[Excerpt] This dissertation studies the long-term decline in state preferences for education spending in the United States. It constructs an expansive state-level panel data set spanning the fiscal years 1976-77 through 2000-2001 to examine how three budget share measures have changed within states over time and across states at a point in time. The share of state discretionary expenditures allocated to public education has fallen by four percentage points since 1977, while the share of public education expenditures allocated to public higher education has fallen by six points. In addition, the share of public higher education dollars appropriated to institutions (as opposed to directly to students) has fallen by four percentage points. Together the declines translate into real institutional appropriation losses of $2,800 per student in an “average” state – significantly more than the $1,700 increase in real average public four-year instate tuition rates since 1977.
Among the main findings are that competing budget items do not appear to “crowd out” education’s budget share. Court mandated K12 funding equalization has resulted in substantial increases in education spending within states, with over a quarter of the increase coming at the expense of public higher education. Attempts by public institutions to increase tuition or raise private funds are seen to trigger a cycle of future budget share cuts, calling into question what institutions can do as they rapidly spiral toward the private “high tuition” equilibrium. The sensitivity of higher education budget shares to observable state factors has increased over time and dynamic panel estimates indicate that states exercise more discretion over the determination of the higher education – K12 split than over other budgetary decisions.
Three additional findings are noteworthy. First, cross-cohort ethnic heterogeneity increases have led to funding shifts away from higher education. Second, the surging popularity of targeted, merit student-aid programs appears to have been in an effort to redistribute income to economically well-off families. Third, as more households in a state become eligible to receive federal Pell grants, states move aid away from institutions and toward students – sanctioning tuition increases to potentially capture increased student eligibility for federal grant aid.