State Higher Education Spending and the Tax Revolt

Government subsidization of public higher education primarily is a function of the states. Even today, with budgets emerging from crisis, the states provide over four dollars of support for higher education expenses for every dollar of federal subsidy. Yet public effort in support of higher education--measured as state funding per $1,000 of personal income--has been in decline for the last quarter century. The magnitude of this decline has been quite significant. Aggregate state effort has fallen by 30% since the late 1970s. In this article, we evaluate the connection between state higher education effort and the tax revolt that began in the 1970s. The tax revolt gave birth to a set of laws and constitutional provisions that have dramatically changed taxing and spending policies in many states. The tax revolt is based on the notion that government is too large, and that the appropriate strategy is to "starve the beast." The most prominent legal change resulting from the tax revolt is the Tax and Expenditure Limitation (TEL), which limits the growth of state revenue or expenditures to some outside indicator, most commonly the growth of state personal income. Starting in the late 1970s, 23 states adopted a TEL. In addition, though this happened more slowly and less often, states added supermajority requirements (SMRs), typically two-thirds, for the legislature to approve tax increases. Thirteen states have an SMR. We use a 41-year panel of state data from 1961 to 2001 to investigate the importance of these tax revolt institutions for state effort on higher education. Both TELs and SMRs prove to be very robust predictors of the time series and cross-sectional variation in state funding effort. Together with rising costs, this retreat of public effort is a major component of the financial difficulties faced by state-supported colleges and universities. One measure of the consequences of this financial crisis at public institutions is the ratio of spending per full-time student at public institutions relative to private institutions. In 1980, public institutions spent 70 cents for every $1 spent at private colleges and universities. By the late 1990s that figure had fallen to 55 cents (see Kane, Orszag, & Gunter, 2003). Understanding the causes of this retreat is crucial if there is any chance of reversing it. Changing the political climate is never easy, but our results suggest that the task ahead is even more difficult. All of the SMRs and a majority of the TELs are amendments to state constitutions. They are firmly in place. The questions that motivate our article arise at three distinct levels of generality. At the highest level, the issue is whether institutions actually affect policy outcomes. At the next, more specific level, the question is whether the particular institutions spawned by the tax revolt affect policy. There is an extensive literature, both theoretical and empirical, on these two questions. Our contribution comes from extending the discussion to the third and most specific question: Have the tax revolt institutions had a meaningful effect on higher education effort in particular? In this introduction, we briefly review the literature on the highest-level question. We discuss the more specific implications of the tax revolt institutions in separate sections of the paper. That political institutions should matter for policy outcomes is not self-evident. In much of the political economy literature as it has evolved since the work of Anthony Downs (1957), policy outcomes are driven by the preferences of the median voter. This is true if politicians know voter preferences and can align their proposals accordingly. In this case, there is little scope for the institutional structure of decision making to exert an independent effect on policy outcomes. Institutions become important again whenever any of the assumptions of the Downsian paradigm are removed. In particular, political parties may care about policy as well as winning elections. …