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The Fiscal Impacts of College Attainment

Research in Higher Education volume 51, pages 220–247 (2010)Cite this article

Abstract

This study quantifies one part of the return to U.S. public investment in college education, namely, the fiscal benefits associated with greater college attainment. College graduates pay much more taxes than those not going to college. Government expenditures are also much less for college graduates than for those without a college education. Indeed, over an average lifetime, total government spending per college degree is negative. That is, direct savings in post-college government expenditures (conservatively, about $85,000 per four-year-equivalent degree over an average lifetime) are greater than government expenditures on higher education (generously, about $74,500 per degree). Plus, the direct extra tax revenues from college graduates alone (roughly $471,000 per degree over a lifetime) are more than six times the gross government cost per college degree. The average real fiscal internal rate of return on government investment in college students is conservatively estimated to be 10.3%.

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Fig. 1
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Notes

  1. According to data from State Higher Education Executive Officers’ State Higher Education Finance project, national real state and local appropriations for postsecondary education in FY 2005 were 3.6% lower than in FY 2000 (these appropriations have increased in more recent years, though), while there were increases in state income and in the number of college students during this period. For detailed discussion of this issue see Longanecker (2006) and Trostel and Ronca (2009).

  2. This is at least partly due to increasing fiscal pressures from slow growth in state tax bases and increasing state spending on Medicaid and corrections (see Hovey 1999; Kane et al. 2005).

  3. A few of the many examples are Card (1999), Mortenson (2001), Harmon et al. (2003), Baum and Payea (2004), Institute for Higher Education Policy (2005), and Barrow and Rouse (2005).

  4. Some examples are Haveman and Wolfe (1984), Wolfe and Haveman (2003), Baum and Payea (2004), Lochner and Moretti (2004), McMahon (2004), Rizzo (2004), Topel (2004), and Institute for Higher Education Policy (2005).

  5. There is also some similar literature that has quantified the long-term fiscal impacts of government investment in pre-school programs (e.g., Currie 2001; Heckman and Masterov 2004; Lynch 2004; Belfield et al. 2006), and some recent literature that has quantified the fiscal effects from high school completion (e.g., Krop 1998; Vernez et al. 1999; Goldhaber and Player 2003; Brady et al. 2005; Levin et al. 2007).

  6. Following standard practice, the absence of cohort effects is implicitly assumed. That is, average earnings across ages in a given year are implicitly assumed to reflect average earnings over individual’s lifecycles.

  7. To be specific about assumed social-insurance receipts during college, degree holders are assumed to receive the level of benefits received by average graduates with: high school diplomas at age 19, associate’s degrees at age 21, bachelor’s degrees at age 23, master’s degrees at age 25, and the interpolated values at ages 20, 22, 24, and 26. For example, the imputed social-insurance benefits during college for a master’s degree is B H19  + (B H19  + B A21 )/2 + B A21  + (B A21  + B B23 )/2 + B B23  + (B B23  + B M25 )/2, where B is the average annual level of benefits, the superscripts H, A, B, and M, respectively, denote high school, associate’s degree, bachelor’s degree, and master’s degree, and the subscripts denote age.

  8. With the exception of payroll taxes, the burden of taxes is assumed to fall on the payers. The real burden of employers’ share of federal payroll taxes is assumed to be borne by workers.

  9. See O’Hara (2004) for information on the CPS procedures used to estimate individuals’ tax burdens.

  10. See Card (1999) and Harmon et al. (2003) for recent reviews of this literature.

  11. See Groot and Maassen van den Brink (2004, unpublished manuscript), Cutler and Lleras-Muney (2006), and Chevalier and Feinstein (2006) for recent reviews of this literature.

  12. For surveys of this literature, see Katz and Autor (1999) and Autor et al. (2005).

  13. These adjustments probably err on the high side (i.e., conservative in estimating the fiscal return to states). Trostel (2007) also found that the net interstate leakage of new college graduates is evidently less for the case of public colleges than for private colleges. With the exception of professional and doctorate degrees, there appears to be no net interstate loss of new graduates from public institutions. The net loss of new professional and doctorate graduates to other states is evidently about the same for public and private institutions. Because most state support for college students is clearly directed toward those in public institutions, the emphasis in this study is on graduates from public colleges. Nonetheless, the more conservative approach is taken.

  14. For example, see Hansen and Weisbrod (1969) and Fernandez and Rogerson (1995).

  15. School lunches are for the family rather than for the individual. It seems appropriate to include the value of school lunches for children.

  16. Medicaid benefits are for the family rather than for the individual, because unlike other forms of public assistance, eligibility rules differ for parents and children, and it seems appropriate (and consistent) to include the Medicaid benefits of children. Also, the CPS measures Medicaid benefits as its insurance market value as opposed to the value of health care bought with Medicaid.

  17. The CPS question about health condition suggests that this could be important. Among recipients of Medicaid age 27 and older, 38% of those with only a high school education report their health to be very good or excellent, compared to 54% for those with a bachelor’s degree as their highest qualification.

