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BBRs are not uniform across states. They vary in stringency and design, and not all spending is subject to BBR limitations. Capital and pension funds, for example, are usually exempt from BBR limitations (Snell 2011) (box 5). In 44 states, the governor must propose a balanced budget, while in 41 states the legislature must pass a balanced budget, and in 40 and DC the governor must ultimately sign a balanced budget (figure 11). States combine rules differently. For example, although Texas and West Virginia require the legislature to pass and the governor to sign a balanced budget, they do not require the governor’s initial proposal to be balanced. Hawaii, meanwhile, requires the governor to propose and eventually sign a balanced budget, but the state does not require the legislature to pass a balanced budget as an intermediary step.

Circumventing Balanced Budget Requirements

The federal government has decided to encourage capital investment by permitting taxpayers to depreciate capital assets. Can a state really ta4ke advantage of this choice and tax capital investments more heavily by slowing down depreciation? Would some kind of conflict preemption not come into play? As I have argued at length elsewhere,102 I think the answer is no. Ordinary federal tax statutes do not have the effect of preempting state tax law because such a rule would dramatically undermine the revenue power of the states. The federal choice to encourage capital investment is a very expensive one; it would be extraordinary if that choice now meant that all states also had to permit full expensing of capital equipment. In fact, the Supreme Court has permitted states leeway in the area of international taxation. The states did not and do not approach the income of MNCs in the same way as the federal government. Among other differences, the federal government, consistent with international norms and treaties, uses foreign tax credits and a methodology called transfer pricing to divide the income of MNCs. Not so the states; they use apportionment. Taxpayers argued that the states were not free to deviate from the federal government in this way. However, the Supreme Court held clearly, twice, that the states are not implicitly bound to follow the federal government even in a context where the taxpayers could plausibly argue that the harm from nonconformity had reverberations beyond other state-federal differences.103 And this makes sense. Given the relative import of MNCs, requiring states to follow the federal lead “only” as to their international operations would amount to a serious limitation on state revenue power.10

PL86-272, which Congress passed in just a few weeks and with little debate, was supposed to be temporary. But it’s been in effect for six decades and Congress hasn’t held a single hearing on its state impact since the early 1960s. We don’t know how much revenue it costs states collectively, but it may well be in the billions of dollars annually — money that could help pay for schools, parks, public health clinics, and other critical services. The law also creates an unlevel playing field for small in-state manufacturers and wholesalers, which must pay tax on 100 percent of their profits.

This is bad enough. Worse, many corporations have figured out ways to exploit this tax break even when they shouldn’t qualify for it. For example, let’s say a manufacturer can’t limit its activity in its customers’ states to soliciting sales because it sells a complicated piece of equipment that it needs to set up at the customer’s facility and teach the customer how to use. So the company incorporates a separate subsidiary to employ the people who do the set-up and training. The subsidiary’s profit is subject to tax by the buyers’ states, but the company’s out-of-state manufacturing arm — which earns most of the profit on the sale — remains protected from taxation in the states where the equipment is delivered. This strategy is known as “entity isolation.”

Corporate income taxes—both at the federal and S&L level—are highly progressive parts of the U.S. fiscal system. The erosion of revenues collected from corporate income taxes has made the overall tax system less progressive, and at the state level it has been a key driver of overall revenue weakness, which in turn has fueled too-austere spending.

The S&L sector is vitally important to the economic health and quality of life of U.S. families. It plays a leading role in the direct provision of valuable public goods and services. But the sector’s ability to provide these services well is highly constrained by how much revenue can be raised. Corporate income tax cuts in recent decades have compromised this revenue collection.

