Thursday, November 04, 2010

 

Taxing a la Carte

This story about the election results got me wondering. (And everybody can put the knives down -- I’m not analyzing candidates here.)

In a climate in which government spending is generally considered suspect, and in which people who campaign on “tax cuts good, spending bad” do very well, ballot measures that supported higher education specifically did very well.

When taxes are considered as part of a lump sum, they’re despised. But when they’re earmarked for specific purposes, they seem to be more popular. Which makes sense psychologically, since the earmark makes it easier to see the point.

Would public higher ed be better off moving from being the “balance wheel” of state budgets (hat-tip to Jane Wellman of the Delta Cost Project for the phrase) to having its own dedicated tax?

I’m wondering if a dedicated tax would be harder to cut than an appropriation in an omnibus bill. Somebody may have done some empirical research on this, but I haven’t found it.

Social Security might be a decent example. Politicians routinely run on cutting income taxes, and some of them will enact substantial cuts on social programs, given the chance. But I literally can’t remember the last time someone ran on reducing the FICA tax. (Bush II floated a variation on that in 2005; it went over like a lead balloon.) As annoying as the FICA tax is, people sort of accept it, because they understand what it’s for. An “income tax” is an undifferentiated mass, but a Social Security tax is for one specific thing.

Higher education gets nailed badly during recessions, because state income tax revenues go down and unemployment claims go up, and the difference has to be made up somewhere. Since K-12 and prisons don’t really have alternate revenue sources -- okay, some prisons do, but that’s another post -- it’s easy for legislators to look at higher ed’s tuition stream and decide that cutting college aid would do less harm than cutting other things.

But what if that option were off the table? What if, instead, higher ed had its own a la carte tax? Call it the “college and university” tax, or something catchier, but make it clear (and enforce legally) that it can only go for the public colleges and universities in a given state.

Yes, the money would fluctuate with the economy, but it would probably fluctuate less than appropriations from general budgets do now. With relative predictability, colleges could actually make (and stick to) spending plans without constantly interrupting them to make up for midyear cuts.

Admittedly, the devil can hide in the details. Property taxes are probably easier to administer than income taxes, but they’re also probably harder to sustain politically. They would also establish an expectation of being used locally, whereas income taxes are more often used at the state level. But these strike me as surmountable.

I know that different states operate differently, so some wise and worldly readers may have seen something like this done somewhere. Those who have, how well did it work? International readers -- the worldliest of the worldly -- is something like this done where you are? Does it seem to be a safer haven for higher ed, or is it just as vulnerable? Is there a catch I haven’t seen?

Comments:
Along these lines, somewhere in the last couple of months I saw a "receipt" for taxpayers, breaking down what percentage of their taxes went to various categories (defense was broken into a couple of categories, surprisingly, but there was also Social Security, NASA, and several others). It was a fascinating breakdown and I wish I'd bookmarked the page.

Something like that would be really useful, I think.
 
Interesting point.
 
Social Security could be a worthy example. Politicians routinely run on reducing income taxes and some of them enact substantial cuts in social programs, given the opportunity. But I literally can not remember the last time someone ran a reduction in FICA taxes. (Bush II floated a variation in 2005, but was more like a lead balloon.) As annoying as the FICA tax is more or less people accept it because they understand what it is. An "income tax" is an undifferentiated mass, but a Social Security tax is a specific thing. link exchange

university admission
 
"But I literally can’t remember the last time someone ran on reducing the FICA tax."

*cough* Rand Paul *cough*

(Or, to be fair, he made it clear throughout his campaign that social security had to be on the table as a place to cut, along with everything else that the government spends money on. And the people of KY really, really liked that.)
 
I think the closest thing to your idea are gasoline taxes targeted for road construction/maintenance. Like you say, these are politically "acceptable," but not just because payers know where the money is going, but also because we can see a logical connection: people who drive more should pay more to fix the roads.

The question is, what can we tax that makes a logical connection to a college education other than a higher income? Books? Museum entrance fees? Computers? Listening to NPR?

If you can identify an appropriate target, it might work well. The downside is that everything I can come up with (like books or NPR) are things that you may not want to sanction with taxes. On the other hand, that very fact may make your idea palatable to anti-tax factions--how many Tea Party legislators are likely to be upset about a tax on NPR listeners?
 
I cannot remember the title, but many years ago I read a short story where a part II was added to your tax form, you got to decide where the money went. I always thought that was a wonderful idea.
 
As a taxpayer, I like the idea of taxing a la carte, though I'd like even better picking where it goes.

But your take on this makes me wonder. You seem pretty confident that most of the people ranting about high taxes wouldn't want to defund higher ed.
When I think about the part of the tax budget I most need to see increased (NIH funding), I tend to presume that support for biomedical research is widespread enough that if it were itemized, people would be happy to pay (I did once see a survey on this and it did seem positive; but this was pre-tea partiers). Yet given how some political candidates have derided *cough*thatwhichtheydonotunderstand*cough* fruitfly research as a waste of money, I'm not so sure the public would really go for it. Certainly it would be vulnerable to politicians grandstanding, and making good things seem wasteful.

