole purpose of going to college here? Is there data that show how many who are educated in Virginia colleges stay in Virginia — especially those who moved here for the schooling?
    2. In inflation-corrected (to 2016$) dollars, financial aid to college students from the state of Virginia grew from $9M in 2003 to $1,100M in 2016. Almost all of the increase occurred during the McDonnell governorship and almost all of the increase was in undergraduate scholarships. (I am still trying to determine how much is given to the schools rather than the students.)
    3. Instead of giving a block of money to the colleges, aid for higher education should be given to the needy students only.

    • I am unaware of any data on how many people move to Virginia for the sole purpose of attending college here. I doubt the number would be large. The prospect of sending you kids to a Virginia university would be only one factor of many for deciding whether to move here. I would love to see someone conduct a survey and find out how highly that factor ranked.

      • We know that families with expensive to treat special needs children move to Fairfax County for the School’s services. Would families move to VA for their children to attend the flagship state universities at state rates? A study would indeed be interesting.

  11. The justification for subsidizing higher education, using the words of economists, is usually that it is a “public good” and/or that it has “positive externalities.” But both of these are questionable. Milton Friedman argued that most of the benefits accrue to the individual who receives the education (more opportunities, higher salaries, etc.), so it should not be subsidized. If I recall his views correctly, he though the subsidy (like any subsidy) would cause overconsumption (evidenced by high dropout rates), higher costs, and it would not be equitable (the point Larry often makes).

    Friedman separated the question of subsidy from the question of funding. He thought “equity” funding would be superior to student loans. In equity funding, a percentage of future income is used to pay back the financing group. Since it is not an entitlement like student loans, there would be more focus on determining if the student is a worth investment. It would also potentially bring more pressure on costs.

  12. You only have this dilemma if you don’t specify what is subsidized and what is not and for what income levels.

    the justification is – does society get MORE back than if it was not subsidized. Is it really an investment that brings returns to taxpayers or not?

    that’s why this should not be about higher salaries for some – and continued unemployment for others by subsidizing soup-to-nuts variants of “college” for higher income recipients instead of basic tuition targeted to those that could not afford even basic college – such that the “good” that society ends up with is substantial – i.e. more employed people, economically independent instead of dependent entitlement takers.

    Even if they need extra academic help – an economically secure worker no longer needs a lifetime of entitlements that far exceeds the money spent on remediation for college.

    That’s basically how “free” college “works” in places like Germany. It is NOT carte-blanche for any/all incomes to provide people who would go to college already with a “better experience” and/or a higher income.

    You are “entitled” to the basic version. If you want more than that – it’s on you and should be.

    When any/all incomes are subsidized open-ended, the Colleges KNOW THIS and set the price of their product in response to the fact that there WILL be more affluent customers with “free” money in their pockets… to buy more “stuff”. This is WHY – MOST – subsidies for people are mean-tested and limited.. not open-ended and not for any income level.

    “Free College” SHOULD BE – non-residential Community College that leads directly to a occupational certificate or guaranteed admission to a 4-year based based on the 2yr academic performance. If parents and their kids want more than that – fine – but it ought to be on THEIR dime, not taxpayers.

    Subsidizing all income levels for any/all types of College is economically dumb – and leads to equally foolish ideas that people who make 100K a year need “help” with “affordability” and that subsidizing lower-income truly needy is “diverting” money from the “middle class” and making college more expensive for them.

    That’s what we have right now – a perverted system that is premised on the idea that higher income people need “help” with “affordability” when just about every other entitlement that is provided is strictly means-tested – AND rationed to strict needs -not wants.

    Again this goes back to whether or not those you subsidize end up not only personally benefiting from it themselves but also end up benefiting other taxpayers by becoming employable and in becoming employable – pay taxes and don’t need entitlements.

  13. I still have no idea why people insist on “means testing” the parents of adult college students. Once you turn 18 you have reached your majority and you are an adult. You can join the Army and fight and perhaps die for your country. If you are convicted of a crime there will be no leniency as a youthful offender. Your parents have no legal obligation whatsoever to support you.

    There are four basic reasons why young adults apply to college. They want to “find themselves”, they want to study something interesting, they want to improve society after they graduate or they want to enhance their education in order to improve their economic potential in society.

    None of these motives justify the taxpayer subsidies of the young adults we call “college students”.

