States invest in higher education to help students gain access to and complete college. According to The Investment Payoff: A 50-State Analysis of the Public and Private Benefits of Higher Education (The Institute for Higher Education Policy, 2005), states benefit from investments in higher education in several ways. In addition to the private benefits that accrue to individuals who earn postsecondary degrees, public benefits also accrue to states in which those citizens reside. According to The Institute for Higher Education Policy (2005), such public benefits include increased tax revenue, greater productivity, increased workforce flexibility, decreased crime rate, increased community service, and social cohesion. Several researchers also find that higher education has positive externalities such as civic engagement (e.g., Dee, 2004), labor productivity, and wages of workers without a college degree (e.g., Acemoglu & Angrist, 2001; Moretti, 2004).
Despite the evidence of the positive externalities of higher education for states, between 1981 and 2001, the proportion of revenue provided by state and local governments to public higher education institutions declined from about 50% to 36% (National Center for Education Statistics, 2006). In 2004, state appropriations to public higher education institutions fell by 2%, the first decrease in 11 years. In contrast, between 1992 and 2004, after adjusting for inflation, tuition at two- and four-year public institutions increased by 64% and 21%, respectively (The College Board, 2006a).
Although several studies have examined the extent to which tuition influences college enrollment at the undergraduate level (e.g., Heller, 1999; Kane, 1995, 1999), there is no known research that examines how changes in financial aspects of state higher education policy affect the production of postsecondary degrees. Over the past 10 years, the production of bachelor's degrees has varied substantially by state (National Center for Public Policy and Higher Education, 2006). Consistent with research that demonstrates human capital accumulation positively influences economic growth across countries (e.g., Agiomirgianakis et al, 2002), the results of recent studies (Fatima & Paulsen, 2004; Vedder, 2004) suggest that within a state, the proportion of the population with a college degree positively influences personal income growth. Therefore, it is important to examine the relationship between changes in financial aspects of state higher education policies and the production of postsecondary degrees. Using state-level data covering several years and from various sources and employing appropriate econometric techniques, this study makes an effort to understand how the production of bachelor's degrees is influenced by selected financial aspects of state higher education policy.
State Higher Education Financial Policies and Bachelor's Degrees Awarded
Between 1992 and 2004, changes in the financial dimensions of state higher education policy have taken place within a changing economic environment that included swings in the business cycle and substantial growth in state expenditures on corrections as well as entitlements such as K-12 education and Medicaid. According to the Bureau of Economic Analysis, the national economy experienced a recession in the early 1990s and decelerated economic growth during the second year of the twenty-first century. Throughout the mid- to late-1990s, however, state expenditures for Medicaid grew and corrections spending increased substantially. (1) Additionally, annual growth in state spending on K-12 education increased as school enrollments grew and court mandates for K-12 finance reform increased.
Originating in California with the enactment of proposition 13 by voters to reduce property taxes (Smith, 1999) and spreading throughout the nation in the 1980s through the early 1990s, voter-enacted tax and spending limitations constrained budgetary spending. …