How would you feel if we itemized higher ed costs, and the public felt very strongly that that sector already wastes so much money that they should be de-funded, even to the point we'd loose all public universities?
I don't see it as a highly likely outcome, but it is possible.
 
Illinois doesn't have a la carte taxation. It does have special taxing districts. Kishwaukee College's district had a referendum on the ballot authorizing borrowing; this one was sold as involving no change in tax rates, but the district can put a referendum up to raise the millage rate for the district. If it passes, that changes one entry on property tax bills.

Illinois has more of these special districts than any other state. One such district exists to pay for the DeKalb Municipal Band. That, too, is an item bundled on the property tax bill.

Tax Increment Financing provides another way to put an a la carte tax on property taxes.

And tourists can be justified in complaining about the different final price in different parts of the state, as counties and cities can put in their own sales tax, which includes a special tax in Chicago only on pop in a cup, the purpose being to bear the cost of emptying trash cans.
 
Maybe if one could find a tax and a tax base that is sufficient (and I know of no place that finances higher education in this way; at this time, even K-12 is a mix of local--typically property) taxes, state revenues, and federal revenues)...but, as always, the devil is in the details.

1. It would have to be the *only* tax-based source of financing. Lottery revenues have often been "earmarked" for education, which has allowed legislators to reduce funding from other sources.

2. It would have to be, on average, sufficient to provide the desired level of support.

3. It would have to be a tax that people were willing to tolerate.

I don't do public finance, but I think that it would be very dfficult to devise such a system right now.
 
CA funds it's community colleges in part by funding from districts to which they belong. It makes it really hard for the CCs to advocate for themselves in Sacramento - technically, they each belong to a small subset of legislators so it can be hard for them to lobby for themselves as one unit.

As for the gas tax, CA has been using this money and money that was earmarked for municipalities to plug other gaping holes in it's budget - there was just a proposition to stop that from happening which shows how severe the problem was.

There's no easy answer as long as taxes are seen as evil rather than contributing to the public good.
 
Thing is, you don't want to tax books to pay for higher ed. If lots of books are being sold, you don't NEED higher ed (or, you don't need more than you already have).
You want to tax something that rises as the need for higher ed rises. So either a tax on something that teenagers buy/consume (I don't know, text messages?), or a tax on something that indicates a lack of and need for higher education (I suggest lottery tickets; other readers can provide their own suggestions).
 
Back in the late 80's, CA voters approved Prop 98, which gives 40% of the State budget to K-12 schools and community colleges. Of that chunk, community colleges get 10 - 12%.

It's taken a while (two decades), but this system works pretty well in providing a relatively stable funding base.

There have been problems in managing the K-12 and cc "split" of the 40%, and because this 40% is the biggest single chunk of the State budget, whenever revenues are out of whack with expenses, the most obvious and easiest place to find money is in education.

Because CA is a heavily Democratic state, and because the California Teachers Association is the most powerful union in the state, this Prop 98 funding has been protected, at least as much as is possible during a deep recession like this one.

The California State University system and the University of California haven't done nearly as well, but it's their own damn fault, in my opinion.

Back when CTA was working on drafting Prop 98, CSU and UC were invited in, but they chose not to participate. That was a bad decision, and it was probably motivated by an elitist, the-Legislature-would-never-dare-to-touch-us" attitude.

--Philip
 
Montana has mill levy property taxes that go directly for education, both K-12 and higher education. I'm not sure how much of the funding for education they provide here in Montana, but they tend to pass, with the exception of Billings.

http://billingsgazette.com/news/local/government-and-politics/article_96c46e46-4a8d-11df-8767-001cc4c03286.html
 
l am an international reader (specifically, a Belgian reader), but have no direct experience with a separate 'education tax', or anything along those lines.

That said, from my decidedly European perspective, I am continually amazed by the fact that American higher education as a sector seems to be in such dire financial straits, as evidenced, among other things, by very high tuition costs born mostly by the students.

I hold a two-year-old Master's degree in a field closely related to clinical psychology. In the five years it took me to get that degree, I spent an estimated 6,000 euros (roughly 8,500 US dollars) a year *total*. Only about 20% of those expenses were strictly school-related (tuition and books), the rest I would have spent either way on things like rent, food and transportation. To be fair, I'm not counting the summer months (July, August and the first half of September), when I would usually live off money from a summer job. Still, the difference between this and what an American student realistically spends on a degree offering similar job opportunities in the USA seems rather staggering to me.

