In essence, what happens is that the net tuition charge to students will increase by the amount of the estimated tax benefits, where net tuition is the actual amount paid by the student after deducting financial aid. This mechanism is virtually certain to operate for all students eligible for either the credit or the deduction, and who also apply for student financial aid. For these institutions to benefit from the proposed tax legislation, their posted tuition prices would have to increase, i.e., the increase in net tuition is not available to them. The temptation to capture the tax credit or deduction is certainly present, but the outcome is not quite so clear in this case. Public sector tuitions are politically determined prices, and often involve negotiation with the governor, the legislature, or the state coordinating board.
Political factors can thus offset economic forces, producing analytical uncertainty.
It is not hard to imagine, however, that state officials will see the tax credit and deduction as an opportunity to raise tuition while reducing state appropriations, thereby shifting costs from state to federal budgets. Jawboning from the federal level may be the only way to resist such moves, but it seems unwise to rely on rhetoric to produce the desired outcome. Let me turn now to another way to think about these tax proposals. When a tax credit or deduction is being proposed as an alternative to a direct expenditure program, it seems reasonable to ask whether one would support the tax proposal if it were presented as a direct outlay. For anyone who supports the concepts imbedded in the Pell Grant program, such a program would be both inefficient and inequitable.