HESA

Higher Education Strategy Associates

Tag Archives: Tax Credits

May 26

Lessons from the Rise of Tax Credits

I’m feeling low on creativity today, so I’m going to go to that old stand-by: telling war stories. And specifically, I’m going to go back and trace the rise of tax credits in the Canadian higher education system and what that tells us about policy-making in Canada.

Tax benefits for education go back to the late 1950s. There was pressure at the time to create a “national system of scholarships”, but this clearly was going to cause problems in Quebec. But Prime Minister Diefenbaker, on the advice of Ted Rogers and with the assistance of Brian Mulroney, found a way around this which was acceptable to Quebec: namely, by making tuition fees tax deductible. Lesson #1: the federal government in part views tax expenditures as a way to get around troublesome provinces.

These tax deductions for tuition and a monthly “education amount” were turned into tax credits in a general tax reform introduced in 1988 by then-Finance Minister Michael Wilson (which is still arguably the greatest thing any Conservative finance minister has done in my lifetime). The tuition credit did not include ancillary fees and the monthly amount was $60/month. And there it stayed until 1996.

Budget 1996 was not a happy time in Canadian history. As far as most people were concerned, we were in year 6 of a recession (a real one, where unemployment hit double digits and a third of the island of Montreal was on social assistance/EI, not like the past few years). The stomach-churning Quebec referendum night was less than four months in the past. The country was broke, and the logic of Paul Martin’s epoch-defining 1995 Budget meant that fiscal room for anything new was just about zero. Yet the government wanted to show that the federal government could still be relevant, particularly around youth unemployment, which was a concern at the time. So what did they do?

They upped the education tax credit to $80/month.

I know that sounds meagre. Trust me, in the context of February 1996, this was a moderately big deal. But it was the 1959 logic at work again. Need to show the feds can do something about an issue that matters to Canadians but is mostly in provincial control? Use the tax system!

Then in December 1996, the Finance Department’s pre-budget polling (which in those days was always, always, always done by Earnscliffe) numbers came in and they showed – totally unexpectedly – that education was suddenly the number two issue for Canadian voters. Terrie O’Leary, Paul Martin’s formidable chief of staff, immediately went to the office of Don Drummond (now Chief Economist at TD, then the ADM at Finance in charge of the budget). The conversation, the best I can reconstruct it from a couple of different sources, went like this:

O’Leary: I want something on education in the budget.

Drummond: (Acutely aware that the budget date was only about ten weeks away and it’s desperately late to start screwing around with it at this point): Not unless you want a replay of the Scientific Tax Credits fiasco.

O’Leary:  <A string of choice expletives to the general effect of “don’t talk back to me”>.

Well, of course Drummond needn’t have worried because when it doubt: tax credits!  The vehicle was already there, so they just juiced it. The $80/month education amount jumped in stages to $200/month, a smaller credit was added from part-time students, and the definition of tuition tax credits was expanded to include ancillary fees. Bonus: unlike the changes to Canada Student Loans and the Millennium Scholarships which were announced in the following year’s budget, there was no tedious negotiations with provinces. Lesson #2: tax credits are sometimes a tool of choice because they’re easy and quick to implement.

Then of course, the economy improved and Paul Martin started getting generous. In the fall 2000 mini-budget which preceded that year’s election (the Stockwell Day election, in case you’ve erased that period from your memory), he doubled the value of the education amount to $400/month for full time students and $120/month for part-timers.  Why? Well, in the preceding election, the Liberals had promised that any surplus money (and we started running surpluses in 1998), would go 50% to new programs and 50% to “debt reduction and tax cuts” (relative proportions not specified). It finally occurred to the Liberals that under this regime tax credits were gold, because depending on one’s choice of definition, tax credits could be counted as an expenditure or as a tax cut. And yes, they counted these as both, to suit the occasion. Lesson #3: tax credits are attractive because the communications around them are flexible.

That was more or less the high point of education tax credits in Canada. After that, they started to gradually fall out of favour. Quebec (2012) and Ontario (2016) have both abolished their credits, and Budget 2016 saw the feds abandon them in favour of higher grants. I suspect they will disappear from the provincial level over the coming decade.

But the point I want you to take here is not that government was misguided about tax credits back then and is smarter now. Apart from a couple of zealots in the Finance Department who prattle on about tax treatment of human capital, no one in the 1990s genuinely thought that tax credits were a particularly good tool to get money to students. What they had over other more direct means of support was convenience, simplicity, and the ability to be implemented completely independently of what a bunch of tiresome provinces think. In the late 1990s – the High Era of Competitive Federalism – that stuff mattered a lot more than it does today. If those conditions ever return, it would be easy enough to see how tax credits as a funding mechanism could return, too.

 

May 09

Conservative Leadership Platform Analysis

So, I just read through all the thirteen leadership candidates’ websites, looking for their thoughts on all the stuff this blog cares about: post-secondary education, skills, science, innovation, youth, etc.

The things I do for you people.

Actually, it was a pretty quick exercise because it turns out almost no one in the Tory leadership race places much importance on post-secondary education, skills, innovation, youth.  They seem to care a lot about taxes, and immigration (and to a lesser extent guns), but for a party that was in government less than two years ago, the Conservative candidates seem to have remarkably little appreciation for the things that actually drive a modern economy.  Anyways, briefly, here is what the candidates say about the issues this blog cares about.

