Bad Idea du Jour: Mandating Community Service for a Tax Credit

by Daniel L. Bennett

Our good friend from ACTA, Anne Neal, has an excellent OpEd in the Washington Examiner arguing that Congress should not mandate community service as a requisite for receiving an college tax credit.

It is most emphatically not about having the government dictate how students spend their time and live their lives.

There is already overwhelming evidence that colleges and universities are failing to focus on their core mission of undergraduate education. They certainly don't need to be further distracted by community service requirements.

Rather than mandating community service, the best way to help college students get outside themselves is to have them delve into great figures of history, wrap their minds around the best works of literature, and grapple with big ideas that have changed the world.

We certainly would balk if Congress decided to give families a tax credit for students to participate in sports or act in local theaters --- wholesome activities, yes, but ones which have little to do with an institution's main educational purpose. For the same reason, we should oppose any efforts by Congress to mandate community service -- something that students, by any definition, should voluntarily choose -- particularly when the available evidence suggests that students desperately need to be focused on learning, not something else.

In addition to Neal's arguments, I'd like to add that linking the credit to community service is a bad idea because of potential unintended consequences:

1)There are already a high percentage of college students who volunteer in their communities, with charities often already having waiting lists that require students and groups to sign up well in advance to volunteer;

2) A service-for-credit incentive theoretically is not much different than the federal work study program, except that it essentially pays students, who may already perform community service voluntarily, a much higher wage (up to $40 and hour);

3) It will dilute the value of volunteering, as persons who currently perform community service out of the goodness of their hearts and are motivated to do a good job will be joined by many who are "only in it for the money"; and

4) The Obama Administration may think that it is creating an incentive to volunteer and that once young people start doing community service, they will continue to do so; however, the incentive could work in reverse: once people get used to the idea that there is something of monetary value to be gained from doing community service, they may never volunteer again without something in return;

What's Chuck Grassley Up To Now? Identifying Illegal Tax Arbitrage

by Daniel L. Bennett

Iowa Senator Charles Grassley is perhaps the biggest critic of higher education in Congress, seeking out scandals and improprieties in the Ivory Tower in an effort to effect change. He has thus far failed to achieve any great and lasting reforms, but I give him an 'A' for effort and his willingness to travel the road often not taken - battling the establishment. So what's Chuck up to these days? His latest criticism of higher education is the use of tax-exempt bonds by universities for (indirect) tax arbitrage. In other words, Grassley believes that universities are taking advantage of their non-profit status to raise cheap, subsidized capital that they use to bankroll higher risk investments and capital expenditures. So what is the problem you might ask? Tax arbitrage is outright illegal.

Grassley asked the non-partisan Congressional Budget Office to assess the extent to which tax arbitrage is occurring among universities. The CBO report indicates that:

the law as currently implemented allows many colleges and universities to use tax-exempt debt to finance investments in operating assets (buildings and equipment) while, at the same time, they hold investment assets that earn a higher return. (Investment assets are publicly traded and privately held securities, as well as land or buildings held for investment purposes.) To the extent that colleges and universities can earn untaxed returns on investments that are higher than the interest they pay on tax-exempt debt, they are benefiting from a form of “indirect” tax arbitrage.

the cost of allowing institutions of higher learning to borrow using such debt—measured in terms of the revenues that could have been collected if those institutions had borrowed using taxable debt—will be about $5.5 billion in 2010

Using data from information returns filed with the Internal Revenue Service by institutions of higher learning and by issuers of tax-exempt debt, CBO developed measures of tax arbitrage under a broader definition of the term that encompasses both direct and indirect tax arbitrage. Under one such definition, nearly all of the tax-exempt bonds that 251 colleges and universities issued in 2003 would be classified as earning profits from tax arbitrage. If some investment assets were set aside in a reserve, which would be excluded from the arbitrage measure under an alternative expanded definition, the amount of debt earning returns from arbitrage would be lower; even so, about 75 percent of bonds issued in 2003 would still be classified as earning arbitrage profits under that expanded definition.