Second, there is an efficiency argument for taxing federal tax bases in strategic ways.49 This argument requires a few steps. First, a fundamental tenet of tax economics is that the amount of deadweight loss generated by a tax increases at the square of the tax rate. The jargon is convoluted, but the behavioral intuition is simple. Consider how much trouble you would go to avoid a 5% tax. Now imagine how much more trouble you would go to avoid a 20% tax. You might not do anything to avoid a 5% tax, but you would do a lot to avoid the 20% tax—hence the exponential growth in wasteful tax planning and lost government revenue.50 Note that this first point can be put a different way: all else equal, it is more efficient to raise revenue by broadening the base of a tax relative to raising the rate of a tax. Pulling GILTI back into a state tax base is a more efficient way of raising revenue relative to raising the corporate tax rate. But there is another way that GILTI conformity can be efficient, which brings us to analytic step number two. The second step requires making the observation that different taxes can be evaded in different ways. I can avoid paying income tax by deferring the sale of appreciated assets, but this does not help me avoid paying sales tax on my new car. I used to be able evade the sales tax by purchasing from a remote vendor online, but this never helped with the income tax. The fact that different taxes can be evaded along different margins has the following implications in the federal system as currently in operation: when the states try to collect more revenue by piggybacking on the federal income tax, they are essentially increasing an already high tax rate and spurring additional evasion. By contrast, when states raise revenue with the sales tax then they are raising money using relatively low tax rates that do not cause as much evasion.

Improving the taxation of the profits of multinational corporations—the topic of this Article—represents a reform that would be efficient, progressive and relatively straightforward to administer. Not only would such a reform thus represent good tax policy, but it would also raise significant revenue. And, if substantial revenue, efficiency, progressivity and administrability are not sufficiently motivating, then I will also add that it would be particularly appropriate to make these changes during the pandemic so as to raise revenue from those best able to pay during the current crisis. To be sure, the argument that states can and should tax multinational corporations (“MNCs”) more has the whiff of paradox. After all, there is general consensus that no nation-state is currently taxing MNCs very effectively and, further, that subnational governments are in an even worse position to do so. This is because MNCs can exploit the mobility of capital even more easily between parts of the same country. Nevertheless, I will argue that the American states find themselves in a particularly strong position to do better at taxing MNCs and this is in part precisely because of the missteps made at the federal level. I will briefly explain. The federal tax law passed in December 2017, known as the Tax Cuts and Jobs Act (“TCJA”), includes a number of new antiabuse rules meant to combat income stripping. Income stripping occurs when a profitable corporation engages in tax planning techniques (more on these shortly) so that profits that are taxed in a relatively high-tax jurisdiction, like the United States, are formally earned in a low or no-tax jurisdiction. One important new antiabuse rule is called the Global Intangible Low-Taxed Income (or “GILTI”) regime. The essence of how the GILTI rules work is by identifying foreign assets that are unusually profitable by means of a formula and then subjecting those excess profits to U.S. tax on the theory that they were not really earned abroad, but shifted out of the United States. The size of the income shifting problem is in dispute, but there is broad consensus that it is a large problem and one that is not going to be much improved by the new federal laws meant to combat it.5 Current respected estimates of the amount of income shifted out of the United States to low tax jurisdictions are about $300 billion per year, with the federal government projected to lose about $100 billion per year.6 The Penn Wharton Budget Model has found that the amount of income available to be taxed by the states if they tax GILTI to be in the same range (about $200 billion in 2020). Based on that $200 billion estimate, states could raise $15 billion in new revenue if they applied a 7% rate (about the current average).7 This would represent about a 30% increase in state corporate revenue.8 That is a lot of money. It is also important to keep in mind that states could borrow against a new revenue stream like GILTI in order to help pay for the immediate crisis. For the over forty states with a corporate income tax, the real question is why would they not raise this revenue from mobile capital and protect their tax base. Of course, representatives of MNCs have argued over and over that they should not and indeed that states cannot conform to GILTI.10 To date, these representatives have been successful in convincing almost all the states—even blue states, even blue states that could have really used the revenue before the current crises (I am looking at you, Illinois).11 Yet note that in many cases, states have not acted one way or the other and that states are still considering the issue.12 Even states that have affirmatively chosen not to tax GILTI can change their minds in light of recent events. Accordingly, I will argue at length in this Article (and have argued briefly elsewhere),13 that the states should and could conform to GILTI. Or, to be more precise, the states should strategically conform because, as we will see, the states should not conform to every aspect of GILTI as applied at the federal level.14 Strategic conformity means that the state should conform in ways that make the state versions of the law more effective at combating income stripping than the federal law on which it is based. Though I cannot prove it, I suspect that the ferocity with which the industry has fought state conformity to GILTI is related to a similar assessment about the possible effectiveness of state GILTI regimes as compared to the federal regime.