 Chris Alexander (Former Minister of Citizenship & Immigration, ex-MP Ajax-Pickering): No specific platform on higher education, but the topic does come up frequently in his policies.  Expanding educational exports to Asia is priority.  He says he wants 400,000 new international students/year by 2020 and 500,000 per year by 2023 (I’m pretty sure he does not actually mean “new” as in new visa applications every year, I think that’s total in the country at any one time).  He also wants to spend money on new National Centres of Excellence and Centres of Excellence for Commercialization and Research for the digital economy as well as invest more in research related to art and design (I assume OCAD’s Robert Luke has something to do with that one).  He also has a general pledge to incentivize PSE institutions to collaborate more with “incubators accelerators and companies of all sizes”, whatever that means.

Maxime Bernier (Former Minister of industry, Foreign Affairs, and Min. of State for Small Business, MP for Beauce)The main point of interest in the Bernier platform is the rise in the personal tax exemption to $15,000 per year, which will have favourable impacts for many students.  Under his health platform, Bernier indicates he wants the federal government to vacate the health field and transfer tax points to the provinces; though he does not say so explicitly, it’s a fairly safe assumption that the same would apply to the transfer of funds to provinces for post-secondary education under the Canada Social Transfer.

Steven Blaney (Former Minister of Public Safety, MP Bellechasse—Les Etchemins—Lévis): Nothing at all.

Michael Chong (Former Minister of Intergovernmental Affairs, and Sport, MP Wellington-Halton Hills):  Nothing at all.

Kellie Leitch (Former Minister of Labour and the Status of Women, MP Simcoe-Grey): Nothing at all.

Pierre Lemieux (Former MP Glengarry-Prescott-Russell): Nothing at all.  Are you seeing a pattern yet?

Deepak Obhrai (MP Calgary Forest Lawn)Nothing at all.

 Erin O’Toole: (Former Minister of Veterans Affairs, MP Durham): O’Toole is the only candidate with anything even vaguely resembling plans for science and Innovation in the form of a scheme to extend the notion of “flow-through shares” –a tax gimmick heavily used in resource industries to defray development expenses – to new life-sciences and tech companies as well.  More intriguing is O’Toole’s “Generation Kick-Start” platform, which promises everyone who completes a degree, diploma or apprenticeship with an extra $100,000 of personal exemptions (i.e. $15K in reduced taxes) to be used before they turn 30.  That goes up to $300,000 if their credential in an area where skills are in “short supply” (definition vague but seems to include engineers, coders and “skilled tradespeople” even though 3 years into the oil slump the latter wouldn’t really qualify as “in demand”).  The latter half of the proposal is goofy, but the basic idea has a lot of merit.

 Rick Peterson: (A BC Investment Advisor of Some Sort): Nothing at all.

Lisa Raitt (Former Minister of Natural Resources, Labour, and Transportation, MP Milton). Like Maxime Bernier proposal, Raitt proposes to raise the basic tax exemption to 15K.  She also wants to increase the (totally useless) apprenticeship and completion grant up to $4,000.

 Andrew Saxton (ex-MP, North Vancouver)Saxton’s policy pages are – to put it mildly – light on detail.  However, he says he does want to invest in “skills training to ensure Canadian skills are matched with Canadian jobs” (whatever that means).  Also, having lived in Switzerland for some time, he advocates a Swiss-style apprenticeship program which extends into industries like banking, pharmaceuticals, etc.

Andrew Scheer (Former Speaker of the House of Commons, MP Regina-Qu’appelle) Scheer’s money proposals in education are limited to a pledge that parents of students attending independent schools a tax deduction of up to $4000 tuition annually per child, and a tax credit of $1,000 (i.e. a $150 reduction in taxes) to parents who choose to homeschool their child.  In addition, Scheer pledges that “public universities or colleges that do not foster a culture of free speech and inquiry on campus” will “not have support from the federal government”.  He then lists the tri-councils and CRCs as specific funding mechanisms for which institutions would not be eligible: it is unclear if the ban would include CFI and – more importantly – CSLP.  Note that the ban would only cover public institutions; private (i.e. religious) institutions would be able to limit free inquiry – as indeed faith-based institutions do for obvious reasons – and still be eligible for council funding.

Brad Trost (ex-MP Saskatoon-University): Nothing apart from a pledge for tax support to private education and homeschooling identical to Scheer’s.

And that’s the lot.  I think it’s fair to say that the field’s appreciation for the role of knowledge and skills in the modern economy is pretty weak.   Maybe dangerously so.  Still, if you are voting in this election and you think PSE and skills are important, your best bet is probably Chris Alexander; if you want to raise youth living standards, vote for O’Toole followed perhaps by Maxime Bernier or Lisa Raitt.

(And yes, I know the percentage of Conservative voters motivated by those two sets of issues are vanishingly small, but I only have this one shtick, so cut me some slack).

