Wednesday, June 17, 2009

Commandment #6: Reduce "third party" payments to universities

Commandment #6: Reduce "third party" payments to universities --from the federal and state governments and from private contributors (by limiting tax exemptions except for pure academic purposes)

by Andrew Gillen

It is something of a mystery to us why donations for non-academic and non-research purposes are tax deductible. A least those activities have a plausible claim to have positive externalities. But why are we encouraging luxury sky boxes and the construction of dorms that cost more than the median home in this country by giving them tax breaks?

More importantly, third party payments in general are not helping. Currently, most states choose to give their public universities large lump sum grants in the form of state appropriations. See figure 11 of this Delta Cost Project report for an idea of the large sums we are talking about here. This is a bad idea that should be stopped. As my recent paper showed, state appropriations are the least effective method of providing financial aid.

To begin with, they are completely ineffective in keeping tuition for everyone low. Every $1,000 in state appropriations lowers tuition by between $100 and $150. Moreover, by definition they are not well targeted towards low income students. Since state taxes are generally less progressive than federal taxes, and the rich are more likely to attend college, in a sense, you’re taxing the poor to give a break to the rich.

State appropriations are so ineffective because higher education is involved in an arms race based on status or prestige. Universities will never have enough money. After some bare minimum necessary to function is met, they are essentially competing to be the best. Since being the best is expensive, another way of saying this is that they are competing to spend the most money. There is no end to this race, and we shouldn’t be playing it with taxpayer money. (See these papers for a great introduction to this argument).

These third party payments should be eliminated, and the money given directly to students based on means testing, just like the Pell grant. This will not only encourage equality of opportunity by ensuring that scarce financial aid funding goes to those who need it, but will also drastically reduce the ability of schools to play the status game with our money.


capeman said...

"Every $1,000 in state appropriations lowers tuition by between $100 and $150"

This is the most idiotic thing I've read all week, and this had been a very entertaining week!

Here where I work, in-state tuition is about $6,000.

Now, I'll tell you, we are efficient, but not that efficient, we spend more than $6,000 per year per undergraduate, even after you take out all the stuff that isn't spent on their education.

Without the state subsidy, there is no way tuition would rise just a few hundred dollars.

Just look what private colleges spend on students, and you'll begin to get the idea.

Cowboy said...

Andrew - you seem to have a bone to pick with the “rich" this week. Eliminate the last two paragraphs of your blog and your blog reads like social engineering and a case for alumni to say the hell with their alma mater.

I believe OU is constructing an addition to the Engineering School. OU built the Margaret M. Walter Hall, The new Baker Center, The Charles J. Ping Student Recreation Center, and new dormitories for the growing student population (capacity build). And I could be wrong, but I don't recall the Bentley Center (at least as it is today) and the Bentley Annex or the Life Science Research Facility being there when I went to school.

So I do not think it is all bad. You can’t look at everything with “the gun is half empty” view. But, for advocates and people or groups with an agenda, I understand that is part of the game. And I don’t believe it is fair to only look at costs without looking at the benefit – or ROI. To only look at the liability side of the balance sheet is an accountant’s job. One must address both sides of the equation.

It is something of a mystery to us why donations for non-academic and non-research purposes are tax deductible.” – It shouldn’t be.

Until the IRS changes the tax status of not-for-profit schools, alumni will donate money if they choose, and for whatever purpose they choose – whether it is driven by ego or benevolence. But after all, most think donors are only giving to get a tax deduction – which may be the case and thus you have donor dollars going to fund what people see as non-academic. And if donations become non-deductible, what do you think would happen to donations, tuition, room & board, and other fees??

“Hi, I’m with the government and I’m here to help you.”
Under the current administration, if the government is involved in the business of lending, and thus benefitting schools, don’t think that the current administration will not want to micro-manage higher ed. However, that remains to be seen.

"Since state taxes are generally less progressive than federal taxes, and the rich are more likely to attend college, in a sense, you’re taxing the poor to give a break to the rich." (I have to assume you are referring to “income tax”.)


What percentage of “poor” dollars goes toward funding the operations of public schools versus "rich" dollars? And what you are implying is that the higher taxes go, the more the "rich" benefit (or are receiving increasingly better “breaks” as taxes increase.)

I think Luke is on a hot trail – I think one of the best ways to increase competition and reduce the cost of attending a college or university is to nuke the current accreditation process and rebuild it.

Keep up the good fight Andrew.