October 20, 2014

Federal Tax Expenditures For Higher Education

Mark J. Warshawsky

Former Senior Research Fellow
Summary

The tax-exempt higher education sector is huge and growing, as government policies encourage demand and tuition prices continue to rise. There are many higher education tax benefits, on both the supply and demand sides, and estimated tax expenditures for the sector reached $50 billion, or about $2,400 per student, in 2012.

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As millions of students begin a new school year at colleges and universities around the country, it is worth pausing for a moment to consider the large size of this mainly tax-exempt sector, its poor price performance, and the significant federal tax expenditures associated with it. Although we will not claim to have proved causal relationships, in the last decade: (1) the sector has grown rapidly and is massive, with $479 billion in revenues in 2011-2012; (2) tuition prices have significantly outstripped general price inflation; and (3) even ignoring direct expenditures and subsidized student loans from the federal government, as well as state and local government support, the value of government funding through various federal tax expenditures has grown rapidly and is substantial. It is reasonable to ask how much of this government spending is unnecessary, misdirected, or even harmful to public policy goals at a time of fiscal constraint.

A. Size of the Higher Education Sector

As shown in Figure 1, student enrollment in colleges and universities has increased rapidly in the postwar years. Some of that expansion may be attributed to the baby boom and general population growth, but there has also been greater motivation to enroll as higher levels of education have become the norm in both the job market and social life. The biggest spurts occurred in the late 1950s through the 1960s, the late 1980s, and the 2000s, likely reflecting demographics, the competing attractions, or lack of them, of the job market and military service, and the costs, net of all sorts of government and private support, of tuition. There are now more than 21 million students enrolled in some form of higher education.

Another measure of size is the total revenue of the sector, broadly defined to include all levels of postsecondary institutions, both public and private, as well as affiliated hospitals, endowments, sports activities, and research. According to data from the National Center for Education Statistics, total revenue in higher education grew from $399 billion in 2005-2006 to $479 billion in 2011-2012, despite fluctuations in investments, grants, appropriations, and gifts, and steadily increasing tuition.

Finally, statistics from the Delta Cost Project indicate the number of both public and private employees in the sector, at all levels, from community colleges to research institutions, including faculty as well as professional, support, and administrative staff. In 2000 there were 2.5 million employees; by 2012 that number had grown to 3.2 million.

These indicators — students, revenue, and employees — consistently show robust growth in the higher education sector in the last decade, despite overall weaknesses during the same period in the economy, personal income, and the labor and financial markets.

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