 

February 02

Manitoba’s Golden Opportunity

It’s tough to be in government these days: prolonged slow growth means it’s difficult to keep increasing spending at a rate at which citizens have become accustomed.  Instead, with rising costs and little appetite to raise taxes or fees, governing often seems to be one long exercise in nickel-and-diming.  Higher education – in most of Canada at least – has felt some of this, but in truth has been insulated more than most other parts of the public service.

But the key role of government should not simply be to find ways to cut: it should be about increasing the effectiveness of public expenditures.  And in particular, making sure public expenditures are designed in such a way as to promote and not hinder growth.  That’s why, if there was one place in Canada I wish I could be an Advanced Education Minister right now, it’s Manitoba.  Because, as I explain in a new paper HESA is releasing today, Manitoba has a boatload of poorly-performing expenditures in higher education tax credits that could be re-purposed into areas which could really help the province.

Here’s the scoop: Manitoba has two tax credits – the Education Amount Tax Credit and the Tuition Fee Income Tax Rebate – which are neither particularly effective nor have many defenders within the higher education sector.  The former tax credit is a hold-over from the Diefenbaker era which all provinces (except Quebec) got stuck with in their portfolios when the provinces moved from a tax-on-tax to a tax-on-income system back in 2000.  In the past 12 months, the federal government, the province of Ontario and the Government of New Brunswick have all eliminated this tax credit because it was neither progressive nor efficient, and funneled that money back to student assistance.  The latter tax credit is effectively a tuition rebate for students who stay in the province, which is batty and wasteful for number of reasons I’ve previously outlined here. In any case, it is demonstrably too small to achieve its intended goal of convincing students who would otherwise not live in the province to live in the province.  The result is this money is a windfall gain to graduates, paying them to do something they were going to do anyways.  The elimination of these two tax measures could yield approximately $67 million per year in savings which could be spent more productively elsewhere within the higher education sector.

$67 million is a lot in Manitoba higher education.  Taking that money away from unproductive tax credits could fund a whole lot of new, useful investments.  These include:

  • Adding $14 million/year to provincial student assistance fund.  Spent correctly, this would be  enough to fund an Ontario-like “free tuition” guarantee to low- and middle-class Manitobans even if tuition fees were allowed to rise by a third (which, given how low tuition is in Manitoba, is probably a not a bad idea).
  • Investing $12 million/year to increasing supports to Indigenous students and expanding community delivery of programming in or near First Nations communities
  • Supporting the expansion of work-integrated learning at Manitoba universities and colleges with the creation of a dedicated $15 million/year fund.
  • Redressing a long-standing imbalance in post-secondary spending by increasing the number of seats in non-Metro Manitoba with a $15 million/year investment.
  • Creating an $11 million/year employer-driven “quick response training fund” to make it easier for employers with expanding businesses to access bespoke training.

In sum, for the price of two badly-designed tax credits, Manitoba could make real investments in access, both in terms of financial aid and providing spaces in under-served areas, increase support to Indigenous students and communities, improve the quality of education and provide more funds for employer-led training that could help relieve skills bottlenecks for investors.  How could you pass this up?  Who wouldn’t do this?

Over to you, Manitoba.

May 06

What Ottawa Spends

The Parliamentary Budget Officer did everyone a solid yesterday by publishing a really helpful compilation of federal government expenditures on higher education. According to the publication, the Government of Canada in 2013-14 spent $12.3 billion on post-secondary education (not including money for apprenticeships, training programs or labour market agreements; that includes $5.1 billion for “human capital measures”, which is mostly Canada Student Loans and Tax Expenditures of various kinds, $3.5 billion for research, three-quarters of which is from the granting councils and the remainder through various departmental programs, and $3.7 billion through the Canada Social Transfer, which is a theoretically earmarked.

The graph below shows the evolution in expenditures in nominal dollar. While the growth is therefore somewhat exaggerated because of inflation, it’s interesting to note that overall, expenditures increased by a third, from $9 billion to $12 billion, between 2005-6 and 2013-14. This would have been a very good talking point for the Tories in the last election; it’s a bit of a mystery why they didn’t use it.

2016-05-05-1

(In case you’re wondering what the bump in human capital formation spending is in 2009-10 and 2010-11, I’m pretty sure it’s the cost of the transitional measures relating to the end of the Millennium Scholarship Foundation).

The report has a nice little projection about what future expenditures in post-secondary are going to be. The PBO seems to think there’s going to be a lot of cost growth because of an upswing in student numbers. I think that’s somewhat unlikely given the demographics; on the other hand, I think there will be cost growth as an increasing number of students figure out that they are eligible for free money under the new student aid arrangements. So it’s probably a wash. In any event, here’s what’s PBO thinks the future looks like:

2016-05-05-2

The one bit of the report I find a little off is the section on who is using tax credits. The problem with analyzing the use of tax credits is that it combines parental use of tax credits with student use of tax credits. This is a problem because students are concentrated in the bottom income deciles. So if the child of a millionaire uses tax credits, it’s counted as being used by Canadians from the bottom quintile of income, which let’s be honest is a bit misleading. But still, overall, this makes a powerful point: tax expenditures are skewed to the wealthier end of society and it’s an awfully good thing that they are being phased out in order to fund poorer students.

