214 S. Soo Lee et al. Economics of Education Review 18 1999 213–221
Weisbrod work, Pechman’s study also did not consider financial aid to students in estimating benefits and
costs. As McGuire 1976 noted, omission of financial aid is likely to lower the relative net benefit received by
students from low-income families.
A study by Windham 1970 for Florida supported the Hansen-Weisbrod conclusion that public financing of
higher education leads to a redistribution in favor of higher income groups. His methodology is similar to
Pechman’s, but he included federal financial aid and taxes in the estimation of costs and benefits. One major
weakness of Windham’s research was the application to Florida of tax incidence estimates that were averages for
the entire United States.
A careful study on the subject was conducted by Hight and Pollock 1973. They compared the net-transfer
effects resulting from public higher education programs in California, Florida and Hawaii by using a modified
version of the Pechman-Windham methodology. In a simple and elegant manner, they compared, for six fam-
ily-income groups, the percentage distribution of stu- dents and the percentage distribution of state and local
tax burden. Although they found that the patterns dif- fered across the three states, the overall picture p. 324
seemed to be that of a transfer from high-income groups to middle-income or lower middle-income groups. The
lowest-income group was a net loser in all cases. The Hight-Pollock study, however, did not take account of
financial aid received by the students.
Our study makes an assessment of the distributive effect of public subsidies to undergraduate education at
state universities and community colleges in Illinois dur- ing the year 1989. It estimates, for various income
classes, the tax cost of such subsidies and the benefits received from participation in the public higher edu-
cation system, including the financial aid received by stu- dents from the state, and thus determines the net benefit
received by each income group. At the time of the Hight- Pollock study, state-funded financial aid to undergrad-
uate students may have been smaller than at present, and thus it is more important to include it now.
The motivation for the research is threefold. First, Illi- nois ranked seventh in the nation in terms of current-fund
expenditures of public institutions of higher education in 1988–89 U.S. Department of Education, 1992, p. 336.
Therefore, a study that examines the redistributive effects of such a substantial outlay on public higher edu-
cation should have considerable policy relevance. Second, we include in the analysis the state-funded fin-
ancial aid given directly to undergraduate students, which most earlier studies did not consider. Third, much
time has elapsed since the earlier studies were conducted. During this period, the structure of taxes, the distribution
of income and thus the tax base, and income distribution of students enrolled in higher education may have
changed. Any of these changes could alter the con- clusions reported in the earlier studies.
2. The design of the study, and the main results
In 1989, Illinois public higher education system con- sisted of 12 university campuses and 50 community col-
leges. As indicated by Illinois Board of Higher Education 1990, p. 54, and Illinois Community College Board
1990, in 1989, the 12 university campuses had a full- time-equivalent FTE enrollment of 133 234 undergrad-
uates, and the 50 community colleges had an FTE enrollment of 174 437. Public universities are supported
largely by state’s general-revenue funds State of Illinois, 1989. Besides the tuition income, some funding also
comes from the federal government and private sources, but the amounts from federal and private sources are
relatively small. Community colleges are financed mainly from the state’s general-revenue funds, local pro-
perty-tax revenues, and the state’s corporate personal property replacement tax CPPRT revenue.
2
The methodology adopted in our study consists of the following steps:
1. Compute the amount of the state’s tax revenue appro- priated for operations of state universities and public
community colleges. Compute also the local property- tax revenue and CPPRT revenue appropriated for
operations of public community colleges.
2. Estimate the proportion of the state appropriations to the universities that is attributable to undergraduate
education. This requires campus-specific information on the proportion of costs attributable to undergrad-
uate education.
3. Compute the amount of direct financial aid to under- graduate students in public universities and com-
munity colleges from the state’s general-revenue funds.
4. Using data on family-income distributions of under- graduate enrollment and financial-aid recipients, con-
struct the distributions of items 2 and 3 by broad income groups, and obtain their sum for universities
and community colleges. These would be the “bene- fits” of undergraduate education in state universities
and community colleges for each income group. Note again that these benefits accrue from the use of tax-
revenue funds for undergraduate education at public institutions, and the funding contributed by tuition
monies or federal or private sources is not included.
5. Estimate the tax share of each income group in rel-
2
Funds from property taxes including corporate personal property replacement tax accounted for about 58 percent of the
appropriations for operations of community colleges, while state funds accounted for about 42 percent.
