Tuesday, December 22, 2009

A Few Thoughts on Taxing Students

Pittsburgh, Pennsylvania has gained some notoriety recently for a new idea in government reform: taxing college students. In an effort to scrounge money for its local government status quo, Pittsburgh's Mayor Luke Ravenstahl had pushed to adopt a head tax for local students that would be added to their college bill.

Actually, it was not a new idea. Providence, Rhode Island's mayor had the same idea earlier in the year. That effort ended in stalemate.

While Pittsburgh's mayor has pulled back from that plan while he negotiates additional "voluntary" contributions from local colleges and universities, Pandora's Box may well now be open. Bad ideas, like good ones, can spread.

Being immediately over the western horizon, Mayor Ravehstahl's idea wouldn't have far to travel to hurt Ohio's college students. Encarnita Pyle reported last week in the Columbus Dispatch that such an idea is unlikely to gain traction in our state. I think she's right, but for reasons beyond what she suggested.

Ms. Pyle's sources talked about the importance of higher education to the state. That is true, but most tax advocates agree that higher education is important. They argue that colleges place burdens on local communities that are not offset by revenues, especially since nonprofit and state government colleges do not pay property taxes. Putting aside the property taxes paid by students, faculty, staff, and landlords for their residences, and the other massive economic impacts of colleges in any city, in Ohio the support for localities goes even farther.

Ohio's communities have the ability to impose income taxes, and do so. The highest local tax rate is a full one-third of the state and local taxes paid for any Ohioans making less than $200,000 per year. In many smaller towns, Ohio independent colleges are the largest source of municipal and school-district income-tax revenues.

Those same communities also receive other direct benefits, as do cities and towns across the nation. In some cases, university police forces agree to patrol portions of a jurisdiction, both for the benefit of the residents and to apportion the costs of law enforcement to the higher education institution.

Cities and towns also receive other benefits from colleges that translate into real money benefits. Colleges create safe communities, with higher property values and generally lower crime. Universities make substantial contributions of services by faculty, staff, and students. These range from food drives to voter registration to care for the elderly to teaching assistance in local elementary schools.

Colleges also help maintain stable communities. Ohio knows what abandoned municipalities look like. We have them in sizes ranging from large to small—towns and cities where the industry of old died or left. Yet look at places where higher education helps preserve the economic lifeblood of the town. Dayton's vitality is intimately tied to the University of Dayton. Franciscan University of Stuebenville anchors that community since the demise of most of the great Weirton works across the river. To understand what these communities would look like without an anchor higher education institution, one need only look elsewhere in our state.

Universities are a source of culture in their communities, which is especially important in an era where such funding is been deeply cut by states, localities, and business supporters. They also attract business. Indeed, part of our own state government's emphasis on supporting higher education is based on the deep link between a strong higher education sector and economic development in modern economies.

The rich irony in Pittsburgh, as it would be in Ohio, is that municipalities and the state spend enormous energy trying to attract for-profit companies by abating taxes and giving credits for local worker income taxes. To raise taxes on students while giving money to corporate shareholders would be incredibly shortsighted, but it would also be stunningly unjust.

Some of the same arguments have been raised to introduce PILOTs (Payments In Lieu Of Taxes) to Ohio. Policy Matters Ohio was contracted by the Cuyahoga County Treasurer to look at PILOTs for local hospitals. Their analysis concluded: a) other jurisdictions tax nonprofit hospitals; and b) if Cleveland did so, it would generate a great deal of money.

Of course, this argument misses two important points. First, nonprofits, including hospitals, colleges, and others provide communities with huge direct and indirect benefits, which are discounted by PILOT and head-tax advocates. (Indigent care comes immediately to mind for the targets of the Policy Matters Ohio study, for example.)

Second, in Ohio, local income taxes are often imposed, which generate comparable revenues to PILOTS in the Northeast. Providence, Rhode Island, which attempted to impose a student head tax, has PILOTs now, like many New England communities. Notably, those communities do not have local income taxes.

There are several other reasons Ohio communities shouldn't adopt student head taxes or PILOTs. In setting tax policy, every community weighs who ultimately pays the tax. Hotel taxes are paid by non-residents. Alcohol and tobacco taxes are paid by drinkers and smokers. Student head taxes and PILOTs are ultimately paid by students. Considering that most students take loans to complete college, the reality is that any new PILOT or head tax will be turned into student debt, mostly for young people under age 23 and working adults who are trying to complete a degree.

In other words, students are either earning very little money and are having their taxes increase, or are about to enter the workforce, typically at lower levels of income. Student head taxes are essentially a regressive taxation system, taxing those with less income for the benefit of those with more.

In addition, increased costs discourage higher education participation. Ohio elected officials proudly touted the public college tuition freeze in 2007's state budget, and attempted to maintain a freeze this year. Yet the difference between the freeze and a typical four percent tuition increase at an Ohio public four-year college is less than the proposed tax in Pittsburgh, which was about $400.

Ohio policy makers claimed that the tuition freeze would encourage enrollment. I would suggest that if a few hundred dollars matters enough to freeze tuition, it certainly matters enough not to raise taxes.

This summer, we learned in late July how much aid to independent college students would be cut. The timing was unusual because it was after student aid packages were mailed in the spring. Cuts were as high as $3,000, which most colleges could not make up. One president of an Ohio college told me his institution of about 2,000 students lost over five dozen students after and because of those unexpected aid cuts.

One final thought for local officials that might support a student head tax: people and institutions can vote with their feet, especially in the modern Internet era. Aside from not attending college, students can go elsewhere. One of Ohio's strengths is its constellation of colleges and universities—public and independent. Students are free to choose other Ohio and non-Ohio alternatives. At the margin, increased costs push students elsewhere.

As importantly, college homes are not permanent. Many people don't know that both Pepper Pike's Ursuline College and Canton's Malone University used to be in downtown Cleveland. Their reasons for moving had nothing to do with taxes, but move they did several decades ago.

The real risk for communities is not that colleges will pick up and go, but that they will evolve away. Opening a new pharmacy school or school of graduate education? A college can just move over the relevant jurisdictional line. Expanding to on-line programs? Create a new campus/server-farm in a faceless suburban office park outside the reach of the head tax.

Tax supporters will say things like, "they'll never move." They have too much tied to this place, or these buildings, or 'our' community. In most cases, that's true. But I speak from personal experience. I graduated from the University of Denver College of Law. Through the 1980's, the law school was downtown, across the street from the City and County Building. After the closure of Colorado Women's College, the campus moved to what is now the Denver campus of Johnson & Wales University, just south of the former Stapleton International Airport. A few years after my graduation, it moved to its present location.

If this same move happened from an original location in downtown Cleveland, it would be no different than moving to Lakewood, and then moving again to Westlake. In Columbus, think downtown Columbus to Upper Arlington to Dublin. Or Cincinnati City Hall, to North College Hill, to Wyoming.

The head tax idea will probably never make it across the Columbiana county line. But it's well worth know why it shouldn't in addition to why it won't.