2016-05-05-3

(Remember though: the reason tax benefits are skewed to upper quintiles isn’t because they are worth more to those individuals. These are credits, not deductions. No, the reason they are skewed is because the children of parents from upper-income quartiles are that much more likely to attend higher education and especially universities. In other words, *all* spending on higher education gets distributed this way. Which is a prime reason why education should not be free – this is the way the benefits of such a move would be skewed).

Anyways, there’s nothing special or complicated about the PBO analysis. It’s just really nice to have all this stuff well documented and presented in a straightforward manner in one place. Kudos.

(Note: I will be taking a break from blogging next week. Back on May 16)

March 29

Who Won and Who Lost in the CSLP Re-Shuffle

(Warning to readers: today’s blog is a long read about student aid policy.  Skip it if this kind of wonkery isn’t to your taste.)

Last week’s historic changes to the Canada Student Loans Program – which saw the elimination of the Education and Textbook Tax Credits, and an increase of 50% in Canada Student Grants – is a very complicated piece of policy to analyze.  Remember that there is no new money in this set-up: any new money given to one set of students through grants is money taken away from another set of students in tax credits.  So it’s reasonable to ask the question: “who won and who lost?” because governments sure as heck aren’t eager to spell this stuff out.

If you want to refresh yourself on the details of the tax credit/grant switcheroo, go back to our budget analysis document and read pages 2-6.  Got it?  Good.  Then we’ll begin.

Winners and losers get divided up along three axes: by geography, by “family” income, and by full-time/part-time status.  We’ll start with geography, and move down from there.

Quebec: Every single full-time student in Quebec loses $558 from the disappearance of the tax credits.  What they will get back is uncertain. The Canada Student Grants program does not operate in Quebec, so no one will “win” by getting money from that source.  Instead, the government of Quebec will receive something in the region of $500 million from the government of Canada over the next four years in “alternative payments” (that’s a rise of about 40% on what the province currently gets).  Will the government invest all that money in student aid?  We don’t know because the government is being non-committal at the moment.  If it does, how will it do so?  Again, no clue.  So we have literally no idea who the winners and losers will be in Quebec.

The Rest of Canada, Bar Ontario: Again, every single FT student will lose $558 in tax credits.  If they are considered “low-income” (I’ll come back to this), they will – once the changes are fully phased-in for 2017 – get an extra $1,000 in grants and thus be “up” on the deal by $442.  If they are not at all eligible for grants, they will be “down” $558.  What happens to the students in between – the so-called “middle-income students” – is a little unclear.

First, who are “middle-income students”?  The definition varies by province and family size (see Tables 10A and 10B here), but if you’re a dependent student from a family of four, it means (roughly) those from families earning between $45,000 and $85,000; if you’re a single independent student, it means those earning between $23,000 and $43,000 (most independent students are low-income and eligible for maximum grants, but not all of them take advantage of the program).

Now, if all you look at is the 2016-17 changes to Canada Student Grants (+$400), and you subtract the $558 in missing credits, you might think “holy cow, these middle-income students are out $158!”  Which, to be honest, I did briefly on budget night.  But the program changes aren’t ending in 2016-17.  In 2017-18, CSLP wants to stop giving out these grants as a step function, and smooth the curve, roughly like so:

Figure 1: CSG Value by Income Level, 2015-16 vs. 2017-18

Fig.1

 

 

 

 

 

 

 

 

 

 

 

 

 

(Caveats on graph: that’s for a family of four in Ontario; mileage may vary by province and family size, and we don’t know exactly what the smoothing formula will look like.)

This is a very different kind of picture.  Those just above the low-income/middle-income cut-off become massive winners – their annual grant amount will increase by almost $2,200.  However, at the other end of the spectrum, those just below the middle-income cut off – say, families making about $80K – will see changes of less than $558, and so need to be counted among the “worse-off”.

But this still isn’t the final story, because there’s another CSG change scheduled for 2018-19, which will involve extending the middle-income cut out-off somewhat (my understanding is that for our hypothetical family it will be slightly north of $100,000/yr).  That won’t help the people just below $80k, but it will make “winners” out of a number of people in the $80-100K range.

Figure 2: CSG by Income Level, 2015-16, 2017-2018, 2018-19

Fig.2

 

 

 

 

 

 

 

 

 

 

 

 

 

(Caveats on this graph are same as previous, only this time we have even less idea what the exact formula will look like.  Think of it as an artist’s rendering of a bunch of vague statements in the Budget and the Liberal Manifesto.)

Based on this, what we can probably say is that all independent students will end up as net beneficiaries (if they bother to apply for aid), as will all dependent students coming from families with incomes below $100K (bar a few with incomes in the $75-80K range).  Above that line, there will be losers to the tune of $558/year.

Ontario: The situation in Ontario is a little more complex because in addition to the CSL changes there are the similar changes to the provincial program announced in the February provincial budget.  Because the province is killing both its own education amount tax credit and its own tuition tax credit, every student (and/or their family) is losing $1,176 in combined tax relief.