215 S. Soo Lee et al. Economics of Education Review 18 1999 213–221
Table 1 State and local tax revenues used for subsidizing undergraduate education in public higher education institutions in Illinois, 1989
Type of institution and subsidy Amount thousand dollars
State universities 697 833
State’s general revenue appropriations for universities 648 626
Financial aid to students from state’s general revenues 49 207
Public community colleges 458 284
State’s general revenue appropriations for community colleges 184 871
Local revenue funds appropriated for community colleges 257 557
Financial aid to students from state’s general revenues 15 856
Total 1 156 117
Note. These are the means for the fiscal years 1988–89 and 1989–90, and are based on the following sources: Hines 1990, p. 17; Illinois Board of Higher Education 1991a, p. 16; Illinois Community College Board 1990, pp. 79, 82; Illinois Student Assistance
Commission 1990, pp. 16, 21.
evant state taxes and in local property taxes. Using these shares, compute the distribution of tax-revenue
costs, which consist of items 2 and 3, for various income groups.
6. From the distributions mentioned in 4 and 5, compute the net benefit for each group for the entire system
and also separately for the universities and the com- munity colleges.
3
Table 1 reports the estimated appropriations from the state’s general-revenue funds for universities and com-
munity colleges and for direct financial aid to students and the local-revenue appropriations for community col-
leges. The appropriations for community colleges and financial aid are entirely for undergraduate education and
no adjustment is needed. The appropriations for state universities have been adjusted to reflect the proportion
attributable to the undergraduate programs at each uni- versity. The proportion varies from 0.50 to 0.87 at the
12 campuses.
4
Table 2 reports the estimated distribution of family income of students enrolled at public universities and
community colleges. These are based on surveys that covered a fairly large segment of undergraduate students
at the universities and community colleges, and provide a reasonable indication of the distribution of the benefits
of undergraduate education at public institutions of higher education in Illinois in 1989. It will be seen from
Table 2 that the distribution of university students is more skewed toward higher-income groups than is the
3
This method assumes that all benefits are internal to the student and the family, and, as already noted, the benefits equal
the appropriations from state and local revenues for undergrad- uate education.
4
Additional details concerning the adjustments are provided by Lee 1993, pp. 40–42.
case for community colleges which are dominated by students from middle-income families. It may be noted
that the distribution for the universities is derived from campus-specific information, but that for community col-
leges is based on family-income data for the entire sys- tem.
5
Table 3 presents the family-income distributions of students in state universities and community colleges
who received direct financial aid from the state’s gen- eral-revenue funds through the Monetary Award Pro-
gram MAP.
6
These represent the distribution of state’s tax-revenue benefit in the form of direct financial aid.
Since MAP is a need-based program, most recipients are from families whose annual income is below 30 000.
7
Using the information on which Table 2 and Table 3
5
Lee 1993, pp. 32–33, 46–48, provides more details about the sources and the procedure.
6
We include state financial aid that is in the form of a “grant” and is neither a loan nor a payment for work. Federal financial
aid is not considered since the focus is on the distributional consequences of the state subsidies. The report by Illinois Board
of Higher Education 1991b, p. 55 indicates that, in terms of the amount disbursed, federal Pell grants are close to the state’s
monetary award program that we have included. Since Pell grants are also need-based, and since federal taxes are largely
progressive, as noted by Pechman 1985, p. 62, inclusion of federal aid is likely to indicate larger net transfers to middle-
and low-income groups.
7
The state’s Monetary Award Program MAP provides grants to students to help pay for tuition and fees at Illinois
colleges and universities. It is a need-based program, and the eligibility and the amount of grant depend largely on a family
income, b tuition and fees at the college or university attended by the student, c academic load carried by the student, and
d in the case of parent-supported applicants, the number of college students the family supports.
216 S. Soo Lee et al. Economics of Education Review 18 1999 213–221
Table 2 Percentage distribution of undergraduate enrollment at Illinois public higher education institutions by income group, 1989
Income group annual family income in State universities
Public community colleges dollars
under 10 000 7.1
7.3 10 000 to 19 999
10.3 13.3
20 000 to 29 999 14.9
21.4 30 000 to 39 999
18.6 25.7
40 000 to 49 999 15.2
15.3 50 000 to 59 999
12.6 8.2
60 000 and over 21.3
8.8 All income groups
100.0 100.0
Note. The distribution for the public universities is a weighted average of the corresponding distribution for each campus, and the weights are the student enrollments. The numbers are derived from the following sources: American College Testing Program 1988,
The ACT Class Profile Report: Freshmen, Table 4.5 and Table 15; American College Testing Program 1989, The ACT Class Profile: Illinois Public Junior Colleges Composite Report, Table 4.5; Morris et al. 1990.
