Friday, June 20, 2008

Obama's Tuition Tax Credit, Part II

Several commenters on this post on Obama's Tuition Tax Credit proposal objected to my suggestion that the supply curve for higher education is flat, in both the short and long runs.

The main objection centered around the political economy of funding public schools: state legislatures and school officials might increase tuition or decrease other student aid if new federal aid were introduced.

This is a fair point and it argues for putting aside the Econ 1 theory and going to the empirical analysis.

This book chapter takes a close econometric look at the effects of the Hope and Lifetime Learning Tax Credits, enacted in 1997, on several outcomes, including state support for higher education and college tuition. The Obama proposal amounts to an expansion and modification of the Hope Tax Credit, so its effects can be taken as a likely indication of the impacts of Obama's initiative.

The main empirical strategy in the paper is to compare states with lots of students eligible for the credit to those with few eligible students, presuming that if the credit had an impact, it would be in the states with many eligible students. Overall, the results are mixed. My summary would be 1) some evidence of decreased state support for 2-year colleges and weak (only in particular specifications) evidence of increased tuition for 2-year colleges, 2) no evidence of any effect on state support for public 4-year schools and tuition at either public 4-year schools or private schools. Unfortunately, the author didn't clearly present the magnitude of the impacts, and I'm having a hard time deciphering these magnitudes from the many specifications in the tables. Commenters are welcome to make an attempt!

1 comment:

Long Memory said...

Thanks for the link to the Bridget Terry Long paper. It should be required reading for anyone trying to devise federal programs in postsecondary education.

Her paper stands out because there are so few studies that look into federal programs for postsecondary education, on either the spending or tax expenditure side of the budget. Of the handful of such papers, hardly any find much to praise. The concensus: evidence of effectiveness commensurate with the size of the investment is sorely lacking.

One might quibble with the paper about what the Hope Scholarships were intended to achieve. Yes, there was a lot of overly-ambitious rhetoric in the 1996 presidential campaign, but when the legislation passed in 1997, the Clinton Administration realized that the real value might be as a targeted-tax cut alternative to a general tax cut, leading to a balanced federal budget and subsequently lower interest costs for student borrowers. Lesser competition in the federal budget from interest on the debt likewise led to greater spending on other postsecondary programs (although how much that helped students is also debatable).

None of which is to say that these programs couldn't work, if better designed.