"On the one hand, if colleges and universities use tax-exempt financing for projects that they would complete even without the subsidy, resources are just reallocated from taxpayers to the schools with no additional social benefit," the report says. "On the other hand, if the subsidy finances capital projects that would not otherwise have been undertaken and that create a social benefit in addition to the institution, it could improve the nation's welfare."

Additional coverage is available here, here and here.

Is the Business Model of Higher Ed Broken?

by Daniel L. Bennett

Is the Business Model of Higher Ed Broken? That was the supposed resolution at last night's the Miller Center for Public Affairs national debate that featured presidents from 4 different sectors. Somewhat surprisingly, Gail O. Mellow, president of LaGuardia Community College, and William E. Kirwan, chancellor of the University System of Maryland, argued in favor of the proposition, while Richard C. Levin, president of Yale University, and Daniel M. Hamburger, president and chief executive of DeVry Inc., argued against it.

After listening to the debate, I realize that the reason I was somewhat surprised about the sides taken was that the debate didn't focus much on the business operations of colleges and universities, but rather the taxpayer subsidization of them. Presidents Kirwan and Mellow decried the current system because it isn't subsidizing their schools to an extent that keeps up with their spending spree. Ms. Mellow appeared particularly upset about the fact that she has to compete with enterprises such as Mr. Hamburger's Devry for students and the federal aid dollars that follow them, making it obvious of her disdain for the sector as a whole by repeatedly stating that it reaps huge profits for its shareholders and implying that her school would plough back into the school for the supposed benefit of students. This concept is exactly what got us into this mess anyhow (see papers from Bob Martin and my colleague, Andrew Gillen).

On the other side of the debate, Presidents Levin and Hamburger seemed content with the current system, espousing enthusiasm for the diversity of and competition among institutions in the US. Mr. Levin, of course, doesn't really have to worry about public subsidization and competition much as he could fill his limited number of seats every year even if he quadrupled tuition at Yale. Mr. Hamburger's schools are focused on controlling costs and creating wealth, and as such, he has the private capitalization to pursue capacity growth and compete with the public sector institutions for students and the student aid subsidies that follow them. Mr. Hamburger correctly noted that his schools have been successful at meeting the needs of the market that have been unmet by a public sector (i.e. community colleges) that doesn't have the resources to expand capacity, citing the long wait lists for nursing programs at public sector institutions as a great example.

In my own opinion, in the context of the debate, yes the business model is broken and college has become increasingly unaffordable for many American families. The problem is not however that we are not subsidizing higher education enough with taxpayer money (despite that being one of the pretexts of the debate), but rather that we are subsidizing it too much. The state subsidy model worked pretty well in keeping costs under control until the federal government came onto the scene with massive outlays for student aid that has been a significant driver of the rapid expansion of campuses and explosion in costs. None of the participants touched on this topic, but rather stuck to the normal rhetoric of college education bestowing great economic returns and other supposed spillover effects, and that the only way to remain globally competitive is by having the highest proportion of college graduates in the world.

The Chronicle has additional coverage of the event.

Still Subsidizing Inefficiency

by Daniel L. Bennett

As my colleague Andrew Gillen has stated publicly in the past, eliminating guaranteed subsidies paid to student lending companies is in itself, progress. To be more precise, Gillen noted that:

FFEL should be taken out back and killed with a shovel

In general, subsidies add to costs and promote inefficiency. Education Secretary Arne Duncan seems to have realized that in promoting the SAFRA bill that killed off the FFEL program (CCAP's opposition to that nationalizing of the entire student loan market aside). However, Mr. Duncan's misunderstanding of markets is apparent in the remarks he made to the Huffington Post heralding the new bill:

This is a $60 billion investment to make higher ed more accessible and more affordable

Folks who don't contain costs are going to lose market share, competitive advantage

What the bill does, rather than reward efficiency and promote competition, is exactly the opposite. It further subsidizes inefficiency and deters competition by making more third party money available for colleges to gobble up, while implementing neither sticks nor carrots to influence cost cutting and efficiency. Sure, the slight increase in Pell Grants may help some students afford to attend to a community college, or perhaps a public 4-year if willing to borrow money from big brother.