    I see no reason to fund a young adult trying to find himself or herself. They can get a job as a barista or in construction and go off in search of themselves.

    I see no reason to fund young adults who are tickling their intellectual curiosity by studying something they find interesting. If you want to get an anthropology degree – go for it! Just son’t ask hard working taxpayers to subsidize your flight of fancy.

    I would be willing to subsidize people who want to do good for society and people who are trying to enhance their economic potential. However, I would only provide those subsidies in arrears. These young adults would be loaned money to attend college. Upon graduation those loans would be slowly forgiven if the graduates ….

    1) Lived in Virginia
    2) Paid taxes in Virginia
    3) For the “do good for society” people – worked in defined roles in Virginia that the state determined were under-staffed (e.g. nurses in southwest Virginia).

    There could be different terms of loan forgiveness – 5 years for a person teaching in an “at risk” area of inner city Richmond, 10 years for a person teaching at Langley High School in McLean, VA.

    Bottom line – I don’t think taxpayers should subsidize potential, I think they should subsidize results.

    As for the “no frills” college – absolutely necessary. State owned and well funded for academics but with strict prohibitions against non-academic extracurriculars like athletics and social clubs.

    • From a purely philosophical perspective, I find your reasoning sound.

    • DJ – if you are living at home as a dependent… and the money you are spending for college comes from your parents… compared to kids whose parents have no resources and are unable to help the kids with college…

      I totally agree with your “sweat equity” loan forgiveness… and sweat equity can also help you on the front end.. back in the day.. “working your way through college” was a “thing”…

  14. Today’s system of higher education seems to have lost its mission.

    That mission requires that each institution attract and empower, and demand that, its best professors teach their students directly. And do so to the highest standards possible. And enforce those same high standards on the learning of their students.

    This mission entails terrible hard, demanding, and often thankless work. On the part to the professor. And on the part of the student. Many (students and professors, will fail to meet these standards, despite best efforts. Many will fail by reason of their refusal or inability to engage, and do what they need to do to succeed. They are in the wrong place, and need to find the right place somewhere else, a different place that meets their talents and energy, and interests.

    So those who fail, after given reasonable opportunity to succeed, need to and deserve “to leave” so they can find a suitable place for themselves, and be replaced by other people who deserve the place these failures now uselessly occupy.

    This is the way teaching institutions should run. It is the way many colleges and universities use to be run. Today, however, most of America’s colleges and universities are failing miserably to meet these standards and fulfill their mission. Indeed they have willfully abdicated it. The reasons are many. Far too much money, and the selfish quest for ever more money, and the misspending to that money, is one reason.

    Until we get serious about the real problems in higher education nothing will change until the system collapses, and likely too the country along with it.

    • I also see serious flaws in this Brooking’s Institution study.

      It appears to blithely assume that most of these kids at these “selective institutions” are getting a decent education. The vast majority of such students at not. See Academically Adrift whose conclusions the study seemingly ignores altogether.

      Secondly, this Brooking study seems to ignore the profound waste and too often twisted results that goes on in, and are the results of ever larger segments of today’s college and university research, particularly research funded by the federal government. And how that waste adversely impacts the cost, quality, and benefits that would otherwise be achieved by high quality higher education.

      In short the study gives far more credit than is due to todays higher education. And fails to address or recognize the real underlying problems within the system.

  15. Subsidies distort markets and can cause unproductive decision making. The mortgage interest deduction is in effect a subsidy for the housing industry and those wealthy enough to be able to purchase houses. (It greatly exceeds rental subsidies by the way.) I know this thing is close to a third rail untouchable item, but it is difficult to argue that it hasn’t distorted markets causing periodic issues or that it is not equitable to those who have to rent but cannot qualify for housing assistance (which is a large part of the population). People already have an incentive to purchase homes (they need housing and they can benefit from price increases). It doesn’t need this subsidy. (That is not to say it not expedient from a political perspective.)

    I think the incentive already exists, at an individual level, for “college ready” individuals to attend college. They will have more opportunities and lifelong earning. Subsidizing them simply drives up the overall costs, which is what we are seeing today. Jim points out that this is hard for people like him to give up because they pay substantial taxes, and this is why the system exists as it does, but it doesn’t really make sense in my view from an economic perspective.