  18. To be more specific, federal spending on welfare is derived as the sum of direct payments for food stamps and housing assistance in Consolidated Federal Funds Report plus grants to state and local governments from the Department of Agriculture’s Food and Nutrition Service (mostly child nutrition, food stamps, WIC) and from the Department of Health and Human Services’ Administration for Children and Families (Temporary Assistance to Needy Families, Head Start, and various other programs) in Federal Aid to States. State and local welfare spending is derived as public welfare less vendor payments (i.e., Medicaid) in State and Local Government Finances less the federal grants above.

  19. As with Medicaid, Medicare benefits are for the family rather than for the individual because of the importance of spousal benefits, and Medicare benefits are measured as their insurance market value.

  20. The CPS question about health condition again suggests that this could be important. Among recipients of Medicare, 33% of those with only a high school education report their health to be very good or excellent, compared to 50% for those with a bachelor’s degree as their highest qualification.

  21. The relationship between college education and work disabilities is similar to the relationship between college education and health. CPS data indicate that for those aged 27 and older, 24% of those with only a high school education report a disability or health problem that limits their ability to work, compared to 15% of those with a bachelor’s degree as their highest qualification.

  22. These unemployment rates across education categories are calculated for those within the ages of 27 and 79 using the CPS outgoing rotations groups.

  23. Unemployment taxes are ignored in the calculations because employers bear the statutory liability. However, the real incidence of the tax may fall on employees to at least some extent.

  24. This cost per prisoner is calculated using all corrections costs, including probation. Thus, the resulting estimates of fiscal premia are for corrections costs rather than just prison costs. This interpretation imposes the implicit assumption that the probabilities of being on probation are roughly proportional to the probabilities of being incarcerated.

  25. Moreover, prisoners (and the homeless) are not included in the CPS. CPS sample selection is not entirely independent of college attainment. Thus, the average high school graduate pays disproportionately less tax revenues than shown earlier. As a result, the preceding estimates of fiscal premia in tax revenues are understated to the extent that the CPS sample is not completely random with respect to college education.

  26. Separate estimates for federal and state corrections cost per inmate are derived using different federal and state incarceration proportions. Adult population proportions in state and local prisons and jails are 1.122, 0.289, and 0.098% for high school diploma, college below a bachelor’s degree, and bachelor’s degree or higher, respectively.

  27. Among the uninsured age 27 and older, 52% of those with only a high school education report their health to be very good or excellent, compared to 65% for those with a bachelor’s degree as their highest qualification.

  28. The NIPA data for calendar years 2002–2005 indicate that the federal share is about 19%.

  29. One could reasonably argue that expenditures financed from publicly owned endowments are public contributions. One could also argue that some of these endowments are established through private donations.

  30. Specifically, the fiscal weights are 19.7% for associate’s degrees, 65.3% for bachelor’s degrees. 10.2% for master’s degrees, and 4.7% for professional and doctorate degrees.

  31. To be consistent with this study’s measure of cost per degree, Table 6 shows the present values of the fiscal premia for the graduate degrees relative to the assumed beginning of graduate school (i.e., the present values at age 23).

  32. This number is the sum of the estimated net migration rates from Trostel (2007) times their respective weights.

  33. See, for example, Haveman and Wolfe (1995).

  34. The results in Table 7 and Fig. 4 are derived assuming half-time work and half-time college attendance beginning at age 19. Thus, an associate’s degree is assumed to take 4 years, a bachelor’s degree takes 8 years (i.e., graduation at age 27), and so on. During college these students are assumed to pay half as much taxes, receive half as much unemployment insurance on average, etc. as full-time workers.

  35. The average state fiscal rate of return varies across states. Among the six New England states, for example, the average fiscal rate of return ranges from 3.0 to 4.7%.

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Acknowledgments

I am grateful for the feedback and support from New England Public Policy Center at the Federal Reserve Bank of Boston. For constructive comments I am also grateful to Sara Goldrick-Rab, Lee Hansen, Nik Hawkins, Eric Olds, Darcy Saas, Alicia Sasser, Robert Tannenwald, and the anonymous referees.

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Authors and Affiliations

  1. Margaret Chase Smith Policy Center, School of Economics, University of Maine, Orono, ME, USA

    Philip A. Trostel

  2. Wisconsin Center for the Advancement of Postsecondary Education, University of Wisconsin, Madison, WI, USA

    Philip A. Trostel

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  1. Philip A. Trostel
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Correspondence to Philip A. Trostel.

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This paper was written while serving as a visiting scholar at the New England Public Policy Center at the Federal Reserve Bank of Boston.

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Trostel, P.A. The Fiscal Impacts of College Attainment. Res High Educ 51, 220–247 (2010). https://doi.org/10.1007/s11162-009-9156-5

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Keywords

  • College education
  • Fiscal
  • Public finance
  • Tax revenues
  • Expenditures
  • Government investment
  • Rate of return

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