State Higher Education Spending and the Tax Revolt Author(s): Robert B. Archibald and David H. Feldman Reviewed work(s): Source: The Journal of Higher Education, Vol. 77, No. 4 (Jul. - Aug., 2006), pp. 618-644 Published by: Ohio State University Press Stable URL: http://www.jstor.org/stable/3838710 . Accessed: 15/11/2011 13:52 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Ohio State University Press is collaborating with JSTOR to digitize, preserve and extend access to The Journal of Higher Education. http://www.jstor.org

Robert B. Archibald David H. Feldman State Higher Education Spending and the Tax Revolt Government subsidization of public higher educa- tion primarily is a function of the states. Even today, with budgets emerging from crisis, the states provide over four dollars of support for higher education expenses for every dollar of federal subsidy. Yet public effort in support of higher education-measured as state funding per $1,000 of personal income-has been in decline for the last quarter cen- tury. The magnitude of this decline has been quite significant. Aggregate state effort has fallen by 30% since the late 1970s. In this article, we evaluate the connection between state higher educa- tion effort and the tax revolt that began in the 1970s. The tax revolt gave birth to a set of laws and constitutional provisions that have dramatically changed taxing and spending policies in many states. The tax revolt is based on the notion that government is too large, and that the appropri- ate strategy is to "starve the beast." The most prominent legal change re- sulting from the tax revolt is the Tax and Expenditure Limitation (TEL), which limits the growth of state revenue or expenditures to some outside indicator, most commonly the growth of state personal income. Starting in the late 1970s, 23 states adopted a TEL. In addition, though this hap- pened more slowly and less often, states added supermajority require- ments (SMRs), typically two-thirds, for the legislature to approve tax in- creases. Thirteen states have an SMR. We use a 41-year panel of state data from 1961 to 2001 to investigate the importance of these tax revolt institutions for state effort on higher Robert B. Archibald is Professor of Economics at the College of William and Mary. David H. Feldman is Professor of Economics at the College of William and Mary. The Journal of Higher Education, Vol. 77, No. 4 (July/August 2006) Copyright ? 2006 by The Ohio State University

State Higher Education Spending 619 education. Both TELs and SMRs prove to be very robust predictors of the time series and cross-sectional variation in state funding effort. To- gether with rising costs, this retreat of public effort is a major compo- nent of the financial difficulties faced by state-supported colleges and universities. One measure of the consequences of this financial crisis at public institutions is the ratio of spending per full-time student at public institutions relative to private institutions. In 1980, public institutions spent 70 cents for every $1 spent at private colleges and universities. By the late 1990s that figure had fallen to 55 cents (see Kane, Orszag, & Gunter, 2003). Understanding the causes of this retreat is crucial if there is any chance of reversing it. Changing the political climate is never easy, but our results suggest that the task ahead is even more difficult. All of the SMRs and a majority of the TELs are amendments to state constitutions. They are firmly in place. The questions that motivate our article arise at three distinct levels of generality. At the highest level, the issue is whether institutions actually affect policy outcomes. At the next, more specific level, the question is whether the particular institutions spawned by the tax revolt affect pol- icy. There is an extensive literature, both theoretical and empirical, on these two questions. Our contribution comes from extending the discus- sion to the third and most specific question: Have the tax revolt institu- tions had a meaningful effect on higher education effort in particular? In this introduction, we briefly review the literature on the highest-level question. We discuss the more specific implications of the tax revolt in- stitutions in separate sections of the paper. That political institutions should matter for policy outcomes is not self-evident. In much of the political economy literature as it has evolved since the work of Anthony Downs (1957), policy outcomes are driven by the preferences of the median voter. This is true if politicians know voter preferences and can align their proposals accordingly. In this case, there is little scope for the institutional structure of decision mak- ing to exert an independent effect on policy outcomes. Institutions be- come important again whenever any of the assumptions of the Downsian paradigm are removed. In particular, political parties may care about policy as well as win- ning elections. They may have imperfect information about voter prefer- ences, and those preferences may not be single peaked (see Alesina, 1988). They may be dependent on political contributions that come from the extremes within a polarized electorate. An independent role for in- terest groups also calls into question the spatial choice nature of median voter models.' Lastly, in multi-issue political settings, the theoretical work of Kenneth Shepsle and Barry Weingast (1981) and Thomas

