Keeping College Grads in the State

Politicians will try just about anything that might boost their state’s economy. There aren’t many measures that will actually do that, so they resort to policies that they can plausibly say will produce economic benefits.

One idea that has been cropping up a lot in recent years is that a state can give its economy a lift by trying to keep students who graduate from colleges within its borders from taking jobs elsewhere. Several states have gone down that path, most recently Maine and West Virginia.

In Maine, Governor John Baldacci recently signed legislation that makes residents who graduate from a college or university in the state eligible for ten years of state tax credits of about $2,100 annually as long as the individual works in Maine. In West Virginia, Governor Joe Manchin recently said that in order to get “more of a return” on his state’s investment in higher education, he would like to see residents who have graduated from a college in the state be exempted from the West Virginia income tax until they turn 26. He also suggested giving students who remain in the state tax credits for money devoted to repaying student loans.

Will these programs or others like them really increase prosperity within a state? To ask the question another way, will the people of the state generally be better off if college graduates are persuaded to remain in the state because they receive tax breaks? Or is this another instance where a policy sounds good but in fact produces net costs for the people rather than net benefits?

I believe it is the latter. Using tax subsidies for college graduates to increase prosperity in a state is bound to fail, and worse yet it diverts attention from educational policies that really could make the state more attractive for business growth and expansion.

While it is true on average that people with college degrees have higher earnings than those who don’t, their earnings don’t materialize out of thin air. People need to have jobs, either self-employed or employed by others. Is it likely that the policy of keeping college graduates within the state will either increase the number of jobs available or increase the compensation paid for those jobs?

One argument that has been advanced is that businesses will be more attracted to states with a higher percentage of college graduates, since that would mean a “more skilled” workforce available. That sounds believable, but on closer inspection, it’s a weak argument. For one thing, in most businesses, educational credentials of potential employees are not terribly important. Employers mostly want workers who are trainable and reliable. Jobs that simply couldn’t be learned by people who hadn’t gone through college are very rare.

Furthermore, other factors are much more important to companies than slight variations in the percentage of people in the labor force with college degrees. Business location decisions focus chiefly on the cost of doing business, including transportation, taxes and regulatory compliance. That’s why, for example, auto makers like BMW and Honda have been locating new plants in states like South Carolina and Kentucky rather than New Jersey or Connecticut where there are more “educated” workers. The favorable business climate in the former states is much more important.

Let’s look at this from another angle, namely the incentives facing graduates. If we do that, we see that tax inducements are likely to have different effects than politicians suppose.

In any state, there will be a small number of people who have very high prospects in the labor market because of their knowledge and aptitude. Those are the people states like Maine and West Virginia are really eager to “keep.” It’s very unlikely, however, that the inducements the state is offering will come close to equaling the benefits those people could enjoy if they moved to where the economic action is greater. If, for example, a top accounting student at West Virginia University is offered a high salary job with a big firm in Washington, DC, the chance to save the payment of the state income tax won’t weigh very heavily in the balance. State tax breaks aren’t likely to have much effect on the people with the greatest marketability.

They will, however, be happily accepted by the far larger number of graduates who attended mediocre to weak schools, majored in fields where the market demand is low, and will be glad to take just about any job offer. Most of those graduates would be staying in the state anyway, so the college subsidy will do very little to alter the employment choices they make. The overall effect therefore won’t be to stimulate the state’s economy, but instead to spread more of the cost of going to college to the taxpayers generally. As special interest group politics goes, that’s probably a clever move, but as an economic stimulus, it’s a loser.

Is there anything a state can do if it wants its education system to give the economy a lift? Yes. Do a better job of preparing young people for work – starting with grade school and continuing through high school and college. The emphasis needs to be on quality and effectiveness of education, not on the length of education. Employers complain that many of the applicants they receive are very weak in “the basics.” That is, they can’t even perform simple math, have trouble reading and understanding directions, and aren’t able to write an intelligible memo. Those weaknesses make job training much more costly for businesses.

Employers would be more inclined to expand in a state if they knew that prospective workers were easily trained. Legislators should turn their attention away from gimmicks like tax subsidies for college graduates and toward the far more difficult task of ensuring that high school and college graduates alike are strong in reading, writing, and basic math.

If you want to lose weight, you can try all sorts of miracle pills, or you can change your behavior by eating less and burning more calories. The policy of tax subsidies for college grads is the equivalent of miracle pills.