Now, who actually wins and loses is difficult to tell at the moment because we really have no idea what the provincial formula will look like.  Based on a tiny sliver of information contained in charts 1.16 and 1.17 of the Ontario Budget, my understanding is that dependent students from families making under about $80,000 are net winners – in some cases by a thousand dollars, or even a bit more.  Above $110,000 it’s all net losers – students from families above this level will keep the grants they currently have but lose all their tax credits.  In between, the best guess is that all will be net losers; however, the exact amount of the loss will depend on the nature of the CSLP 2018-19 changes.

That’s dependent students – what about independent ones?  Here, it’s *very* difficult to tell.  Unlike the federal grants, current Ontario grants are restricted to dependent students, and the language in last month’s Budget is ambiguous as to whether independent students will have access to the new grants. I think it’s telling that none of the examples given in this Ontario budget backgrounder are independent students; this implies that the province simply hasn’t yet figured out what the rules for these students will be.  So for the moment we simply show how the winners and losers will break out among independent students.

(Nota bene: if you’re wondering why the Ontario change seems to have a worse winners-to-losers ratio than the federal one, it’s because money in the system is not conserved.  If you read the text of the budget carefully, you’ll note that some of the money from the eliminated tax credits is going to universities and colleges – students themselves will, on aggregate, receive less money in total after the change than before.  Less money = fewer winners.)

Part-Time Students:  You’ll notice that I’ve been focusing on full-time students: that’s because the calculus is quite different for the country’s half-million or so part-time students.  Part-timers receive a smaller amount of education and textbook credits: only $168 federally.  They all lose this amount; part-timers in Ontario will also lose an additional $100-200 or so depending on how much tuition they are paying.  The federal system makes up for this in a tiny, tiny way by increasing bursaries for part-time students – something which currently only about 13,000 students receive.  The Ontario system does not give money to part-time students at all.  So for this demographic, it seems that nearly everyone loses from the re-shuffle.

So, what do we conclude from all this?  Two things:

1)  Part-time students everywhere, and (possibly) mature students in Ontario, don’t do very well out of these changes.

2)  In the main, among dependent students at least, there will be a growing gap in net prices by family income.  In Ontario, families with below median incomes will see their net tuition fall by $1,000 or so; those with incomes in the top quartile will see an increase of nearly $1,200.  Basically, tuition is becoming a much more progressive user fee.  And that’s altogether to the good.

March 21

An Orgy of Bad Policy in Saskatchewan

Two weeks from today, voters in Saskatchewan go to the polls.  You may be forgiven for not having noticed this one coming since it has barely registered in the national press.  And that’s not just because of the usual central Canadian obliviousness, or because it’s a fly-over province; it’s also because this is one of the least competitive match-ups since…. well, since the last time Brad Wall won re-election.  CBC’s poll currently gives the Saskatchewan Party a 25 point lead over the New Democrats.

Normally, when provinces go to the polls I do a detailed look at their post-secondary platforms.  It hardly seems worth it here.  Neither the Liberals nor the Greens have a chance of taking a seat so frankly, who cares?  The NDP has released a platform full of promises large and small (my particular favourite: on page 34, they pledge to put more refrigerators in public liquor stores in order to provide more cold beer options), but did not even bother to put out a costing document, which suggests not even they think they have a hope in hell of winning on April 4.  For their part, the Saskatchewan Party has put out a manifesto, which basically says “elect us and the good times will continue to roll”: no strong vision of the future, just a recounting of past glories and four small promises that add up to a total of $110M over four years.  The only manifesto I can think of that comes close to this in sheer complacency is the Liberal Red Book from the 2000 federal election.  Which, given that oil is still around $40/barrel, is quite something.

But hey, when you’re writing a daily blog, sometimes you need an easy target. So here goes:

The Saskatchewan NDP platform on PSE is pretty awful.  They want to “improve funding for post-secondary institutions” (By how much?  Who knows?  There’s no costing document).  They want to offer everyone a $1,000 rebate on tuition, which everyone knows is regressive.  They also want to convert all provincial loans, but this actually isn’t much money since Saskatchewan aid is mostly grant.  But, get this: they also want to get rid of interest on outstanding provincial loans, which is just a whole mountain of dumb since it has no effect whatever on access, and rewards people for choices they made years ago.  Offering to help borrowers in distress is sensible; a blanket interest subsidy for people who have already finished their studies implies the manifesto-writer has suffered some kind of head trauma.

Still, in some ways, the NDP platform looks good in comparison to what the Saskatchewan Party is offering.  As some of you probably know, for the past decade or so the Government of Saskatchewan has offered a generous set of tax credits to graduates who stay within the province.  Essentially, if you are a university graduate you can reduce your payable provincial taxes by $2,000/year for the first four years that you live in the province, and $4,000 per year for the next three (if you don’t earn enough in a given year to use all of that, you can carry forward to a future year; amounts are reduced slightly for college graduates).  Add to this the usual panoply of federal and provincial tax credits, and you realize that Saskatchewan graduates who stay in the province are receiving more in tax benefits than they ever pay in tuition.

If that formulation sounds familiar, it should – it’s exactly the way Ontario finally figured out it could market itself as having “free tuition” to low-income students without spending a penny.  But the Saskatchewan Party, instead of following Ontario and transferring money to a more front-ended set of incentives, has decided to double-down on the back-end.  Their big post-secondary-related pledge is to allow graduates to take up to $10,000 unused rebate money and use it as a down payment on the purchase of a house.

