The mayor of Providence, Rhode Island, David Cicilline, has proposed an interesting new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . He thinks that the city should charge a per student tax on college students at a rate of $150 per semester. The argument for the tax is that students are consuming more government service than they pay for. The tax would bring in between $7 million and $8 million per year and would apply to students of the four non-public schools located there: Brown, Providence College, Johnson & Wales University and the Rhode Island School of Design. Students at the two state schools, Rhode Island College and the Providence campus of the University of Rhode Island, would be exempt.
It is probably true that college students in Providence pay little or no income tax. But this is because they have little or no taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . The students do pay other taxes though, like sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es, excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es, and various fees. So it would be incorrect to make a blanket statement like “college students do not pay taxes”.
But the taxes mentioned above are largely paid to state governments. So to some extent it may be true that when it comes to funding local government, college students don’t pay much. Considering only money raised from their own sources, local governments fund services mostly through various fees, property taxes, and sometimes sales taxes (local governments also receive a large amount of funding from their respective state governments and the federal government). Of these, property taxes bear a majority of the burden. Since everyone who lives in a local government’s jurisdiction pays property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es (owners are charged directly, renters pay through higher rent) everyone pays to fund local government service.
That is, unless the owners of the property are exempt from property taxes, as is the case for colleges and universities. Because institutions of higher education are considered non-profits, a designation that could be disputed considering their often huge endowments and investment income, states and localities have chosen to exempt them from property taxes. This tax savings is then passed on to the students in the form of lower tuition, and other taxpayers like non-exempt property owners pick up the tab. For this reason, the argument that students do not pay enough to help fund local government might have traction.
And this is no small amount of savings. According to the city, the property in Providence owned by the four tax-exempt schools constitutes roughly half of the land in the city and is valued at over $1.7 billion. So it is no surprise that the city would like to get its hands on some of this potential revenue. In fact, in 2003 the four tax-exempt schools agreed to pay the city nearly $50 million over 20 years, the burden of which would at least partially fall on students. But with the economic situation taking a toll on all government budgets, Providence now wants more.
But the college head taxA head tax, also known as a poll tax or capitation, is a flat or uniform tax levied equally on every taxpayer. Unlike an income tax, it is a fixed amount and not based on how much one earns, nor does it change based on any taxpayer circumstance or action. is a bad idea as it would be a punative non-neutral tax. (It should be noted that the author of this post actually made a suggestion for a college head tax last December, though it was made tongue-in-cheek. Even so, a head tax would have been preferable to the tax being considered in Pennsylvania at that time.) A better solution would be to do away with tax exempt status for colleges and universities. The idea behind not taxing schools is that they are beneficial to society and do not exist as a profit making machine. Indeed, the federal government heavily subsidized higher education for this reason. But at the same time mayor Cicilline wants to tax the students, the very “products” of these socially beneficial institutions. If the social benefit of these schools and the students that come out of them is not enough to justify their tax-exempt status then the schools should not be tax exempt.
Instead of levying a head tax on a select group of people, the tax exempt status of these schools should be eliminated. In doing so the city would treat all property owners equally, schools and their students would pay more to help fund city services, and the city would avoid a punitive non-neutral tax on college attendance.
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