Obviously, Belgian higher education is heavily subsidized. In a country where *every* institution of higher education is government-subsidized (no private schools that I'm aware of), the Ministry of Education reports that it spent roughly 10,500 euros per higher ed student in the academic year 2007-2008. This means that over 85% of the true cost of higher education (not counting lost wages or the aforementioned cost of living, both of which are a factor to students worldwide) is covered by the government here. In some cases (when the student comes from a particularly low-income family), it's even more than that.

Surprisingly, though, Belgian income tax (about 30% on average, according to the federal government) is not that much higher than American income tax (about 27% on average, according to The Tax Foundation -- taxfoundation.org).

This makes me wonder if what American education really needs is for the US government to thoroughly reassess its spending priorities. I don't know if taking education money out of the 'lump sum' income tax and calling it by a different name can help with that. But if it can, as the FICA example seems to suggest, then it strikes me as something that should, and could, have been implemented years ago.
 
This comment has been removed by the author.
 
Pay attention, folks. There are MANY proposals to cut FICA taxes, one of which (a payroll tax "holiday") was discussed just this morning on CNBC by Jack Welch. It is sold as a way to create jobs by getting rid of the employer's share of FICA without mentioning how it would weaken Social Security and is likely to be high on the agenda of the new Congress.

[That would be the Jack Welch of GE who claims to know how to create jobs ... by laying people off at GE.]

On your original point, I don't buy the optimism of the IHE article. Those were almost all bonds (borrowing for 30 years or so against property taxes) to build a building to house programs they can't afford to run under the current budget situation. And, although it is true that school property taxes have sometimes been raised even in bad times because schools are a Good Thing, they are not immune any more.
 
I think something along the lines of what Phillip outlined in CA might work.

Make the tax an education tax and lump K-12 and higher ed together. Yes, it might lead to some nasty fights between K-12 and higher ed, BUT I think it's a lot harder for pols to argue for defunding K-12 than higher ed.
 
I like the idea, but can you imagine the outrage that would be felt by a mechanic who has never gone to college opening his paycheck and seeing that he is paying for college?

Now, that higher education funding will benefit him, but only in an indirect way that he cannot see.
 
I kind of feel like this is dealing with the wrong problem.

Our main issue right now is that our conservative colleagues hate so many categories of Americans that they basically view themselves as a "true" America which should not be forced to be part of the fallen America we find ourselves in. That's what's behind the anti-tax insanity; they hate the idea of their tax money going to fund programs which can benefit the many Americans they hate so much.

All diverse countries face this problem, and as the US has gotten more diverse, the problem has gotten more brutal. I don't know that there are easy solutions, but I do know that we need to continue hammering on the idea that the fundamental difference between the Dems and the Repubs is that the Dems don't hate America as it currently exists.
 
I think that this is very risky - the potential downsides to putting higher ed funding up for a vote (basically) are much greater than the possible upsides. Higher ed funding is not nearly as popular as social security funding, or even as popular as k-12 funding in better districts (where even people who don't have school age kids can benefit if their property values increase).

Plus, as CCPhys. noted, most (although not all) of these referenda were for bonding for specific projects; not for the funding of day to day operations. And even then, only two out of six such referenda in my state passed in the last election, so there's no guarantee.

I'm afraid that once you've separated out higher ed funding, you've also made it a target, and if you get a few people demagoguing about overpaid professors with six-figure salaries who *don't even teach*...well, funding may become a much larger problem.

People who haven't done the job like to make fun of legislators, but there are genuine advantages to representative democracy.
 
One way to secure financing for higher ed would be to put the money with the students as opposed to institutions. If you gave the students vouchers then there would be a large constituency (students, their parents, and parents of prospective students) to offend if a politician suggested cutting the voucher level. This would not entirely reduce volatility but would shift it from aggregate funding levels to volatility experienced by an instittuion. If the voucher were capped at flagship u tuition or portion thereof but redeemable at any higher ed school within the state (for instance a cc) I would anticipate this would be a boon for community colleges.
 
"An “income tax” is an undifferentiated mass, but a Social Security tax is for one specific thing." In theory this is true, but not in practice. All the social security dollars that are not immediately distributed to current recipients are used to fund other federal government spending programs. The social security administration is required, by law, to use its surplus to buy federal government bonds. The bond revenue is then put into the general fund and spent.

In a few years when most of the baby boomers are retired, there will be fewer dollars flowing into social security than dollars needed to pay recipients. At that point the social security administration will try to collect the proceeds of those government bonds it is holding and we taxpayers will be on the hook for that money.
 
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1. Here's the sci-fi story that Jim C was referring to...We, The People

2. Here's the Wikipedia entry on the concept...tax choice

3. Here's the google friendly label..."pragmatarianism"

4. Here's a list of other pages that I've found on the subject...Choose Where Your Taxes Go.

It's one of my favorite subjects...so if you're interested...feel free to post a blog entry with any questions/concerns that you might have and I'd be more than happy to try and address them.

At the very least...it would be nice to have another option on the table.
 
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