But how in any way is this promoting competition? If anything, it is deterring it, as well as consumer choice, by directing more students into a relatively fixed number of publicly subsidized institutions that don't have the capacity to expand and already have the artificial competitive advantage of receiving direct institutional subsidies from their states. As much of CCAP's analysis and research has indicated, these subsidies have in no way, shape or form promoted efficiency or cost cutting, as the institutions have used these resources for things other than education, often adding to costs as opposed to reducing, or even limiting them. Why would anyone think that further feeding the insatiable appetites of these inefficient institutions would lead to cost cutting and competition, when we have a history of experience revealing the opposite effect?

As we've said in the past, it would be much more efficient to subsidize students directly and give them a choice in where to attend, rather than limiting their choice to a limited number of public schools. This would be a much better way to promote fair competition, access and affordability, if we as a society choose to subsidize college education at all. But then again, I'm not sure that competition and efficiency are among the Administration's real agenda items, as the bill will also pump more than $2.55 billion into

bolstering the resources of community colleges, historically black colleges and universities and minority-serving institutions

I'm assuming that none of this funding is being made available to the career colleges, which provide educational opportunities to a large share of minority students, often with better outcomes. This is the antithesis of competition, with the Administration obviously favoring one segment of institutions over another.

Let's Subsidize Students, Rather than Institutions

by Daniel L. Bennett

Public colleges like to go around telling sympathetic listeners (especially legislators) that they are forced to jack up tuition charges because state subsidies are declining. Colleges and their sympathizers espouse the confusing rhetoric that the percentage of their revenues coming from state subsidies has declined, while failing to mention the reason that subsidies have declined as a percentage of their budget: because their rate of SPENDING has outpaced the rest of the economy over the past several decades. This is a much different story than saying, as Neal McCluskey and others have demonstrated: that public subsidies have generally been constant when adjusted for inflation and enrollment over the past 25 years.

The public has generally lived up to its bargain of subsidizing colleges in order to keep tuition affordable so that low and middle income people can get a postsecondary education. It is the colleges who have failed to live up to their end of the deal by engaging in a spending spree and empire expansion, mostly with taxpayer money, that has caused a surge in tuition. When organizations or people in the private world demonstrate an inability to manage their finances in a responsible manner, creditors cut them off. For those who sympathize with providing affordable access to college for the less-fortunate Americans, there is a solution that avoids turning off the spigot altogether: Stop subsidizing the institutions directly and instead subsidize the STUDENTS in the form of a voucher, grant or scholarship (whatever you want to call it) that follows the student to whatever college they choose to attend, regardless of ownership status.

That's right, empower students and their families to vote with their feet where the subsidies should be directed, rather than do so through the political process. This is akin to giving low income families food stamps to buy what they want rather than giving them bags of rice and beans. Schools eager to attract recipient students would then be much more likely to allocate their resources to areas important to students. The end result would likely be greater diversity in institutional models, with one extreme being a low cost online provider, the other the conglomerate country-club campus, and many variations in between.

We currently have institutional diversity to some extent, but the majority of public colleges are moving in the direction of the elite county club campus, making it less and less affordable for lower income students to afford to attend. So let's nudge them along to becoming fully privatized and elitist by cutting off their institutional subsidies and instead empower the students with the subsidies. My guess is that more institutions will move in the opposite direction, towards more value-based models focused on education. This would at least give students the choice in how they spend the taxpayer's money, and provide a glimmer of hope that it will be used more effectively. Doing so would also improve policymakers' ability to target funds to specific objectives, such as improving access to low income students or adult learners.