Yes, I am serious.  Check it out.  Page 8.

I mean, in a way, it’s genius; a twofer tax credit, combining the middle-class’ two fondest wishes: that government subsidize both their education and their house purchases.  And if you assume the basic premise that graduates need financial inducements to stay in the province, why not make that financial inducement in the form of a housing subsidy, which physically ties graduates to the province?

But in another, deeper, way it’s a travesty.  If the Saskatchewan Party has done such a fantastic job managing the economy, why does the province still need this financial inducement to get people to stay in the province?  If the argument is that “young people need a break”, why give so much to those likeliest to succeed (i.e. university grads) and nothing to those least likely (those who never make it to PSE)?

So, yeah, Saskatchewan.  Yet another province with a bi-partisan consensus that all the specified PSE goodies should go to students and graduates rather than, you know, the actual institutions who provide the education.  Raspberries all around.

March 15

ECE Contributions vs. PSE Contributions

Morning all.  Today, HESA is releasing a paper called “What We Ask of Parents: Unequal Expectations for Parental Contributions to Early-Childhood and Post-Secondary Education in Canada”, by Jacqueline Lambert, Jonathan Williams, and me.  The gist of it is: “Holy cow, we ask parents to contribute a lot more to ECE than PSE – why is that?” You can click here to read the whole report, or you can see the short version as an op-ed in today’s Globe and Mail.  What I want to show you in today’s blog is the wonky background stuff, because we’ve done a couple of things in this paper that no one has done before.

The paper is really built around the key insight that you can create “expected contribution curves” for both early-childhood education (ECE) and post-secondary education (PSE). In PSE, you can do this simply by looking at the parental contribution tables embedded in student financial aid programs, and then add in the value of tax credits.  You’ve seen me do stuff like this before, but here’s what it looks like for PSE:

Figure 1: Net-After Tax Expected Parental Contributions for Parents of Children in PSE, Canada 2015

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You can see pretty clearly what’s going on here.  Below about $15,000 the expected contribution is $0 – no contribution required, but income levels are too low for any taxes to kick in, so no tax credits, either.   As income starts to rise, net contribution falls because of the value of tax credits.  But then, expected contributions from the student aid system kick in: at about $45,000 in the case of Quebec, and around $60,000 elsewhere (as a result, despite low tuition, Quebec is the place where parents are expected to pay the most, if their income is between $45,000 and $70,000).  The exception to this is Alberta, where no parental contribution is required at all.  I’ll come back to that.

Eventually, this graph shows that contributions flatten out at a level equal to tuition and fees, which is the maximum possible contribution in this exercise.  Now, I’m pretty sure this will tick a lot of people off because at least some parents also support students for their living expenses, and we’re excluding them, and hence making contributions look smaller than they really are.  This is true – and we do it in part because actual living expenses are quite variable and difficult to model.  But that doesn’t mean we’re exaggerating the difference between expected contributions to ECE and PSE – after all, parents of children in ECE are paying for their kids’ living expenses too.  So we just call all of that a wash and focus on what parents are paying in fees to daycares and universities.

Anyways, for early childhood education you can draw very similar curves to the ones in Figure 1 by taking the average child care costs and applying the subsidies available to low income parents according to the provincial formula.  No one seems to have ever done this before in Canada, but it can be done.  You have to do it three times, because outside Quebec, prices tend to differ by the age of the child (infants are more expensive than toddlers, who are more expensive than pre-schoolers), but it is eminently doable.  Here’s what the graph looks like for infants, after tax deductions are applied:

Figure 2: Net-After Tax Expected Parental Contributions for Parents of Toddlers in ECE, Canada, 2015

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As you can see, the story for ECE contribution is quite a different from the one for PSE.  For infants, the minimum contribution is almost never zero.  In most provinces, parents hit maximum contributions at between $45,000 and $70,000 in family income – a level where parents of PSE students are usually not required to contribute a thing.  To say we as a country are inconsistent in the way we pay for these two types of education is putting it mildly.

Anyways, in the paper itself (well, in the appendices anyway) we generate province-by-province comparisons like this one below, for Alberta:

Figure 3: Effective After-Tax Required Contributions for Parents of Dependent PSE Students and Children in Child-Care, by Family Income, Alberta, 2015

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Yeah, this graph is pretty crazy.  This is what happens when you say there shouldn’t be a parental contribution to post-secondary education, which Alberta did about five years ago.  At $75,000 in family income, the gap between required parental contributions for an infant and for a university student is a little over $14,000.  Madness.

And finally, by multiplying provincial values by each province’s share of population, we can generate some national averages.  To wit:

Figure 4: Average Effective After-Tax Required Contributions for Parents of Dependent PSE Students and Infants in ECE, by Family Income, Canada, 2015

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Fun, huh?

Tomorrow: the policy implications.

December 08

Innovation Ecosystems: Promise and Opportunism

We sometimes think of innovation policy as being about generating better ideas through things like sponsored research.  And that’s certainly one part of it.  But if those ideas are generated in a vacuum, they go nowhere – making ideas spread faster is the second pillar of innovation policy (a third pillar – to the extent that innovation is about new product-generation – has to do with venture capital and regulatory environments, but we’ll leave those aside for now).

