Economics of Education Review 18 1999 213–221
Distributive effect of state subsidy to undergraduate education: the case of Illinois
Seong Soo Lee, Rati Ram, Charles W. Smith
Department of Economics, Illinois State University, Normal, IL 61790-4200, U.S.A. Received 11 November 1993; accepted 17 February 1998
Abstract
An assessment is made of the distributive effects of state subsidies to undergraduate education in public universities and community colleges in Illinois during 1989. The main finding is that the existing system of public subsidy to
undergraduate education favors lower-income and middle-income groups. Public subsidies lead to redistribution of income from higher-income to lower-income and middle-income families, with the most significant transfer being from
the highest-income group to families with income of less than 40 000 per year. A comparison of the patterns for universities and community colleges indicates that middle-income groups are the major beneficiaries of community
colleges; the net transfer from the highest-income group is larger, and the net gain of the poorest group is smaller, in community colleges than in universities. [JEL I22, H7]
1999 Elsevier Science Ltd. All rights reserved.
1. Introduction
An understanding of the redistribution effects of pub- lic subsidies to education is important so that policy
issues concerning the financing of higher education can be addressed from an equity perspective.
Hansen and Weisbrod 1969 used a net-benefit approach to assess the distributive effects of public sub-
sidies to higher education in California. They compared the amount of taxes paid with the subsidies received by
families with children enrolled in community colleges, State University campuses and the University of Califor-
nia system. Their conclusion was that the net benefits received were positively correlated with family income,
and that, therefore, the system led to a redistribution from lower to upper income families. Although a pion-
eering work, the Hansen-Weisbrod study was criticized by several scholars, including Cohn 1970; Gifford
1970; Hartman 1970; Pechman 1970 and Sharkan- sky 1970. The main weaknesses noted by these schol-
Corresponding author. E-mail: cwsmithistu.edu
0272-775799 - see front matter
1999 Elsevier Science Ltd. All rights reserved. PII: S 0 2 7 2 - 7 7 5 7 9 8 0 0 0 2 7 - 2
ars in the Hansen-Weisbrod study were a correlating the average net benefit by institution-type with family
income, instead of considering the net benefit by income groups, b comparing total state taxes paid with the
benefits received only from the public higher education system, c omission of student financial aid, d heavy
reliance on data for parent-supported students, and e some of the suggested conclusions not being reasonable
implications of the reported results.
Pechman 1970 argued that a better approach to an assessment of the distributive effects of public subsidies
to higher education would be a comparison of net bene- fits received by different income groups. On the basis of
the distribution by family income of a the burden of the proportion of state and local taxes that supported
public higher education in California, and b benefits of the public higher education system in the state, Pechman
concluded that there was a redistribution from higher- income to lower-income families.
1
Like the Hansen-
1
He assumed that the costs of state colleges and universities are met from state taxes, and that junior colleges are funded
from state and local revenue in the ratio of 40:60.
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
