Higher Education Watch: Tuition Tax

Most higher educators might have missed this one over the holidays.

Desperate for new sources of revenue, cash-strapped Pittsburgh came up with a novel way to raise $15 million to cover its underfunded pensions: add a 1% tax to university tuition, according to a news brief published in the New York Times a few weeks ago (Pittsburgh Delays Vote to Tax Tuition, December 16, 2009, http://www.nytimes.com/2009/12/17/education/17college.html?hpw) .

Because universities are legally nonprofit institutions, I believe that the law exempts them from property taxes. Unable to change that law, the city went after the people these nonprofit institutions serve.

The revenue opportunity is enticing: Among its many universities are two world-class ones—one private with high tuition (Carnegie Mellon) and one public with a high volume of students.

As I recall from my days as a (working) student there, Pittsburgh is already one of the few cities in the U.S. that has its own income tax.

So if those students are working, they’ll be taxed. And if those students are buying books, furniture, school supplies, clothing—they will also be taxed. So students are paying something. And soon enough, if Pittsburgh can create the jobs—and make itself an attractive place to remain after university—those students will be working, buying homes, and paying those pensions.

But this isn’t just a short-term money grab. I also see it as a long-term statement about the public view of the investment in education. And this financially desperate statement about tuition in Pittsburgh—one that, according to the New York Times, is being watched with great interest by many other cash-strapped cities with large universities inside their jurisdictions—is one that sends a chilling message.

Many of those students will be taking on tens of thousands of dollars in loans to complete their education. On some level, all of them do so because they believe that investing in an education in their early twenties will pay handsome dividends later. But those dividends—which include home ownership, capital purchases, and many other taxing purchases that ultimately benefit the city—will be further delayed when they have to take on more debt to close the financial gap of the city.

If anything, university endowments, which are still solvent despite the recent stock market crisis, are probably in a much better position to be covering this shortfall.

But the bigger issue is that the choice to tax tuition contradicts at least a century of public policy, in which governments have actively supported higher education and tried to make them as financially accessible as possible to the average citizen. Indeed, the student loan programs described earlier, are underwritten with government support.

And while Pittsburgh considered taxing tuition (and, effectively, raising it 1 percent), the U.S. federal government is looking for ways to keep more students in college, and encourage them to graduate. A tuition tax is not likely to aid those efforts.

The good news is that, for now, the mayor of Pittsburgh has dropped the idea, according to the website of local CBS affiliate KDKA (Proposed Pittsburgh Tuition Tax Averted, December 21, 2009, http://kdka.com/politics/tuition.tax.update.2.1383101.html).

But I have a feeling that the issue of making short-term choices whose long-term consequences take public policy in an unintended direction is likely to continue.