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.