State Fiscal Constraints and Higher Education Spending

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TPC Discussion Paper No. 11

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The Urban-Brookings Tax Policy Center

The Tax Policy Center (TPC) aims to clarify and analyze the nation's tax policy choices by providing timely and accessible facts, analyses, and commentary to policymakers, journalists, citizens and researchers. TPC's nationally recognized experts in tax, budget and social policy carry out an integrated program of research and communication on four overarching issues: fair, simple and efficient taxation; long-term implications of tax policy choices; social policy in the tax code; and state tax issues.

A joint venture of the Urban Institute and the Brookings Institution, the TPC receives support from a generous consortium of funders, including the Ford Foundation, the Annie E. Casey Foundation, and the George Gund Foundation.

Views expressed do not necessarily reflect those of the Urban Institute, the Brookings Institution, their boards of trustees, or their funders.

Contents

Introduction

I. State Support for Higher Education

II. Explaining the Trends
Background on state expenditures
Econometric analysis

III. Business Cycle
Cyclicality of higher education relative to other budget items

IV. Quality Concerns

V. Looking to the Future

References

Introduction

State governments have historically taken the lead in financing higher education. In fiscal year 2002, state governments spent approximately $63 billion on subsidies to higher education institutions. In contrast, the federal government granted approximately $9 billion in aid to low-income students, provided $6 billion in Hope and Lifelong Learning tax credits, and guaranteed approximately $38 billion in loans. Yet over the past twenty years, state support for higher education has gradually waned, with the share of higher education expenditures subsidized by state appropriations declining.

One result of declining state support has been the widely publicized rise in tuition at public institutions. Media reports have documented the most recent wave of tuition increases at public universities and reductions in student aid across the nation as state governments struggle to close projected budget deficits. In 16 states, for example, tuition for the 2002-2003 academic year increased by more than 10 percent at some or all state colleges and universities, relative to the 2001-2002 academic year.¹

A second result, which has been less well recognized, is a widening gap in expenditures per student and average faculty salaries at public and private institutions. Since roughly three-quarters of postsecondary students enroll in public institutions, it is important to understand the reasons for the shifting state priorities. In this paper, we use state-level data on expenditures since 1977 to study the forces underlying the shift in state financing.

More specifically, we examine interactions between state appropriations for higher education, other state budget items (especially Medicaid), and the business cycle. The first section documents the substantial decline in state support for higher education over the past two decades. The second section examines the causes of that decline, focusing particularly on expansions in the Medicaid program and the implications for state higher education spending.

The third section explores the effects of the business cycle on higher education subsidies. The fourth section briefly examines the impact of declines in state appropriations for higher education on the relative quality of public higher education institutions, which is discussed in more detail in a forthcoming companion paper.

Note: This report is available in its entirety in the Portable Document Format (PDF).

About the Authors

Thomas J. Kane is Professor of Policy Studies and Economics at the University of California- Los Angeles and a nonresident senior fellow in Economic Studies at the Brookings Institution. Peter R. Orszag is the Joseph A. Pechman Senior Fellow at the Brookings Institution and codirector of the Urban-Brookings Tax Policy Center. David L. Gunter is a research assistant in economic studies at the Brookings Institution.

Acknowledgments

The authors thank Matthew Hall and Jennifer Derstine for assistance on this paper; Robert Cumby, William Gale, Leighton Ku, and Iris Lav for comments and helpful discussions; Diane Whitmore for help in obtaining some of the data; Jim Hines for some of the state fiscal data used in this paper; and seminar participants at Brookings for suggestions. The authors thank a consortium of funders organized by Kenny Jastrow for their generous support of this research. Any errors or opinions are the authors' and should not be taken to represent the views of the funders, officers, trustees, or staff of any of the institutions with which they are affiliated.

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