Brain Drain Aversion

by Daniel L. Bennett

Daniel Luzer has an interesting post over at the College Guide blog discussing a proposal in Michigan to convert its merit-based Promise scholarship into a tax credit for graduates who remain in-state to work after graduation. The goal of either program:

to counteract “brain drain” and try to keep bright, hard-working students in the state after graduation.

While it is reasonable that the state, which invests in higher education (at least partially) to improve its economy, would want to retain the graduates that it subsidized in order to get some benefit from its investment (i.e. to expand its tax base), such a policy of brain drain aversion through incentives is misguided. The reason is simple: college graduates (so-called skilled labor) follow the jobs made available by employers, not the other way around. Offering a tax credit for remaining in state to work will have no effect if a graduate is unable to find suitable employment.

Employers are not going to relocate to the state of Michigan because it has an excess supply of college graduates...unless the state offers an attractive environment to do business. The nearly 15% unemployment rate in Michigan signals that it does not offer an attractive business climate. Rather than dumping more taxpayer money into college education in a misguided attempt to improve its economy, Michigan (and other states) would be better off to use its resources to make it more attractive to do business in the state. This would attract employers who would create jobs for the state's graduates, as well as likely attract skilled workers willing to migrate from other states. This would mitigate the need to incentivize students to stay in state to work, saving the state money and likely boosting its economy and tax base. That is, unless the stated goal of investing in college education to improve the economy is a false premise for some other social goal.

Guest Blog: Subsidizing Inefficiency

by Charles Miller

Note: the following is a special guest blog post

In his very well written and argued piece about "Why The Student Protesters Are Wrong" in Minding the Campus, Daniel Bennett makes one statement which I think misses the mark and reduces the argument he is making unless corrected:

"The widespread availability of cheap loans has increased the ability of students to pay for college, and the colleges have gladly used this additional money to propel their arms race, passing the extra costs on to students with the means to pay."

The first part of this statement is the crux of the argument, with which I agree. However, colleges have not necessarily "passed the extra costs on to students with the means pay", at least not entirely.

At the same time tuition and general operating costs have risen in real terms over two or more decades, the amount of merit based aid was one of the fastest growing line items in the financial statements of colleges, with much of that merit aid going to students who already had some ability to pay and not to students who needed the aid in the ordinary use of that term. That subsidy in the form of aid came from government (taxpayers directly), private contributors (taxpayers and the wealthy through tax incentives) and endowment and other earnings(taxpayers again). Because, of course, even wealthy and middle class families got subsidized loans and other tax incentives, as well as direct merit aid.

Finally, public colleges generally were held to price controlled tuition levels which essentially subsidized students who could afford more, putting more burden on state finances to make up the operating deficit and either limiting the amount of state funds directed to students with real financial needs or reducing the quality of the education, or both.

The main point is that the taxpayer generally ends up paying for these bad public policies, whether in the sub prime mortgage bubble or the tuition bubble. Those with high income or who are wealthier also end up paying indirectly as well because of the damage to the whole economic system, but not usually directly as in college payments.

Of course, if wealthy students pay a price for college higher than they should because of the weak productivity of the academy, it's no different than most other government enterprises such as public education and much of the health care system. But as least they are able to pay (the subsidy for inefficiency) for a pass to a better life existence. Many others cannot. Thus, we have education being a barrier rather than an enhancement to opportunity.

In general, I agree that the students may be protesting against the wrong target, but I also have to wonder what the average family income is for many of those protesters.

Persistent Rhetoric...

by Daniel L. Bennett

Take a moment to read the following sentences that were espoused during a Congressional hearing in support of increasing the federal government's role in financing higher education:

"Colleges and universities across the country were experiencing acute financial strains and were apprehensive about rising enrollments and the additional burdens they would pose."

