There’s no such thing as free college

I have seen a few comments in social media over the past few days celebrating Rhode Island’s decision to offer “free college.” There is of course a little more to it than that, but the recent action by the Rhode Island legislature, signed by the governor, bears examination.

Last Thursday the Rhode Island legislature approved the Promise Scholarship, which will cover the cost of tuition and fees at the Community College of Rhode Island for new students starting this fall. The tuition and fees will be covered regardless of their income. According to CNN, it is a four-year pilot program for which the legislature appropriated, as part of the state’s budget, $2.8 million for the first year.

Community College of Rhode Island has some 15,000 students, but most of them will not be eligible for the Promise Scholarship because they are part-time students or are not recent high school graduates. The CNN report indicates that the college “expects an uptick in enrollment of first-time students next year by at least 200 because of the program. It estimates that between 1,200 and 1,300 students will receive the scholarship this fall.”

Full-time tuition for Rhode Island residents is currently $2,074 per semester. The Promise Scholarship will also cover a per-semester fee of $208 per student.

This all sounds very exciting, of course, especially to those who like the idea of free college education. But, just as there is no such thing as a free lunch, there is no such thing as free college. The Community College of Rhode Island will continue to receive the same $2,074 per student per semester (plus the $208 fee) I assure you–the money will just come from somewhere else. Specifically, it will be included in the state budget, paid for out of state coffers. But where does the state get its money? From taxes, of course, paid by the residents of Rhode Island.

Rhode Island is not the first state to offer “free” college education. It is, in fact, the fourth. The first three are New York, Oregon and Tennessee. It is worth noting, then, that according to the Tax Foundation’s rating of the top marginal individual income tax rates as of June 1, 2017 only California and Maine have a higher rate than Oregon, where the rate is 9.9%. New York is among the highest rates as well, at 8.82%. (Minnesota, Vermont, New Jersey and Washington, D.C. fall between Oregon and New York though, other than Minnesota at 9.85% those states are all between 8.82 and 8.97%).

What about Tennessee? It’s income tax rate is a middle-of-the-road 5.0%. Nine states have a lower rate, besides the seven states that have no state income tax. But Tennessee actually only taxes interest and dividends income, meaning it would effectively be lower than most of those nine states with lower rates. So how does Tennessee pull off its free college program? It simply shifts the tax burden. According to the Tax Foundation, only Louisiana has a higher sales tax than Tennessee (9.98% to 9.46%).

As of July, Rhode Island’s state income tax rate was only 5.99%–but its sales tax rate was 7.0%, making it 21st in the nation. Keep an eye on tax rates in Rhode Island over the next four years of this program because it seems likely that one or both rates will increase. In Oregon, for example, despite its high income tax rate and low rate of purchasing power (it ranked 33rd in 2015 in the Tax Foundation’s comparison of regional price parities, examining the real value of $100), their free tuition program is already being altered. When it launched in 2016 only recent high school graduates were eligible. But, the state budget suffered a shortfall, and starting this year students from high-income families are not eligible, CNN reported. New York has similar restrictions; its program starts this year but it excludes students from families earning $125,000 per year or more. That does not seem particularly burdensome probably, to expect a family earning $125,000 to be able to afford college tuition, but New York ranks 49th in real purchasing power; only Hawaii is worse. The real value of $100 in Rhode Island is $101.32. In Oregon it is $100.81. In New York it is only $86.73. The likely increase in Rhode Island taxes is further supported by the fact that, according to Ballotpedia, Rhode Island, in fiscal year 2016 (before the implementation of the Promise Scholarship), had higher per-capita spending that Oregon for total state expenditures. Additionally, the Pew Charitable Trust report on August 4, 2017 entitled “Fiscal 50: State Trends and Analysis” indicates that Oregon experienced an increase in tax revenue from FY 2016 to 2017–while Rhode Island experienced a decrease. (Interestingly, New York and Tennessee also experienced declines–leaving Oregon as the only state with a “free college” program that experienced an increase in tax revenue over the past year). If Oregon cannot continue its program then, why would Rhode Island think it can? The Pew report also ranked states’ rainy day funds, or financial reserves. According to the report, the “total balances in states’ general fund budgets—including rainy day funds—could run government operations for a median of 36.2 days” as of the end of FY 2016. Rhode Island fell just above that median, at 37 days. New York (47.9 days) and Tennessee (56.5 days) were well above the median.

One good thing about the Rhode Island scholarship is that it does have a string attached: according to The Hill, “Upon receiving the scholarship, students must also agree to stay and work in Rhode Island for as many years as they received tuition.”

It is telling that the state legislature did not go as far as Democratic Governor Gina Raimondo wanted it to go; she had favored covering community college tuition as well as covering two years of schooling at Rhode Island’s two public four-year colleges. Their refusal to do so shows at least some fiscal restraint among the legislature. Only time will tell, of course, how Rhode Island’s Promise Scholarship turns out. But even if it works (a possibility on which, I confess, I am skeptical) do not forget–neither lunches nor college educations are ever really free.