Value added answer

A sales tax dividend could be just the ticket for a US sector hit by wave after wave of state cuts, opines Hamid Shirvani

January 5, 2012

Financial support for public higher education in the US has been declining for the past two decades, but more recently universities have experienced massive cuts as states have responded to stalling economies and drastically reduced tax revenues by wielding the axe.

According to calculations by the American Association of State Colleges and Universities, state support for four-year public universities fell in 35 states for 2011-12. In 13 states, the funding reductions were in double-digit percentages. The largest decreases were in New Hampshire (-48 per cent), Arizona (-24 per cent), California and Washington (both -23 per cent).

In response to declining revenues, four-year public universities increased their tuition fees by an average of 7.9 per cent in 2010-11 and 8.3 per cent for 2011-12. In states that made larger decreases to higher education spending, there were even larger fee rises.

But such dramatic fee hikes pass the costs directly to consumers - desperate measures aimed at making up the difference - and are already shutting thousands of deserving students out of the education for which they have prepared. And just as the US strives to improve its global competitiveness, we see states across the country stifling the very thing that will keep the nation competitive: college graduation rates.

President Barack Obama has set out his aspiration for the US to return to its position of having the highest proportion of college graduates in the world. He is pushing Congress to overhaul student-loan programmes and make permanent the $10,000 (£6,300) tax credit for college expenses. But these measures are not nearly enough to achieve his proclaimed goal.

The states need to step up and find a solution that will provide a reliable, stable income stream for higher education. We need a sustainable, equitable, generally predictable income source that would eliminate the need for university officials to go cap in hand to state legislatures each year to fight, bargain, browbeat or beg - whatever it takes - to keep their budgets at manageable levels. We need a single solution we can count on. In my view, we need to dedicate a percentage of sales taxes to higher education.

The average state sales tax in the US is approximately 5.5 per cent, or 9 per cent when taxes charged by local governments and special districts are included. A 1 to 2 per cent increase would still put the US figure well below the value added tax that applies to sales in Europe and many other parts of the world, including the UK (VAT at 20 per cent), Germany and the Netherlands (19 per cent), Russia (18 per cent) and China (17 per cent).

As an example, California had $463 billion (£295 billion) of taxable transactions in 2009-10. A 2 per cent tax that year on total transactions would have yielded $9.26 billion. That is just slightly less than the $9.4 billion in general funds that was allocated in 2010-11 to support the state's tripartite higher education system - and significantly more than the $8 billion of general funds allocated for 2011-12.

If student contributions continue to go up and state support continues to go down, fewer and fewer young Americans will be able to take advantage of the nation's still-great state colleges and universities. Not only will fewer students be able to afford university, but the quality of our colleges and universities themselves will be eroded beyond recognition, too.

Voters may become more supportive of future efforts to reverse this trend when they see the effects of a crumbling education system. Unfortunately, by that stage the damage will have been done and the cost of repairing the system will be significantly higher.

As it stands, the US is on the road to the complete destruction of the greatest higher education system in the world. The UK and other countries face similar threats. As global economic powerhouses such as India and China continue to pump more money into their universities, can we afford to fall further behind?

For the US, a simple sales tax could be the solution.

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