The simple fact is that governments around the world cannot afford to see the US economy collapsed because this is, and has been for some time, the engine room of the worldwide economy. If US business was to stall or money markets were to freeze then this would effectively kill the business arena overnight and have massive knock-on effects in international markets, both investment and trade.

However, one of the major issues of the moment is the fact that the US authorities have already invested billions upon billions of dollars, as has the UK government, into a previous economic stimulus program. With tax income still relatively low, benefit payments rising and budget deficit problems in the US it is unclear at this moment in time exactly where the US authorities would lay their hands on the funds required. This is a very difficult and a potentially catastrophic situation and one which needs to be addressed on a worldwide basis as soon as possible.

We understand and empathize: High and rising prices aren’t fun. They can be excruciating. But they are crucial to incentivize more supply—and temper demand temporarily until then. Market processes aren’t always quick or painless, hence the frustration and clamor for relief by other means. Without dynamic price signals to consumers and producers, though, history shows greater pain awaits.

You don’t have to look back very far to see how. The Nixon administration’s price controls were disastrous. Introduced in August 1971 along with scrapping dollar convertibility to gold, President Richard Nixon ordered a 90-day freeze on wages, prices and rents. Next came October 1971’s dual Economic Stabilization agencies—the Pay Board and the Price Commission overseen by the Cost of Living Council—which administered wage and price controls thereafter, permitting increases by diktat. Price controls seemed to succeed at first. CPI inflation was running at 4.4% y/y in August 1971 and fell to 2.9% a year later.[i] But by January 1973, price controls started phasing out, first with “voluntary controls” and later “voluntary compliance” in August 1973. Catch-up inflation ensued.

One deficiency experienced at the grammar-school level would likely also arise from this proposal: the erosion of price signals.

Prices are more than just the dollars and cents we pay for a good or service. They encompass a bundle of information: the cost of the inputs, the prices of competing goods, the supply of and demand for the service, the effects of natural conditions, etc.

When asked whether tuition at public colleges and universities should be free, the results were even starker. Seventy-four percent of Democrats answered yes and 19% answered no, compared to 31% of Republicans responding yes, and 62% no.

MSN polls its readers and then uses machine learning to model how a representative sample of the US would have responded, using big data, such as the Census. It's as accurate as a traditional, scientific survey.

In the 2020 field, Elizabeth Warren has joined Sanders on the free college bandwagon. Joe Biden was an early endorser of this idea in 2015, though he hasn’t talked about it much in the current cycle. Pete Buttigieg says he’s opposed, favoring instead a dramatic expansion of Pell Grants to make college much more affordable for students from low-income families. Amy Klobuchar has been more dismissive, saying she’s not “a magic genie” who can just give expensive stuff to everyone (although the federal government’s ability to create and spend money is not magic but just how the financial system works).

It’s a debate that cleaves two philosophically distinct approaches to politics: one a mentality of hoarding scarce resources for the most efficient uses, and the other a broad, aspirational vision of public luxury in which there’s little need to quibble about exactly who gets what.

President Biden may have tabled his bid for universal free community college, but states and municipalities are keeping the momentum going with new or expanded programs to cover tuition.

At least seven tuition-free initiatives have publicly launched since November, according to the College Promise campaign, which advocates making the first two or more years of college free. The governors of Pennsylvania and Maine are pushing for new programs, while the University of Texas System Board of Regents recently approved a $300 million endowment to cover tuition for more students at its public institutions.

