States aggressively invest to persuade business firms to locate within their borders. They often offer very attractive packages that include tax breaks and publicly supported infrastructure improvements at no cost to the firm being romanced.
But even though a very important attraction for many potential employers is a workforce with a large percentage of college graduates, significant cuts to public higher education budgets are fairly common. These budget cuts have caused universities to raise tuition, which in turn has led to larger student loan balances, more time spent in low-paying jobs and reduced academic performance.
Why are states cutting their higher education expenditures? The causes are many, but a frequently overlooked reason is the interstate tax competition resulting from their economic development efforts. Businesses are attracted by spending that produces direct and immediate advantages to the firm (such as road improvements), but much less attracted by spending for public benefits that only indirectly benefit them, such as on higher education or for feeding hungry people. When firms choose to locate in lower-taxed states, support for the public sector is forced down.
Because the states are in competition with one another, it is unrealistic to expect them to meet the nation's educational goals. The incentive to cut taxes to attract businesses is at odds with the national goal of educating the next generation of our young people.
Individual state support for higher education is further diluted because many students leave the state upon graduation. This is especially likely when students major in subjects that are not needed by in-state businesses but are of great value elsewhere. For example, computer science majors often leave their home state to work in the high-tech communities of the East and West Coast.
Why should a Midwestern or Southern state invest in such education when its recipient is likely to leave? Because of this mobility, state legislators and governors perceive a greater advantage from cutting state taxes to improve the state's business climate. From the national point of view, this results in underfunding of higher education.
The federal student loan program plays a strong role in offsetting the adverse incentives facing the states. That loan program works on the demand side to enable students to shoulder more of their own educational expenses, which is consistent with taxpayers' preferences.
The loans permit students to spread the rising costs of college over many years, reducing their need to work during college when they should be investing that time in earning higher grades in more rigorous courses of study. Meanwhile, the money flow from the loans sustains our existing higher education institutions, allowing them to focus on creating a workforce for the nation, not for specific states.
Interstate tax competition promotes a "race to the bottom" in higher education, placing the United States at a serious competitive disadvantage in the global economy in which our major trading partners finance education nationally. Features of our much maligned federal student loan program — very long repayment terms, subsidized interest rates — can turn this race into a "race to the top."
William L. Holahan is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.