Yesterday, I discussed why the key to speeding up innovation was the density of the medium through which new ideas travel: basically, ideas about IT travel faster in Waterloo than in Tuktoyaktuk; ideas about marine biology travel faster in Halifax than in Prince Albert.  And the faster ideas travel and collide (or “have sex” in Matt Ridley’s phrase), the more innovation is produced, ceteris paribus.

Now, although they don’t quite use this terminology, the proponents of big universities and big cities alike find this logic pretty congenial.  You want density of knowledge industries?  Toronto/Montreal/Vancouver have that.  You want density of superstar researchers?  U of T, McGill, and UBC have that (especially if you throw in allied medical institutes).  That makes these places the natural spot to invest money for innovation, say the usual suspects.  All you need to do is invest in “urban innovation ecosystems” (whatever those are – I get the impression it’s largely a real estate play to bring scientists, entrepreneurs, and VCs into closer spatial proximity), and voila!  Innovation!

This is where sensible people need to get off the bus.

It’s absolutely true that innovation requires a certain ecosystem of researchers, and entrepreneurs, and money.  And on average productive ecosystems are likelier to occur in larger cities, and around more research-intensive universities.  But it’s not a slam dunk.  Silicon Valley was essentially an exurb of San Francisco when it started its journey to being a tech hub.  This is super-inconvenient to the “cool downtowns” argument by the Richard Floridas of this world; as Joel Kotkin has repeatedly pointed out, innovative companies and hubs are as likely (or likelier) to be located in the ‘burbs, as they are in funky urban spaces, mainly because it’s usually cheaper to live and rent space there.  Heck, Canada’s Silicon Valley was born in the heart of Ontario Mennonite country.

We actually don’t have a particularly good theory of how innovation clusters start or improve.  Richard Florida, for instance, waxes eloquent about trendy co-working spaces in Miami as a reason for its sudden emergence as a tech hub. American observers tend to attribute success to the state’s low tax rate, and presumably there are a host of other possible catalysts.  Who’s right?  Dunno.  But I’m willing to bet it’s not Florida.

We have plenty of examples of smaller communities hitting tech take-off without having a lot of creative amenities or “urban innovation strategies”. Somehow, despite the lack of population density, some small communities manage to get their ideas out in the world in ways that gets smart investors’ attention.  No one has a freaking clue how this happens: research on “why some cities grow faster than others” is methodologically no more evolved than research on “why some universities become more research intensive than others”, which is to say it’s all pretty suspect.  Equally, some big cities never get particularly good at innovation (Montreal, for instance, is living proof that cheap rent, lots of universities, and bountiful cultural amenities aren’t a guarantee of start-up/innovation success).

Moreover, the nature of the ecosystem is likely to differ somewhat in different fields of endeavor.  The kinds of relationships required to make IT projects work is quite different from the kinds that are required to make (for example) biotech work.  The former is quick and transactional, the latter requires considerably more patience, and hence is probably less apt to depend on chance meetings over triple espressos in a shared-work-environment incubator.  Raleigh-Durham and Geneva are both major biotech hubs that are neither large nor particularly hip (nor, in Raleigh’s case, particularly dense).

It’s good that governments are getting beyond the idea that one-dimensional policy instruments like “more money in granting councils” or “tax credits” are each unlikely on their own to kickstart innovation.  It’s good that we are starting to think in terms of complex inter-relations between actors (some, but not all of which involve spatial proximity), and using “ecosystem” metaphors.  Complexity is important. Complexity matters.

But to jump from “we need to think in terms of ecosystems” to “an innovation agenda is a cities agenda” is simply policy opportunism.   The real solutions are more complex. We can and should be smarter than this.

October 06

Party Platform Analysis: The Liberals

Two quick things at the outset.  First, this will only look at the Liberal’s Monday announcement on student financing.  Tomorrow, I’ll look at their science/innovation policy in conjunction with that of the NDP, which apparently released a similar platform in conditions of complete secrecy last week.  Second, in the interest of full disclosure: I was asked by the Liberals to comment on a draft of their platform a few weeks ago.  I did so, as I would have for any party had they asked.  Judging by what I see in their platform, they took at least some of my comments into account.  So bear that in mind when reading this analysis.

The main plank of the Liberal announcement is that they are planning to increase grants for low income students by $750 million, rising to $900 million by the end of the mandate (which more than doubles the total amount; however,it’s not clear if this increase includes alternative compensation to Quebec… if it does not, add another $200 million).  The Canada Student Grant for Students from Low-Income Families (CSG-LI) will rise in value from $2,000/year to $3,000/year, and the Canada Student Grant for Students from Middle-Income Families (CSG-MI) will rise in value from $800 to $1,800.  The thresholds for both will be increased, meaning more students will receive the low-income grant, and more students with incomes in the $80-100K family income range (precise values not set, but this looks like about what they are going to do) will receive the middle-income grant.  In addition, the Liberals propose raising the repayment threshold (i.e. the level below which borrowers in repayment are not required to make payments on their loans) from just over $20,000 to $25,000.  It’s unclear what this would cost (take-up rate is uncertain), but a good bet would be somewhere in the neighborhood of $100 million.