"Overcrowded classrooms,inadequate libraries, deteriorating facilities...the scenario painted...in Congress by presidents and deans of institutions of higher learning."

Do these pleas sound familiar? You might guess that they were made prior to passing of Obama's stimulus plan in February 2008, or possibly prior to passage of any of the previous reauthorizations of the HEA. And that would be a great guess because similar pleas are often made by university officials as they beg for government support. But, these statements were in fact testimony made by former Congressman and president of NYU, John Brademas, at a 1985 House subcommittee hearing in describing the justification for passing the original Higher Education Act in 1965 that established the federal student aid programs. That's right, college and universities have been using the same rhetoric about financial strains, growing enrollments and deteriorating facilities for nearly 50 years to extract money from taxpayers.

One would think that enough time (and public subsidies) has elapsed that colleges would have learned how to better manage their resources to avoid such problems. But no, the public feeding continues without no fundamental change in the way that colleges operate, as they continue to hold out their hands. Yet, college continues to become less and less affordable, as its value continues to diminish. It is past time that our politicians and the taxpayers who elect them wise up to this rhetoric and hold these institutions accountable.

Why Do We Have Taxpayer Subsidized State Universities?

By Richard Vedder

While I often will argue with their conclusions, the Education Trust is a respected and needed advocacy group promoting equal access in higher education. Its president, Kati Haycock, is someone I greatly respect, and she served with distinction with me on the Spellings Commission. So I take notice when Kati issues a new report on the progress of flagship state universities in achieving equal access goals.

Drawing from Doug Lederman's excellent report in yesterday's INSIDE HIGHER ED, I think it is fair to say the trend of flagship state universities to become schools for the affluent is continuing. In 2003, as I calculate it, it was 1.93 times more likely that a kid from an affluent family (top 20 percent of the income distribution) would attend one of the 50 flagships as a poor kid (from the bottom 20 percent). In 2007, that ratio had risen rather dramatically, to 2.31 times as great.

It is true that financial aid increased more for lower income kids than higher income ones --grants got larger, etc. for poor kids. But the bottom line is that the flagship schools are increasingly serving relatively upper income kids. In a world where college admissions were trully blind with respect to income and nothing else (especially academic quality) mattered, we would expect the ratio of high income kids to low income kids to be 1.00 or even less, since presumably the wealthy kids disproportionately would attend private schools. Increasingly, at the elite state schools, we are deviating from that model.

The reason, of course, is that on average kids from wealthy families are better students than kids from poor families. They went to better high schools, had more after school enrichment training with parental support, and, dare I say it, probably on average have at least slightly higher IQs. If meritocracy is the defining admission criterion, the high ratio of affluent kids to non-affluent kids is to be expected.

There is a trade-off at work: schools can emphasize the egalitarian ideal, or they can emphasize the meritocracy ideal --both are part of American traditions and the American Dream. The American Dream does not say "everyone has an equal chance of being rich no matter what they do or how they act," but rather "everyone who works hard and has talent and determination can move up the ladder of economic opportunity." I have some sympathy for the flagships having to deal with the impossible task of trying to meet two goals --meritocracy and equality.

However, Kati and company do have a point. What is the rationale of state government subsidized universities? One is that allegedly universities provide some positive spillover effects to society, a somewhat dubious proposition in our view after researching the issue for many years. The second goal is the egalitarian goal ---rich kids can afford private schools, so state schools are designed to provide a low cost option (that is a laugh these days!) for those otherwise unable to attend college. Increasingly, the flagships are emulating the prestigious private schools. They restrict supply, turning decent if not spectacular students away. They say, "go to lesser, inferior schools." This rather haughty attitude is inconsistent with the egalitarian ideal, which is one reason why the prestige-seeking state universities are losing state support (Jim Duderstadt, former U of Michigan prez, told me last week that only about 5 percent of U of M funding now comes from the state).