President Biden’s plan to make two years of community college tuition-free nationwide is going nowhere in Congress at the moment.

But across the country, “College Promise” programs continue to grow among state and local governments as elected officials look for ways to improve college-going and work-force preparation. The idea of offering free tuition has grown steadily since the advent of the Tennessee Promise program in 2014, which became the model for a federal program proposed by President Barack Obama. Depending on definitions, half to two-thirds of states and scores of localities now offer some kind of program for free tuition, mostly at community and technical colleges.

Free college, like universal health care, is one of those things that exist in Europe that Americans love to idealize. In Europe, most universities are public and France, Germany, Sweden and Scotland don’t charge fees to domestic students. But like just health care, nothing is ever really free. Free college is paid for with taxpayer money, which is always in short supply, and that often results in lower-quality services in the form of over-crowded classrooms and crumbling buildings. It's popular to make fun of the plush facilities on American college campuses, but a lot of the spending on students is valuable. More spending per student is one big reason why British and American universities dominate global rankings.

Limited resources also means rationing. And when capacity is limited, places tend to go to students from higher-income families. They get better secondary educations and appear more qualified when it comes to admissions in competitive schools. In Germany, about three-quarters of adult college graduates send their children to college, while only 25% of adults without degrees have children in college. The figure below shows the share of the population (25 and above) with a bachelor’s degree (or equivalent) in different countries between 2016 and 2020. The countries that offer free or very cheap college have much lower graduation rates than the higher-cost US and UK. Perhaps lower graduation rates would be fine, since it seems like too many people go to college anyway. But free college doesn’t mean more vocational training. Germany briefly charged fees starting in 2006. But after lots of protest it returned to free college in 2014. Once they removed fees, more students went to university, and this reduced the number of students who enrolled in vocational schools. The United Kingdom also offers a useful case study. Until 1998 college was free for English students. At first fees were modest, but they now exceed £9,000 per year (typically about $12,000 — more than many state schools in the US), which are financed with loans that graduates pay back based on their income when they start work. One study found that charging fees resulted in more students attending university; it narrowed the participation gap between students from high- and low-income families and more resources were spent per student.

Gov. Gina Raimondo recently proposed giving state residents two years of "free" tuition at Rhode Island public colleges. Her proposal is similar to two others: former President Obama's plan for "free" community college and Bernie Sander's plan for four years of "free" public college.

All three initiatives share three things in common: they shift the financial burden from the primary beneficiaries (students) to taxpayers, do nothing to address college quality, and do nothing to address the underlying cause of tuition inflation.

Sara Goldrick-Rab and Nancy Kendall have published a report, with the Lumina Foundation, in which they call for reallocating federal, state, and local aid to higher education. The hook of the proposal -- F2CO, for “first two years of college free” -- is that the money in the current financial aid system would be redirected to allow students to take the first two years of college at any public college or university free. In other words, while it would be of particular interest to community colleges, it wouldn’t be exclusive to community colleges; the proposal would apply as well to the first two years of public four-year colleges.

As with any Big Fat Hairy Idea, it’s easy to pick details with which to quibble. Instead, I’ll chew on what I consider the most conspicuous and central points.

Working at a community college, I also have to raise an eyebrow at a term as seemingly simple as “two years.” Does that mean the equivalent credits for two years, or does it literally mean two years? (Since the plan comes with a living-expense stipend, this is a real question.) If students are essentially required to attend full-time, which seems to be the idea, then many working parents will be shut out. If part-time attendance is an option, then I’d immediately expect issues to arise around stipends. The “two years” model also assumes that everybody passes every class on the first try; again, on the ground, I can assure you that it doesn’t work like that. Would stipends be extended for students who fail? If so, I can envision some pretty odd incentives developing. If not, I see the clock running out fastest on the students who need help the most.

Obviously, repurposing existing funding to making the first two years free raises the question of what comes after those first two years. Goldrick-Rab and Kendall acknowledge that “it is not financially feasible to provide bachelor’s degrees for free without a significant increase in public funding for higher education.” They make a few passing suggestions, including price controls, but largely leave the question for another day. Presumably, they’re assuming that when a huge cohort of students runs out of “free,” many will demand more education, and a softened-up polity will respond accordingly.