Table 3 Percentage distribution of undergraduate recipients of financial aid by income group in Illinois public higher education institutions,
1989 Income group annual family income in
State universities Public community colleges
dollars under 10 000
42 60
10 000 to 19 999 26
25 20 000 to 29 999
20 12
30 000 to 39 999 9
3 40 000 to 49 999
3 50 000 to 59 999
60 000 and over All income groups
100 100
Note. This is based on Illinois Student Assistance Commission 1990, pp. 48–49.
are based, the distribution of benefits shown in Table 1 across the various income groups is estimated and
presented in Table 4.
8
It may be noted again that while all community colleges are treated as single system, for
the public universities the family-income distribution of enrollment in Table 2 and of the state’s institutional
8
For distributing the benefits of financial aid, we proceed on the basis that the average award is the same for each income
group. This is a reasonable procedure since Illinois Student Assistance Commission 1990, tables 2.4b and 2.4c indicates
only small variations in the average award across the various income groups. It may be noted here that the concepts of “fam-
ily income” used in the surveys on which Table 2 is based may not be the same as that underlying Table 3. However, these
seem close enough to enable compilation of the distribution of benefits for the sum of institutional appropriations and finan-
cial aid.
appropriations in Table 4 are based on campus-specific information.
9
The next step is to determine who pays for the benefits and costs reported in Table 1. To estimate the tax share
of each income group, the amounts shown in Table 1 are allocated according to the estimates of the incidence of
state and local taxes that are relevant to the financing of higher education. State taxes that go into the general-
9
Therefore, while the distribution of appropriations for com- munity colleges in Table 4 is identical with that for enrollments
in Table 2, the percentage distributions of enrollments in Table 2 and of appropriations in Table 4 for the universities are not
identical. The distribution of appropriations in Table 4 is more accurate than what one would get by simply applying the
enrollment distribution of Table 2 to the total state appropriation of about 648.6 million dollars for undergraduate education at
the universities. See also the note to Table 4.
217 S. Soo Lee et al. Economics of Education Review 18 1999 213–221
Table 4 Distribution by income group of benefits of state’s general revenue and local-fund appropriations for undergraduate education and
of direct financial aid to students in Illinois public higher education institutions, 1989 Income group
State universities Public community colleges
Total Percent
annual family institutional
financial aid institutional
financial aid ’000
share in total income in
appropriation ’000
appropriation ’000
dollars ’000
’000 under 10 000
56 319 20 667
32 297 9 514
118 797 10.28
10 000 to 19 999 76 471
12 794 58 843
3 964 152 072
13.15 20 000 to 29 999 102 717
9 841 94 680
1 903 209 141
18.09 30 000 to 39 999 123 855
4 429 113 704
475 242 463
20.97 40 000 to 49 999
94 259 1 476
67 691 163 426
14.14 50 000 to 59 999
76 781 36 279
113 060 9.78
60 000 and over 118 224
38 934 157 158
13.59 All income
648 626 49 207
442 428 15 856
1 156 117 100.0
groups Note. These numbers are derived from the sources on which Tables 1–3 are based. It may be recalled that both distributions for
community colleges and the distribution of financial aid for the universities are based on system-wide information, but that for institutional appropriation for the universities is derived from campus-specific data on state appropriations. Since neither students’
family income nor state appropriation per student is identical across campuses, the percentage distribution of state appropriations across family-income groups for the universities is not the same as that for enrollments given in Table 2. The distribution of appropriations by
family income given above is more accurate than that obtained by simply dividing the total appropriation of 648.6 million dollars on the basis of the enrollment percentages in Table 2. See also note 9.
revenue pool, which finances higher education, consist of individual and corporate income taxes, general and
selective sales taxes, and taxes on alcoholic beverages, tobacco products, insurance, amusements, death, gifts,
and real estate transfers. Incidence of several other taxes, including state’s motor fuel tax and license taxes, and
local sales taxes, that go into other funds, is not directly relevant to the distribution of costs of public subsidy to
higher education. For the local-revenue appropriations to community colleges, the incidence of local property
taxes is relevant.
Estimates of the incidence of state and local taxes in Illinois for 1989 are not available. Since a direct esti-
mation for that year is beyond the scope of this study, the estimates prepared by Phares 1980 for 1976 are
used after making several adjustments. These adjust- ments include a calculation of effective tax rate for
each income group used by Phares, b modifying the income groups after taking into consideration inflation
from 1976 to 1989, and c then calculating the tax-share of each income group used in our study for state- and
local-revenue appropriations.
