Wednesday, December 16, 2009

Freshman, can you spare a dime?

Pittsburgh considers a 1 percent tax on student tuitions to fund the city's retirement system.
The mayor of Pittsburgh calls it the “Fair Share Tax.” But to officials at the city’s 10 colleges and universities and many of their 100,000 students, it is anything but.

On Wednesday, the City Council is expected to give preliminary approval to Mayor Luke Ravenstahl’s proposal for a 1 percent tuition tax on students attending college in Pittsburgh, which he says will raise $16.2 million in annual revenue that is needed to pay pensions for retired city employees. Final Council action will be on Monday.
In principle, a tax on students is fair. While students contribute to the economy of a city and pay some taxes directly (sales taxes) and indirectly (property taxes through their landlords), they also require services. An average annual tax of $162 doesn't seem unreasonable for those services.

Of course, the students did not contribute to the retirement shortfall, so tying the increase to retirement funding is an economic head scratcher (a political explanation is that the mayor and city council are pandering to older voters at the expense of younger non-voters). Ultimately, however, the revenue is fungible (increased payments to the retirement system reduce other budgetary pressures).

Fungibility also applies to the colleges and universities. The likely alternative to a tuition tax would be "voluntary" payments by the institutions to the city. Some of the costs of those payments would be passed on to the students in the form of higher net tuition.

Students elsewhere who think that they are avoiding this "tax" should think again. Many institutions have arrangements with their local communities to make payments in lieu of taxes. Seen or unseen, these costs enter students' tuition bills.

Less fair in the tax proposal is the distribution of the tax burden across institutions. Students pay only a portion of the costs of their educations through tuition. Institutions receive funding from federal, state, and private sources. The effective tax burden will be highest for institutions that are the most tuition dependent. It will be relatively low for institutions that receive large portions of their revenue from the state or from endowment support.

If Pittsburgh goes through with this, look for other cities to follow its example.