620 The Journal of Higher Education Romer and Howard Rosenthal (1978) has shown the importance of re- strictions on the power to propose policies within a legislative process. These changes to the basic assumptions may lead to departures from the median voter's preferred outcome or to the reduced political salience of the median voter, creating a role for institutions to affect policy choices. Timothy Besley and Anne Case (2003) have provided a thorough re- view of the theoretical and empirical literature on the role political insti- tutions play in determining policy choices in the United States. They consider electoral rules, such as limitations on who can vote and whether proportional representation is used, and decision making rules, such as the line item veto, rules for appointing regulators, and whether agencies are independent or not. They conclude their detailed review of this literature by saying that the evidence from the U.S. clearly indicates that institutions do matter: "There can be little doubt that the structure of political representation, the terms on which elections are fought, and the rules governing the policy process, all influence policy outcomes" (Besley & Case, 2003, p. 67). We address the remaining questions in six additional sections. In the next section, we explain the institutions of particular interest to us, TELs and SMRs, and review the literature about their effects on state budgets. In the third section, we review the evidence of the slowdown in higher education spending and the literature on this slowdown. In the fourth section, we describe the model and the data we use to test our hypothe- sis that the tax revolt institutions have an important impact on state spending effort for higher education. The fifth section presents our re- sults. We discuss the policy implications of our finding in the sixth sec- tion. The final section contains our conclusions. Tax Revolt Institutions and Research on the Tax Revolt Tax Revolt Institutions Individuals who did not trust legislatures started the tax revolt. They were deeply concerned with the growth of government at all levels, but particularly with the growth of state government. The basic strategy of the tax revolt was to put hard limitations on the growth of state tax rev- enues or direct limits on spending growth. Given balanced budget re- quirements, the approaches are very similar. There are a number of theoretical reasons to expect that marginal vot- ers might respond favorably to proposals that reduce the flow of re- sources toward public sector uses chosen by a legislature (see Mat- susaka, 1995). Agency problems in politics may be similar to those that

State Higher Education Spending 621 characterize corporate governance. If constituents have limited informa- tion about their representatives, legislators may shirk and implement policies contrary to constituent interests without being punished at the polls. Moreover, logrolling within legislatures may help win approval for projects that are highly valued by some representatives even if they do not command a public majority. This provides a rationale for why initia- tives make their way onto the ballot-citizens distrust elected officials. Many of the TELs, however, were results of the legislative process it- self. There is ample support in the literature for why legislatures might act this way.2 TELs and SMRs throw sand in the gears of government, thus constraining future legislatures that may have a different attitude to- ward the fiscal role of government. Starting in 1976, 23 states enacted TELs. Sixteen of the 23 TELs were enacted in the four-year period from 1977 to 1980. A supermajority requirement for a tax increase is moti- vated by the same fear of the growth of government. If we make raising taxes more difficult, it will be harder for government to grow. SMRs are much less prevalent than TELs, and in most cases, they are a much more recent phenomenon. Only 13 states have such requirements, and six of these enacted their SMR in 1992 or thereafter. Table 1 lists the states that have TELs and some of the characteristics of the provisions. These TELs are all limitations on total state spending or total state revenues as opposed to similar restrictions that affect par- ticular taxes, typically property taxes. The TELs are a hodgepodge of different types of regulations. Some are constitutional provisions, and others are statutory. Some TELs restrict expenditures and others restrict taxation. Most limitations are based on the growth of personal income in the state, but some states use population growth and inflation. In addi- tion, the exact composition of the budget subject to the restriction varies across states. In our empirical work below, we will focus on three dis- tinctions among TELS. The first of these distinctions was suggested by Besley and Case (2003), who distinguished between TELs that impose restrictive limits and ones that impose non-restrictive limits. Non-restrictive limits are ones that are either binding on the administration's budget submissions but not on the budget the legislature eventually passes, or ones that re- quire only a simple majority of the legislature to override. A priori one would expect restrictive TELs to have a greater effect on the decisions of budget makers than non-restrictive ones have. Our second distinction concerns the breadth of the TEL. Breadth is a difficult thing to measure, but it clearly varies across states. For the purposes of our analysis, we determined whether college tuition, or expenditures funded by tuition, was affected by the TEL. In cases in