It's not difficult to muster up the potential benefits of making college free in the U.S. It could provide equitable access to the opportunities made available through higher education, open possible pathways for some to escape generational poverty, and offload the yoke of college debt. These benefits have some calling for college to be free nationwide, a proposal that gains ground during Democratic primaries. But while I agree that there is a real problem in this country of socioeconomic factors creating barriers to upward mobility, I don't think college is the answer, free or not.

Eleven years ago, I was a member of the lower socioeconomic tier myself. I was 18 years old and living in my car, sleeping at the homes of my friends and their families when I could. If you had offered me a full ride to go to college at that time, it would have been about as useful as trying to heal a gunshot wound with Neosporin. I needed surgery, not a salve. And even if you'd lifted the burden of tuition costs from my shoulders, I still would have had to pay for the cost of living: food, shelter, repairs to my unreliable car, clothing, and a phone. Even without the cost of tuition, there was no way I would have been able to work full time, go to school full time, and claw my way out of the pit of poverty I was in.

Affordability has yet to prove itself as an attractive feature for academia, and tuition-free colleges and free college equivalency programs that already are in existence have not suppressed the urge to enroll at institutions viewed to be of higher status.

Actually, the higher the price, the greater the interest, since it is assumed to be of greater value—in terms of professors, resources, residency amenities, and placement potential (grad school or job offers).

Free college sounds great! Who doesn’t like free stuff? To make the idea sound even more appealing, advocates continuously cite Europe as an example of success. Many European countries offer their citizens tuition-free higher education, so why can’t America? The truth is that free college in Europe is no success story. Rather, it should serve as a cautionary tale for the United States. European-style tuition-free higher education has proved one thing beyond the shadow of a doubt: “Free” college is actually wildly expensive. Americans already pay a steep price for our higher education system. Taxpayers—including those who never went to college and never intend to—spend over $150 billion a year on federal student loans, grants, and other government programs. The increasingly hefty price tag attached to college tuition reflects the fact that colleges have no incentive to keep their prices low because students can so easily take out massive loans from Washington. >>>Why College Costs Are Out of Control One of the few factors putting any downward pressure on higher education costs is the growing criticism that universities receive for leaving so many students burdened with massive amounts of student loan debt. Under a fully financed government system, however, universities would receive no such scrutiny; they’d simply pass the bill to D.C. and let lawmakers take the heat from unhappy taxpayers. That cumulative bill would quickly skyrocket. Many European countries that have experimented with “free college” are finding that approach to be simply unaffordable. Germany, for example, saw a 37% increase in the college subsidy cost to taxpayers once public universities removed tuition. Similarly, England had a free college policy between the 1960s and the 1990s. Enrollment soared, straining government revenues. Ultimately, England had to lower resources by 39% per student. Ultimately, England’s free college policy wound up hurting low-income students the most, as schools were forced to cap the number of students admitted. In fact, according to researchers at the National Bureau of Economic Research, “the gap in degree attainment between high- and low-income families more than doubled.” European countries that offer tuition-free higher education also struggle with the issue of completion. Finland, for example, ranks first among all OECD countries in terms of subsidies for higher education, with 96% of all higher education funding coming from public sources. However, Finland ranks 25th among OECD countries for degree attainment. France famously touts its tuition-free university system. Seldom, however, do their boasts note that almost 50% of French students drop out or fail out after just their first year. It is clear that transferring the entire cost of higher education from students to taxpayers is fraught with unintended consequences. Countries like England and Poland actually saw significant increases in higher education quality and access after reinstating private tuition payments in their countries. It appears that there is some value in requiring students to invest in for their own education. Given the increased tax burdens placed on taxpayers (including nondegree holders), the significant overcrowding and high drop-out rates, European-style free college should largely be considered a public policy failure.