Basically, I think too many kids, not too few, go to college. But if you are going to subsidize universities largely on egalitarian motives, then it is not unreasonable to expect that those subsidized schools would meet more closely the goals of the funders, namely the taxpaying public. Alternatively, schools like Michigan, Virgina and Colorado have the option of transitioning to private status, probably the best alternative given the impossibility of meeting incompatible goals.

Unwilling to Contribute to the Costs of its Own Objectives

by Daniel L. Bennett

The higher ed establishment has outdone itself with a recent letter that it sent to Congress, ostensibly supporting the proposed health care bill, but asking for special treatment with respect to "student group-like insurance plans". My problem with the fact that many colleges mandate students to maintain health insurance while enrolled (forced consumption), often with enrollment in the college insurance plan as the default, aside, this is very troubling.

In its letter, the group suggests that the bill will subject the student plans to the same reforms that apply to individual plans, and that this would lead to higher premiums. This is due to the fact that the bill will essentially subsidize the health care costs of riskier consumers (old, unhealthy) by enforcing higher premiums on less risky consumers (young, healthy). Forcing all persons to buy health insurance regardless of risk or need in order to spread the risk of the insurance pool is the fundamental theory behind the bill's attempt to lower health care costs and expand coverage. This necessitates that the traditional college age group be subject to higher insurance premiums -whether they are on their parent's plan or a school-sponsored one. Exempting such a huge segment of the young and healthy population from incurring the premium increases needed to subsidize the government's social intervention would render the effort much more costly.

The group's letter also expresses concern that the health care bill could reduce public support of higher education due to the state's having to spend more on Medicaid because the bill would increase the numbers enrolled in the program. This is a likely outcome of the bill, which ought to be reason for the higher ed establishment to oppose the bill, rather than support it. Yet, the group instead opts to plea for mercy in the form of federal subsidies to offset the increase in state Medicaid costs in an attempt to preserve their share of funding.

Despite contending in the letter that higher ed advances the common good, its plea for special treatment suggests otherwise. The lobby expresses support for a bill that will in some way fulfill its desire for so-called social justice by expanding publicly provided health care coverage by imposing costs on all others (not to mention stripping away individual liberty and choice), but wishes to shield itself from contributing to this social goal that it so feverishly promotes. The higher ed establishment once again provides evidence that it only seeks to advance its own interests, with complete disregard for the costs conferred to the public at large. This is despicable.

Arguing past each other again

by Andrew Gillen

Kevin Carey’s recent piece calling for a government mandate on information disclosure for colleges attracted the attention of libertarian D.A. Ridgely, who disagrees.

As I see it, they are largely talking past each other, so I’ll try once again to clear this up. The easiest way to see what is going on is the following. Let

A = government funding of higher education
B = government mandates for information disclosure to see how (A) is being spent
C = government regulation of the day to day activities of colleges

Carey wants (A), and thinks that (B) is needed to make sure we’re using the money wisely. Libertarians (Ridgely, Cato) see (B) as leading to (C), which they strongly oppose, and conclude that the only way to avoid (C) is to avoid (A), which is just as well, since they don’t like levying taxes to pay for (A).

This is problematic when they talk to each other, because they are talking about different things. Carey takes (A) as a given, and goes from there, which naturally causes him to focus on (B). Libertarians respond by saying, you shouldn’t take (A) as given, since (A) leads to (B) which leads to (C), which is really bad, so we’d better avoid it by eliminating (A). As a result, they both basically ignore the main point the other is trying to make.

Libertarians ignore Carey’s point that if you have (A), you really need to have (B) too:

Ridgely: I would prefer (as libertarians so often do) to address the various problems with higher education first and foremost by the removal of government funding and the control that is invariably tied to that funding.

And Carey ignores the libertarian point that if you want to avoid (C), you should avoid (A) too.