So, a $1 billion promise.  Except the Liberals are promising that this will all cost the taxpayer… nothing.  And the reason for that is that the Liberals have decided they will axe the education amount and textbook tax credits (something I, and, others have been suggesting for many years – for instance here).  Now, I actually don’t think this will quite cover the entire spending bill, but it will be within $100 million, or so (basically, it will cover the grants, but not the loan threshold change).

However, what this means is that the plan creates winners and losers.  The value of those federal tax credits for full-time students is $558/year (for part-time students it is $168).  Everybody will lose that amount.  For those who currently receive the CSG-LI, and those who receive CSG-MI and remain in the CSG-MI bracket after the thresholds move, the extra $1,000/year the Liberals are offering means they will be better off by $442 (but they will also benefit by getting the entirety of their $1,000 sooner in the form of grants, rather than delayed in the form of tax relief).  For those in the CSG-MI moving into the CSG-LI category, the net benefit will be $1,642.  For those who currently do not receive grants, but will now become eligible for CSG-MI, the net benefit will be $1,242.

So there are winners.  But there are losers, too.  Families with incomes over $100,000 (or so) will simply be out that $558.  And part-time students, who are ineligible to receive CSGs, will also be out $168.  But this is what happens when you try to do big policy without spending (many) additional dollars.  And there’s always the risk that they will come under political fire for “raising taxes”, which is arguably what cutting tax credits amounts to.

So, full marks for creativity here: these policies would make the funding system somewhat more progressive (in a slightly quirky way).  And full marks for putting out a backgrounder that makes it clear that these moves will create costs for provinces (their co-operation will be needed in order to raise the loan threshold) that need to be mitigated, even though the Liberals are vague on how this will actually work.

But it should be noted that by their own claim (which, as I said above, is probably not quite true), Liberals are choosing not to invest another dime in the sector, which puts them last among political parties in new spending commitments.  As pleasing as the re-arrangement of inefficient subsidies is, wouldn’t it have been better if they had added some funds on top of it?

December 03

Solving the Fees Problem

So, here’s the problem: Canadian governments are mostly broke.  Even the ones that didn’t look broke a couple of months ago (Alberta, Saskatchewan, Newfoundland) are now very definitely broke (especially Newfoundland).  There’s no money for PSE.  Everybody knows that.

So, equally, everyone knows that the only way institutions are going to avoid a crunch is either by turning themselves into finishing schools for the Asian middle class, or by charging domestic students higher tuition fees.  No one genuinely thinks the former is a sensible long-term solution, and yet that’s the way we’re heading because Canadian families and the politicians who represent them are resistant to the idea of a rise in fees.

To be clear, resistance does not arise because anyone really thinks fees deter access.  Even the dopiest politician knows that participation rates today are over 50% higher than they were 20 years ago when nominal tuition was about half what it is now (certain student groups are indeed that dopey, but that’s another story).  No, the reason people don’t want more fees is because too many people think that what universities and colleges are offering isn’t worth what they’re charging.

This is of course insane because, as we know, Canadians, on aggregate, are paying Net Zero Tuition for post-secondary education.  We have $7.2 billion going out every year in various forms of aid – exactly equal to what universities and colleges charge in tuition to domestic students – and apparently no one notices.  The focus is exclusively on the sticker price, never on the net price, which in many cases is negative.  This shouldn’t be a surprise, given the opacity of our student aid system.  We prevent students from working out their student aid package before they apply, and then we hand out as much of our aid as possible at the back end where no one will notice it.

It’s madness.  And it has to change.  We need to make it a lot more obvious what a great deal people are getting.  We need to make it so that when governments spend money to make it easier for people to go to school, the people being helped actually realize they are being helped.

This is going to require coordination.  Our confusing system is a product of the fact that many different players (feds, provinces, institutions) designed it so that it met their own administrative needs and desires for visibility, not the needs of students.  We need all of them to agree to make it less complicated, more predictable, and more visible.  That means, above all, ditching tax credits and either turning them into (hopefully targeted) grants or transferring them to institutions in return for a reduction in tuition.

Can’t be done, you say, because governments like to take credit for tax expenditures?  Tosh.  It’s abundantly clear that the public has no idea the credits even exist, so governments could hardly do worse than what they do now.  Besides, there’s precedent to show it’s good politics: in 2012, Quebec ditched some tax credits in order to pay for improved student aid, and back in 1999, Manitoba explicitly ditched a refundable tax credit to pay for a tuition roll-back (meaning the roll-back cost the government nothing, and students were in fact no better off at the end of the day, but boy did the NDP make hay out of that one).

So it’s doable.  But someone has to get the provinces and the feds to sit down together to make them do it.  The only people who can do this are the institutions: specifically, the Association of Universities and Colleges of Canada (AUCC) and Colleges and Institutes Canada (CIC).  Only they have the clout to get the provinces and the federal government in the same room to hammer out a deal.  And it’s eminently in their interest to do so.  Until Canadians rediscover what a fantastically good deal they actually have in their higher education system, the likelihood of more funds heading their way is pretty slight.

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