10
The adjusted tax-inci- dence estimates seem to provide a reasonable picture for
1989, especially since, largely due to the relatively con- stant tax rates and tax base, the tax reliance of the state
10
See Lee 1993, pp. 51–61 for details of the procedure. He also explained that several sensitivity tests about the incidence
of taxes indicate the same broad pattern.
of Illinois has remained fairly stable between 1976 and 1989.
11
Allocation to each income group of the costs of appro- priations from state and local funds for undergraduate
education in public institutions can now be done on the basis of the tax-incidence estimates for state and local
revenues. As Table 1 shows, the total cost is 1156.12 million dollars. Out of that, an amount of 898.56 million
dollars comes from the state’s general revenues, and the rest 257.56 million dollars is from local taxes. There-
fore, the former amount is allocated to each income group on the basis of the distribution of the state- tax
burden, and the latter sum is allocated on the basis of the distribution of the local property tax burden. The
resulting distribution is shown in Table 5.
The final step is to use the distributions of benefits and costs to estimate the net benefit for each income
group. This is shown in Table 6. Several points may be noted from Table 6.
First, there is a net transfer from high-income families to middle-income and low-income groups. The transfers
from families whose annual income lies between 40 000 and 60 000 are relatively small, but there is a
fairly large transfer from the highest-income group with an income of over 60 000.
11
Only minor changes occurred in the tax rates from 1976 to 1989. Major changes in the tax rates took place after the
fiscal year 1989.
218 S. Soo Lee et al. Economics of Education Review 18 1999 213–221
Table 5 Distribution by income group of costs of public subsidies to undergraduate education at Illinois public higher education insti-
tutions, 1989 Income group annual
subsidy from state taxes Subsidy from local taxes Total subsidy ’000 Percent share in total
family income in dollars ’000 ’000
under 10 000 46 456
23 927 70 383
6.09 10 000 to 19 999
91 384 33 173
124 557 10.77
20 000 to 29 999 126 337
35 981 162 318
14.04 30 000 to 39 999
147 274 37 191
184 465 15.96
40 000 to 49 999 135 143
31 602 166 745
14.42 50 000 to 59 999
106 569 23 876
130 445 11.28
60 000 and over 245 397
71 807 317 204
27.44 All income groups
898 560 257 557
1 156 117 100.0
Note. This is based on Table 1 and the authors’ calculations using the material reported by Phares 1980, pp. 179–272. Table 6
Distribution by income group of the net benefits of public subsidies to undergraduate education at Illinois public higher education institutions, 1989
Income group annual Percent share of total
Percent share of total Percent share of net
Net benefit million family income in dollars benefits
costs benefits
under 10 000 10.28
6.09 14.19
148.4 10 000 to 19 999
13.15 10.77
12.38 127.5
20 000 to 29 999 18.09
14.04 14.05
146.8 30 000 to 39 999
20.97 15.96
15.01 157.9
40 000 to 49 999 14.14
14.42 20.28
23.2 50 000 to 59 999
9.78 11.28
21.50 217.3
60 000 and over 13.59
27.44 213.85
2160.1 All income groups
100.00 100.00
Note. This is based on Tables 4 and 5
Second, the distribution of positive net benefits does not differ dramatically across the four income ranges.
For three of these groups, the net transfer is of the order of 4 to 5 of the total benefit, and the amount of net
gain lies between 47 and 58 million dollars. For families whose income lies between 10 000 and 20 000, the net
transfer is smaller at 2.38 or 27.5 million dollars. The net transfer from the highest-income group is 13.85,
which represents an amount of about 160 million dollars. In other words, the magnitude of the transfers seems sub-
stantial.
Third, the pattern resembles in some respects the scen- ario in Table 3 of the study by Hight and Pollock 1973,
p. 324. The middle-income and lower-middle groups gain, and the highest-income group is a net loser. How-
ever, one notable difference is that while the Hight-Pol- lock study shows the poorest group to be a net loser in
all the three states, our study indicates the poorest group to be a significant net gainer. Although the income
groups in our study differ from those of Hight and Pol- lock, the broad categorization appears fairly similar.
The patterns noted in our study reflect a combination of the incidence of taxes and the usage of the benefits.
The tax shares rise up to a point and then fall until the highest-income group is reached. The benefit usage rises
up to the middle-income group 30 000-40 000 and shows an erratic downward tendency thereafter.
3. Some further reflections