    Subsidizing those who are not “college ready” results in colleges (which can be quite expensive) taking unqualified students and high dropout and default rates. There are external implications here, though (as Larry points out), because these people tend not to contribute as much in taxes and take more in entitlements. The focus here needs to be on remediating in a more cost effective way.

    This is a general statement. There may be fields where subsidies are needed due to other economic factors (which themselves may be due to a distortion), like teaching, rural health care, etc.

    Jim raised one last point, which was would Virginia lose its appeal against say North Carolina if it did not provide a blanket subsidy for its state colleges and universities. This is difficult to answer, but I note that there is already a significant delta. North Carolina provides a much larger subsidy per student than Virginia does, and does so with a slightly lower marginal tax rate.

    • “North Carolina provides a much larger subsidy per student than Virginia does, and does so with a slightly lower marginal tax rate.”

      Last week I attended a meeting with the Fairfax County Tax Assessors Office. In addition to learning quite a bit of state real estate tax laws and the County’s operations, we were informed that, for every dollar that is taxed by the Commonwealth or its subdivisions, 90 cents is not taxed. This covers income, sales and property taxes, according to the speaker. The current Director of Tax Administration used to work for the state Department of Taxation.

      Most of us were flabbergasted. Are the loopholes eating the tax law? Jim, you might wish to post this one separately.

    • just FYI – the biggest tax deduction – by far at over 200 billion is being able to use pre-tax money for health insurance…then next… retirement pensions…

      but don’t forget also there are tax credits for tuition and tax deductions for college loans..

  16. re: subsidies and means testing.

    these concepts are embodied all throughout the tax code for credits and deductions as well as most entitlements – Medicare… Medicaid…. TANF, food stamps… free & reduced lunches.. section 8 housing , etc

    It’s not a foreign concept.. and it’s certainly not used to help the middle class “afford” .. “better” stuff….

    What it provides is the minimum… usually on a means-tested basis ..IF you qualify… by meeting low-income thresholds.

    it’s so you can afford the minimum – the basics …
    tax credits like the Child Tax credit or earned income credit are all means-tested If you make over a certain amount – you do not qualify at all – but even under the threshold – it’s a sliding scale of benefit.

    Even for the mortgage deduction – there are caps on that deduction based on income… if your income exceeds the cap levels – you lose that deduction.

    There are some notable exceptions the most notable being money spent on health insurance – no matter how much is spent – it is included from being taxed… and the theory is so it can be “affordable”.. and not surprising is that the costs of health insurance also keep escalating because medical providers will set their prices according to how much the insurance will cover… and the game is to learn the “codes” so that when you come in to be treated.. you receive treatment for all the codes that the insurance company will pay for and.. none that they won’t.

    Higher Ed has evolved to similar strategies… albeit in a slightly different way but the bottom line is that since they know that the State is providing money for “affordability” .. with specifying what it is or setting enforceable standards – they decide what is “affordable” and so what is “affordable” to Higher Ed is what brings in the most dollars – just like in health care insurance reimbursements.

    The “solution” to this is not to demand more “transparency”.. which is really more information about costs and how many administrators, etc… and then to assert that the higher costs are due to more administrators or other expensive staff – basically telling colleges how they ought to be doing business.. that whole exercise is futile…. nor does the blame game work. it just tears down the institutions out of frustration with the costs.

    The way to fix this is to change the funding from pots of money in exchange for “affordability”… that method of funding used for health care, for instance ..would makes things even worse.

    You need to convert state funding for higher ed to a per student model … and it needs to be “portable” so the student can use it at any College…

    How much the student gets should be means-tested… if he is still a dependent in a family… or if he/she is on their own then their own income.

    Then students will “shop” for the best deal … using online tools like the College Scorecard – https://collegescorecard.ed.gov/ or other rating organizations.

    Funding should be enough to completely pay for 2 years of Community College provided a occupational certificate is achieved OR acceptance into a 4 year college…

    There are some exceptions – the most notable is the amount of money spent on health insurance.. at this point – it’s all excluded from being taxed… any amount – which indeed makes it more “affordable” for the middle class… to the tune of several thousands dollars per tax year provided it is spent on employer-provided .. if you buy your own… because your employer does not offer it -you get no such deduction… The “Cadillac Tax” was an attempt to cap the benefit.. and tax as regular income any amount over the cap. You could still spend it on health insurance.. but the part over the cap would be taxed first.

