Taxing Tuitions

The City of Pittsburgh is preparing to approve a 1% tuition tax on students attending college in that city. the tax would raise about $16 million and, in a a classic public choice move of identifying "winners" in order to garner political support, the tax is initially earmarked to pay pensions for retired city employees. Other cities have threatened such taxes - or, more directly, they have threatened to extend their property taxes to some nonprofit organizations. In response some universities (much larger property owners than museums and even churches in these cities) have agreed to make lump-sum payments to offset the presumed cost of firefighting and policing. My guess is that the tax will be imposed, challenged in court but not defeated, and then a compromise will be reached when one of the large universities next undertakes substantial building or expansion. At that point the university will have bargaining power - whereas at the moment the universities are fixed in place and vulnerable.

But what is the right result? The $16 million estimate suggests something like 50,000 students. Those who live off-campus, and their teachers, and the staff needed to support them do of course pay property taxes, income taxes, sales taxes and amusement taxes exactly as do other residents and visitors. Indeed, a hefty tax would probably have brought about a smaller higher-education sector in Pittsburgh, so that the city has benefited in some way from its colleges. To the the extent that the property tax is traditionally thought of as the means of financing public schools, undergraduates do not use that service at all - and the tradition, if it is just that, of property tax exemption is appropriate. Of course, the property tax is not exactly a user fee for the school system; many residents have no children or move to Pittsburgh after their children are grown (well, not many, but perhaps one or two). Most of the colleges finance their own police departments, though they can also call on the city's police. A fair assessment of the drain on public services would probably yield a number much less than the 1% tax, but the same could be said of other subsets of residents.

A better way to think of the issue is probably to imagine turning time back and having jurisdictions bid, or otherwise strike long-term deals, with entities. Some might charge for the right to build or to enjoy tax-free status; others might pay museums or universities to open in their midst because of the jobs, tourism, or other benefits associated with them. Universities would then choose among the packages of services and charges (or subsidies). But it is too late for that. Now the universities have substantial investments, and are among the least mobile of employers. Their physical plants are not easily sold to other taxpayers. They might have protected themselves by gaining charter protection, or contractual protection, especially before undertaking substantial expansions. Alternatively, they have been forced to acquire political influence, in the manner of other interest groups. Their tax-exempt status does, however, put them at a competitive disadvantage in this regard, as they are not permitted to engage in direct political activity. They can argue their case(s), but they can not support particular candidates or parties.

If the city's maneuver is a product of unusual financial stress, as appears to be the case, then the universities might do best to bargain now. In return for agreeing to make modest payments for "services" (based perhaps on a formula that took their own expenditures on police services into account, especially insofar as these provide externalities benefiting the city), they could secure long-term agreements capping the tax or the payments.

Finally, we can see the tuition tax as much more clever than a lump sum payment for services or a removal of the property tax exemption.Of these, only the tuition tax distinguishes colleges from museums and from churches. The city can be seen as arguing that it, along with many other jurisdictions, already imposes sales taxes on amusements and other things that straddle the line between services and products. A modest sales tax on tuitions - and on museum entry fees - is thus rather clever. But can taxes on temple dues and pew fees be next?

Comments

[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...