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December 16, 2009

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Omri Ben-Shahar

I would add two small observations to Saul's post.

First, one can ask whether the tax/fee levied on a university is "just" -- does it reflect an otherwise unpaid-for net benefit that a university receives, and thus mirrors a price that would have been negotiated between the municipality and the university ex ante. This is an interesting thought experiment, trying to account for the free perks that the university community extracts (e.g., emergency services), but also the positive externalities it brings to the community (a hospital, cultural institutions...).

Second, imposing a new tax on established universities is an efficient way to raise income if it creates a smaller distortion than other taxes. It is unlikely that the university will pack up and move, so there is no effect on this front. Assuming that the 1% tax would be rolled, at least in part, into the tuition paid by students, would it affect students' decisions to enroll? At the high-tuition elite echelon, my hunch is that there would be no effect, because within this price range students sort out through mechanisms other than tuition. At the lower echelon schools, it is plausible that there would be some potential drop outs -- those for whom the 1% increase makes education unaffordable -- but if identified they can be price protected. Finally, a distortion could arise if universities fund the tax cost by cutting other programs, which, depending on the program cut -- catered faculty parties versus scientific experiments -- may or may not be socially costly.

Jacob

"My guess is that the tax will be imposed, challenged in court but not defeated..."

The city's legal capacity to place such a tax is still being disputed, and the city has a history of unapologetically passing ordinances that violate or try to get around Commonwealth statute. More importantly, a bill has been presented in the state legislature that will outright ban tuition taxes across Pennsylvania. With popular support swung the way of the universities and Harrisburg moving against the mayor I do not see this tax lasting more than a few months even if the mayor can get city council to enact it soon...

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