Subsidy and Tuition Policies in Public Higher Education

I. INTRODUCTION The much discussed and widely debated recent conditions in public higher education include expanding enrollments, flat if not declining public appropriations per resident student, and rapid increases in tuition rates. (1) To many observers, tuition policy in public higher education appears be explained as an attempt to set tuition at whatever level is necessary to compensate for shortfalls between public appropriations and instructional expenditures. Ehrenberg (2006) asserts that public higher education has been "buffeted by a perfect storm," in which state appropriations to public higher education institutions have failed to keep pace with per student expenditures in private higher education because of economic recession, the priorities placed on alternative uses of state tax revenues (such as elementary and secondary education, Medicaid, welfare, and criminal justice), and efforts to reduce income and sales tax rates. A considerable empirical literature examines the relationship between tuition in public higher education and state appropriations. Koshal and Koshal (2000) identify a negative relationship between tuition and state appropriation. A study of college costs and prices, which is conducted by Cunningham et al. (2001), identifies an inverse association between tuition rates and annual budget appropriations but finds little evidence of a link between tuition and expenditures on instruction. Lowry (2001) treats state appropriations as exogenous in a resident tuition equation and discovers a significant negative relationship between state funding and tuition. Rizzo (2005) finds that increases in tuition are linked to declines in future levels of state funding, which hints at a dynamic association. Rizzo and Ehrenberg (2004), in one of the more extensive examination of the topic, treat real state appropriations per student as an exogenous variable in their resident tuition equation and find that "schools that receive higher state appropriations per student charge lower tuition, though the elasticity is far from unity." Acknowledging the economic and demographic conditions of public higher education and the empirical literature linking appropriations and tuition raises a number of questions. What activities are legislatures supporting when they allocate public funds to higher education? What are the implied responsibilities for subsidizing residents versus nonresidents? How are resident and nonresident tuition rates determined, and what are the relationships among tuition rates, resident and nonresident enrollments, and state appropriations to higher education? In particular, there appears to be the need to develop a better understanding of the decision processes that determine both the public subsidy and the setting of tuition rates. A goal of this article is to develop a conceptual framework for that process. There is a widely held notion that residents should pay a lower tuition than nonresidents, and as a result of a resident subsidy, they do so in nearly all public universities. One rationale for favorable treatment is that residents and their parents pay state taxes. Another claim, which receives some support by Groen (2004), is that residents are likely to remain in the state after graduation and thus contribute future tax revenues. Although the public subsidy to higher education is justified for these, and many other economic-development reasons, some argue that the higher education subsidy is simply a payoff to special interest groups who influence legislatures and governors. Friedman (1968) and Goldin and Katz (1998) provide a general discussion of the objectives of subsidized higher education. For whatever reasons, resident students continue to receive a substantial publicfinanced subsidy, while nonresidents pay close to full cost. There are two basic arrangements for determining tuition rates in higher education: (1) institutions determine tuition rates under the direction of an independent governing board; and (2) state legislatures, who are governed by statues and budget policies, make tuition decisions. …