    At this point – we treat higher education like we do employer-provided healthcare… to make it more “affordable”…

    Ironically – Obamacare is done like means-tested tax deductions/credits and entitlements.

    If you make over 400% of poverty level -you get no subsidy…

    and if you make less than 100% of poverty- you qualify for Medicaid.

    even then – there are means-tests even for Medicaid.. and it usually does not pay for basic things like dental …

    Something along these lines will succeed … continuing to ding the Colleges on their costs – won’t…

  17. Larry,

    I agree with some of your direction, but I NEVER understand your aversion to transparency. It makes no sense from a governance or economics standpoint. One of the reasons the higher education and healthcare markets do not function well in the U.S. from a cost perspective is all of the information is with the provider, and their costs are extraordinarily difficult to understand or analyze from the buyers perspective. It is really a black box.

    In a single payer system, like UK healthcare, it is not as important for the patient to understand costs since they are not paying directly. The NHS and its panels are analyzing cost/benefit and they have good information. But in markets where the buyer is an individual, “asymmetrical” information is a killer and the market will go awry as healthcare and higher education have in the U.S.

    This is one reason I went on (perhaps too much) on cost shifting in higher education is that it is essentially hidden from people who are paying for undergraduate education. Billions and billions are redirected from undergraduate education to research, administration, and graduate education (you can throw athletics in here as well for 98% of all institutions). Note that this relates directly to what you want to do. You want to have a minimum (bare bones) baseline for higher education. You’d have to strip out all that extraneous stuff to define the baseline, and you need data to do it.

    I fundamentally agree on a couple of points: 1) funding, if provided, should attach to the individual rather than the institution [this is similar to UK funding model] and 2) subsidies should not be indiscriminately provided – there should be means and other tests.

    I agree with Don that moving to a model where the funding is repaid by work in the public interest or a percentage of future income should be explored.

  18. Izzo – where did you get that idea? I totally support transparency… in fact I think the govt should REQUIRE IT!

    ” One of the reasons the higher education and healthcare markets do not function well in the U.S. from a cost perspective is all of the information is with the provider, and their costs are extraordinarily difficult to understand or analyze from the buyers perspective. It is really a black box. ”

    that’s the way the “free market” … “works”.. guy… you have 170 countries with free market health care…. does “transparency” help it?

    “Transparency” is not going to “help” a product that uses adverse selection to reduce it’s liabilities… and instead focus on only customers who they can make money on… how does “transparency” help that?

    re: ” In a single payer system, like UK healthcare, it is not as important for the patient to understand costs since they are not paying directly.”

    and they pay less than we do…. and we pay MORE than every other country on the planet… even though they do not have transparency either..

    the issue with college tuition is not “transparency”… the people who say they want “transparency” want more and more … to the details of who is hired and for what… so that info can then be used to attack the institution – as a proxy for their unhappiness with costs… People attacking institutions and tearing them down is not going to make them better

    Tell me what you want to do from a POLICY point of View… do you want the govt to control prices -?? Do you want them stipulating how much tuition should cost? People have choices… especially those who are relatively affluent .. but what they want is essentially subsidies so they can free up their own financial resources for other things… instead of making choices about what they want – or not….. like they do with houses and cars and health insurance.. retirement. Do you want more “transparency” with respect to these other things they buy so they can then threaten them also with govt involvement if the prices get too high?

    “transparency” to the point where people can look into an institution and do things like question how many cafeteria workers they have or English professors or salaries so they can then use that info to attack the institutions and threaten more govt involvement and control is not “transparency” that people would use to make choices… it’s more a political agenda to involve people directly into how the institution should be run – from people who don’t have a clue about the actual running of the institution.. they think they can with “transparency” do it better.. that somehow the people currently running it are not fit to do so… and need to be replaced with others who have “transparency”…

    excuse the grammar,etc… I was a service brat and moved around a lot and did miss a fair amount of education in moving because ……. back in the day- there were no standards that applied across schools and school systems… and if you did not stay in the same school – there was no guarantee when you moved that you stayed “on track”… and now my excuse is I’m lazy …. if I was going to write a blog post. I’d spend more time and effort – even have someone else review and edit….