Carey: It’s almost as if libertarianism as currently practiced by the likes of Ridgely is less a coherent way of thinking about balancing state and individual power and more a way of dressing up reflexive anti-government thinking in the trappings of philosophy…

On a completely different note, a better known Andrew G - Andrew Gelman - picks up on different argument in Carey's piece.

Carey: colleges don't figure out how much money they need to spend and then go get it. Instead, they get as much money as they can and then spend it.

Gelman

But doesn't it really describe almost anybody?...

I don't see at all what's special about universities here--this just seems like a cheap shot to me. Universities are like other organizations: they're happy to take money that people are willing to give to them. I mean, I don't see Apple saying, "Hey, we have enough money--we're gonna give out i-pods for free."

Gelman is absolutely right that any individual or institution, university or not, will take all the money people will give. But the crucial difference is what they do with it. For instance, if we keep giving Apple more money, diminishing returns will at some point lead them to stop using it to make i-pods, and do something else with it (commenter Paul on Gelman’s blog sort of gets at this point). But because universities are mostly government run or non-profit, they won’t respond to diminishing returns the same way. They’ll keep doing what they’ve always done, such as writing the 21,674th piece of analysis of Shakespeare.

If you think we need all those, then everything is going according to plan. On the other hand, if you think that might be a bit of overkill, then we really should consider changing the revenue streams and incentives that allow and encourage universities to behave in this manner with our money.

The Information Age Will Render Sales Taxes Obsolete

by Daniel L. Bennett

Kevin Carey has an interesting post concerning Amazon's unwillingness to collect and pay taxes for its online sales. He relates this to education by making a back-of-the-envelope estimation that $160M in education funding is being left off the table from Amazon's refusal to collect and pay sales taxes for its sales. I agree with Carey that the enforcement of sales taxes for online purchases is a thorny issue from a policy standpoint. My disfavor of the regressive nature of a sales tax aside, I question the method of financing state and local government, and hence education, via consumption taxation. In the past, collecting such taxes at the point of sale was efficient because almost all transactions occurred at bricks and mortar markets and as Carey points out, enforcement and compliance were convenient.

The internet age, however, has created not only national, but also international online marketplaces for goods and services (g&s). Consumers, as well as businesses, can now competitively shop for g&s from a much greater number of providers that often don't have the high overhead costs of a bricks and mortar shop. This heightened competition, as well as greater economies of scale being realized, leads to lower prices and more consumer surplus.

As Carey pointed out, it would cost him $25.95 plus $1.49 in sales tax ($27.44 total) to "walk up Connecticut Avenue to Kramerbooks and buy a copy of 'The Girl Who Played With Fire', whereas he could purchase a copy brand new from Amazon for $13 plus $3.99 shipping & handling ($16.99 total). Carey argues that the failure of Amazon to collect sales tax puts Kramerbooks at competitive disadvantage due the total price differential. Even if Amazon collected a 5.75% sales tax, he would still realize a $9.47 savings by purchasing the book online from Amazon. These same principles of competition and economies of scale could apply to online higher education to help lower the cost for students.

As consumers continue to be more price conscience and do more shopping online due to the costs savings, the collection of sales taxes will become increasingly difficult due to the allocation problem of which state the taxes are due - point of production, sale, receipt, etc? This could eventually render the sales tax as a means of public finance obsolete. In my opinion this would be a good thing, as sales taxes are incredibly regressive.

You Can't Have Cake and Eat it Too

by Daniel L. Bennett

Surely the temperature was warmer than the message delivered by Mark Wilson of the Florida Chamber of Commerce at last week's Higher Education Government Relation's Conference in Orlando: "Stop asking for money!"

Wilson was quoted by Inside Higher Ed as saying:

Colleges can't just engage in their usual tack of asking business leaders to help them lobby legislators for more money...

they must show a propensity to "match up their supply of students with the demand for jobs.... I'm confident there will be more money available for degrees that the business community needs," but not necessarily more money for the status quo.

