By Richard Vedder
Virtually every state university in the nation charges students residing within the state lower tuition than residents of other states or countries. The argument is that the state government subsidizes the university for the benefit of resident students, and that those subsidies should not be used to pay for freeloaders from outside the state. The economic and moral justification for a two tier tuition structure is reasonably sound, although I suspect in reality this practice tends to reduce somewhat interstate academic mobility, which is not a good thing.
As Michael LaFaive of the Mackinac Center in Midland, Michigan, pointed out to me in a recent email, however, now some states are thinking more about what happens to the students after they graduate --and whether there should be incentives for students to reside in-state (or, arguably, disincentives for students who move out of state). The carrot approach might be to have the state pay off some student loans for students agreeing to stay in-state after graduation, or perhaps give them a special income tax credit that effectively lowers their taxes. The stick approach would be to make all students sign a contract upon entering college that states that there will be deferred tuition charges (an amount that is less than or equal to the present value of the differential between in and out of state tuition rates) that students are liable to pay over X number of years after graduation.
As with the traditional geographic-based tuition differentials already existing, there are arguments both for and against these proposals. It can be argued that state subsides are human capital investments in college students, and if the investment vanishes (moves away), the state cannot earn a return on its investment. A migration "tax" or "subsidy" thus is a way of mitigating that phenomenon.
The arguments against such policies are also strong --and arguably even more compelling. Such schemes frustrate and distort the geogrpahic migration of people that is vital to the nation's dynamic economic change over time. It violates the spirit, if not the letter, of the interstate commerce clause of the U.S. Constitution. Moreover, it raises troubling issues relating to horizontal equity --treating people of similar circumstances differently for tax (or subsidy) purposes.
The problems of states like Michigan and my own Ohio are far more fundamental. Young people want to leave Michigan because of limited economic opportunities there. Globalization, unionization, perhaps high or perverse taxes, etc., all may contribute to the unwillingness of businesses to invest in the industrial Midwest, which, in turn, promotes migration of labor resources. The appropriate public policies to deal with these issues are probably not to distort the price and reward mechanism determined by markets that reflect human economic behavior.
At the same time, taxpayers do not like being ripped off. In Ohio, graduate students from, say, China, are subsidized the same amount as those from Ohio --even though few stay in the state after graduation. Many are outraged by the expensive form of "foreign aid." The state (and perhaps others as well) has already had some modest programs that force Ohio physicians to pay back medical school tuition fees if they practice in another state. It might be worth while to study the impact of these type programs on migration and employment opportunities before expanding the concept to huge numbers of undergraduates.