    • Larry, would you please stop insulting our intelligence by saying things like, “that’s the way the free market works,” as if the U.S. health care sector were anything remotely resembling a free market. It is the most highly subsidized/cross-subsidized/regulated/government run industry in the entire country. The only way to get less “free market” is to complete the government takeover and establish a national health system.

      • I think you misunderstand Jim.. I say the free market is in the 170 developing and 3rd word countries – much more so than in the 35 OECD countries.. and as such – SHOULD perform more like what you guys claim.

        Ya’ll blather on and on about the free market.. in health care and 7/8 of the world is essentially small govt and and truly a free market in a lot of areas including health care.

        so what about it?? what’s the excuse? and yes..this is about “intelligence” also but I won’t insult you…

  19. Pingback: Should We Subsidize Rural Economies? - Bacon's Rebellion

  20. To make crystal clear.

    The ONLY countries on the plane earth that have the highest rates of literacy and the highest levels of life expectancy are where the govt is heavily involved in education and health care – and YES .. it’s NOT a free-market!

    The countries that DO have free-markets and minimal govt involvement are ALL developing world and third world… unless someone can show some countries where the “free-market” HAS produced an economy where there is a high rate of literacy and life expectancy.

    Why the people who “believe” this is possible continue to assert that it is – in the face of the totally opposite facts and realities that it would “work” when in fact… there are no such countries out of the 200+ on the planet… demonstrates a faith.. a “belief” that disregards .. realities…

    They’ll cite that the US … “used to be that way”.. Really? Go back to that era and look at our own literacy rates and life expectancy rates.. and they’ll look remarkable like development world countries look like today.

    So… no… the unbridled free market is NOT present in the OECD countries when it comes to education and health care – and the results compared to other countries who DO have “more’ free market and “less” govt – ought to be clear.. unambiguous… and undeniable…

    The difference between the US and other OECD countries is pretty simple. – they control costs and we do not… it’s NOT the free-market in the other OECD countries that control costs – it is, in fact, the GOVT!

    and yes they DO ration … we do too… everyone does that – including the free market … you cannot get all you want for one low price!!! it just don’t work that way! What you get is the MINIMUM … and if you want “more” you are more than free to go get it – and pay for it… yes.. in a “free market”… you are free to go “shop” for the best price and value for the things the govt will not pay for!

    And you get as much “transparency” of price as you get from WalMart selling you green beans or State Farm , auto insurance…

    The huge irony here is the folks blathering about the “better” the Free market will do than Govt.. then they turn around and want the Govt to require transparency from that “free market”.

    what the…. ??? I thought govt was the problem because it “interfered” with that “free market”.

    🙂

    • Larry,

      First of all, this thread is about whether public colleges should be subsidized.
      We’ve gotten way off topic on that. Oddly enough, I can interpret some things you have written as a NO on this. You have said funding should go to the individual rather than the institution (the UK system is similar to this). Subsidies that go directly to public colleges can be argued to be a subsidy of the upper middle class.

      But beyond that, I think you have everything mixed up on issues and terminology. Separate them out:

      * Is the U.S. healthcare system “free market”? NO. About 50% of funding comes from the government and it ranges from single payer to private insurance (although with tax incentives) to out of pocket. (Even in most centralized systems no more than about 70% comes from the government. Some part is private). The government is involved in the VA, Medicare, Medicaid, employer mandates, tax incentives, restrictions on bargaining (the prescription drug act of 2003) etc., etc. I think your point is really that the U.S. system is grossly inefficient. You’ll get no disagreement with me there, and I actually favor single payer (although, given the influence of special interests, I think the U.S. may struggle to control costs regardless of the system used).
      *Is the education system in the U.S. “free market”? NO. 90% of K-12 students go to state supported schools. Nearly 75% of higher education students are enrolled at public colleges and universities. Beyond that, the government is involved heavily in funding in grants, loan guarantees, R&D, etc.
      * Are the LEAST successful countries relatively speaking “free market” as you said? NO. There are studies on this. Countries with government places greater restriction on personal choice, voluntary exchange, and open markets are are typically less prosperous and have lower standards of living. Countries with more economic freedom have longer life expectancy, and higher average incomes. (See the Economic Freedom of the World Annual Report). Note that this does not at all mean the government has no role.

      One can support the goal of having free markets and having government play a role in ensuring transparency, since that is a condition for market efficiency. The stock market is an example. So I really don’t understand your comments at all there.

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