Wilson's statements are laudable in calling for accountability of higher ed and he continues with an equally compelling statement that:

What the state needs in order to compete..is an education system that serves as a “talent supply chain” to produce enough educated and skilled workers to provide the workers needed by companies in Florida’s emerging industries

However, Wilson continues with somewhat of a dubious claim:

If Florida doesn’t produce them, the companies will leave to go where the workers are...

I agree with Wilson that the education system should aim to produce graduates with the skills and education in demand by the labor force, but his assertion that companies will pack up shop and skip town if the local supply of workers is less than demand is questionable. Skilled workers are a highly mobile group, with a high propensity to follow the money trail. The high concentration of migratory skilled workers in the nation's most prosperous cities (New York, San Francisco, Washington, DC, etc) seems to suggest that educated workers go where the jobs are, not vice versa.

The idea that a state can attract businesses by increasing its pool of educated citizens is an unproven myth. Yet, it is precisely this fallacy that is often championed by higher education officials and their cheerleaders (see for example, efforts by Arizona and North Dakota) in lobbying for more public funds. A recent study released by CCAP and the ND Policy provides evidence to the contrary: that there is a negative relationship between public investments in higher education and economic growth.

While I'm sure that a skilled local workforce is appealing to prospective businesses, they are likely to consider a number of additional details when deciding where to locate, including the tax and regulatory conditions, local market / wage conditions, and access to distribution routes, among other things. The higher ed establishment favors tax hikes in order to increase the pool of funding available to it, which is counter intuitive to making a state or locale attractive to the businesses that will hopefully hire its graduates. If a state has an oversupply of college graduates but no employers to hire them, then they will migrate to places where jobs do exist. The higher ed establishment needs to learn that it can't have its cake and eat it too.

Biting the Hand That Feeds You

by Daniel L. Bennett

Inside Higher Ed has a story this morning discussing how business and college leaders collaborate on many things, but differ on tax policy. This comes as no surprise as taxes have a negative impact on profitability and the ability to expand for the former, but a positive affect on the ability to expand for the latter (public universities in particular).

Both parties obviously have an interest in state-level tax policy. Colleges make the case that they are engines of economic growth and that they provide a public service a la research and education. Businesses are undoubtedly engines of economic growth (employing a far greater share of citizens than the public sector) and providing the taxable profits and employee salaries that are needed to support the public sector, including colleges. There is an added dynamic at play in which private businesses provide the income by which parents use to pay for their children's tuition.

State budget's are struggling in the current recession and unlike the federal government, have to balance their budget every year - forcing them to make tough decisions. The two primary options to balance the budget are to reducing expenditures or to raise revenues (i.e. tax hikes). The public sector prefers to avoid the former scenario, and the current downturn has made the former option less viable, as the nationwide unemployment rate has surged to double digits (nearly 17% if you count the underemployed). Businesses have scaled way back in order to survive the crisis and need an environment that fosters economic growth before they can resume hiring. By imposing additional taxes, it further squeezes businesses and private consumers, reducing the likelihood of a quick recovery and a decline in unemployment. The private sector needs incentives to grow, not disincentives.

Increasing taxes in a recession is a zero sum game that makes to the recipients of public funds (e.g. colleges) the winners in the short run, while possibly imperiling their long-term viability, as businesses downsize or relocate to more business-friendly locales, and the public resentment of and willingness to support fiscal irresponsibility grows.

A report this week revealed that colleges continued to hire non-instructional employees during the recession, adding fuel to the fire. While many businesses and families are struggling to keep the heat on and put food on the table, colleges are taking advantage of public support to engage in rent-seeking behavior and expand their regimes, while at the same time squeezing increasing amounts from the students and their families through tuition hikes. Effectively biting the hand that feeds them. This is fiscally irresponsible, morally inappropriate, self-serving behavior that needs to come to an end.