Stabilizing and Strengthening State Funding for Public Higher Education After the Big Beautiful Bill

The One Big Beautiful Bill Act, signed into law by President Donald Trump in July 2025, cuts $186 billion in federal spending on nutrition assistance and more than $1 trillion in health care spending over the next decade, shifting a greater share of the costs for these programs to the states.¹ The state budgetary challenges that will likely result from this legislation will threaten public higher education funding, which is particularly vulnerable to cuts because it is largely discretionary spending and is often viewed as having an alternate funding mechanism—tuition and fees.² In 2025, higher education was the third-largest area of expenditures for state general funds—and therefore the third-largest source of state discretionary spending—at about 9 percent, following K-12 spending at 34 percent and Medicaid spending at 20 percent.³

However, decreased operating support and increased prices for students and families have consequences, as they affect student loan-borrowing levels, educational quality, and overall rates of degree attainment in the states. For example, following the Great Recession, overall state funding for higher education declined significantly for several years as states sought to balance budgets amid decreased tax revenue.⁴ From 2008 to 2012, state higher education appropriations declined 23 percent on average nationwide, from $10,714 to $8,213 per full-time equivalent (FTE) student when adjusted for inflation.⁵ Meanwhile, public colleges and universities increased tuition to make up for the lost revenue from state appropriations. As a result, the average tuition paid per FTE student increased 18 percent nationally, from $5,949 to $7,040 in constant dollars, over the same time period.⁶

State and local funding levels directly influence student outcomes, particularly for students attending public two-year colleges (community colleges). When state appropriations decline, four-year institutions tend to raise tuition or attempt to enroll more international and out-of-state students who pay higher out-of-jurisdiction tuition and fees.⁷ By contrast, community colleges, which are more limited in their ability to increase revenues, are more likely to respond by decreasing expenditures on instruction and student services.⁸

On the positive side, in the four-year sector, increases in state appropriations lead to lower student loan-borrowing levels.⁹ In addition, research from the Federal Reserve shows that, for community college students, more robust state funding leads to higher rates of degree completion and transfer to four-year institutions.¹⁰ It also leads to reduced student loan borrowing and a lower likelihood of default and delinquency.¹¹ Moreover, studies have found that increased state appropriations positively affect enrollment and the number of degrees awarded at both the two- and four-year levels.¹² Maintaining and bolstering state and local funding can help make bachelor’s degrees more affordable, ensure community college students have the resources they need to succeed and graduate, and ensure states’ workforces have the skills needed to fill in-demand jobs.

While it is well-known that those who earn a college degree outearn their peers with a high school diploma over their working careers—to the tune of $400,000 for an associate degree and $1.2 million for a bachelor’s degree, on average—the wider societal impacts of degree attainment receive less attention. States derive significant benefits from investing in their postsecondary education systems: These graduates are skilled workers who join the workforce, contribute to a higher tax base, and grow state and local economies.¹³ About 8 in 10 graduates of community colleges and 7 in 10 graduates of public four-year universities stayed in-state after graduation.¹⁴ One study found that an average of one additional year of schooling past high school in a state increased real gross domestic product (GDP) per capita 17.4 percent and real wages per capita 17.8 percent.¹⁵

Other studies have found a positive causal relationship between educational attainment and GDP, both in U.S. states and globally.¹⁶ Some researchers posit a “virtuous cycle” of growth by which an increased supply of educated workers attracts employers, particularly those that require skilled workers.¹⁷ Increased investments in university-based research, in particular, foster innovation and work as drivers of economic growth.¹⁸ In addition, more highly educated workers contribute to increased state tax revenues (due to their higher earnings than those of workers without a college degree), decreased state spending on public welfare programs, and increased spending in the local economy.¹⁹ Finally, colleges and universities themselves are engines of economic output, employing more than 4 million people nationwide and increasing demand for local goods and services.²⁰

State and local governments are operating under significant economic and budgetary uncertainty right now, with the impacts of federal policy changes such as higher tariffs and reduced federal spending on health care and nutrition assistance threatening to create funding gaps for important state programs, including public higher education.²¹ The Big Beautiful Bill (BBB) will cut tens of billions of dollars from nutrition assistance programs and more than $1 trillion in health care spending to offset tax cuts for the wealthy. For the first time, states will be required to shoulder significant portions of the costs of benefits for residents of their states, as well as to take on larger portions of administrative costs.²² Perhaps most challengingly of all, these costs to states will vary over time, dependent on the fluctuation of so-called error rates in the Supplemental Nutrition Assistance Program (SNAP), creating greater uncertainty and instability in state budgets.²³

The tax cuts in the BBB disproportionately benefit the highest earners and the most profitable businesses.²⁴ Given the potentially devastating fiscal challenges these cuts may cause, states should consider ways to raise tax revenue from these same groups to avoid disruptions in essential state services and foster continued growth. Increased revenue can ensure that public higher education systems remain engines of economic mobility, offering high-quality, affordable postsecondary education and workforce training to students from all backgrounds.

State and local appropriations are the most important source of revenue for public colleges and universities, accounting for about 21 percent of total revenue for four-year institutions and nearly half—47 percent—for two-year institutions on average in 2024.²⁵ (Two-year institutions, or community colleges, are particularly reliant on local appropriations, which in 2024 accounted for 20 percent of total revenue for community colleges but just 1.4 percent of revenue for four-year institutions).²⁶ Taken together, local and state appropriations exceeded even the revenue generated from tuition and fees (19 percent at four-year institutions and 12 percent at two-year institutions).²⁷ According to the State Higher Education Executive Officers Association (SHEEO), state and local funding for higher education accounted for nearly $140 billion in fiscal year 2024, supporting 18.4 million full- and part-time students, both undergraduate and graduate, across two- and four-year institutions.²⁸

A majority of state and local funding for higher education comes from appropriations generated by tax revenue (92.9 percent), with smaller shares coming from nontax sources such as state lotteries (4 percent) and state-funded endowment earnings (1.2 percent).²⁹ Most of that funding is provided directly to institutions for general operating expenses (78.6 percent), while smaller amounts go to agricultural and medical research (10.1 percent) and student financial aid (10.7 percent).³⁰

In 2024, state and local funding provided an average of $11,683 in education appropriations per FTE student nationwide.³⁵ Appropriations varied significantly, from $4,629 in New Hampshire to $21,109 in Wyoming.³⁶ When adjusted for inflation, this total level of support is almost exactly equal to levels 25 years ago ($11,685 per FTE student in constant dollars in 1999), following periods of decline during economic recessions—2001 to 2004 and 2009 to 2012—and a gradual recovery since 2012.³⁷ Local appropriations for postsecondary education almost exclusively supported two-year institutions ($3,712 per FTE student compared with $32 per FTE student at four-year institutions), bringing the total level of state and local support for community colleges to $10,899, compared with $12,986 for four-year public institutions.³⁸

States’ capacity to raise revenue to support their higher education sectors varies significantly, depending on factors such as the level and distribution of wealth and income of their residents, the number and size of their businesses, their natural resources, and the size of their populations.³⁹ Factors such as these affect states’ tax bases, offering some states greater resources than others to draw upon for funding public services, including education.

The following table and figure compare a state’s higher education funding with its fiscal capacity (defined as the state’s total taxable resources), considering per-student levels of support relative to the size of a state’s tax base. The first column of Table 1 shows average state and local funding for public postsecondary education and research (institutional operating expenses, student financial aid, and research funding) per student for fiscal years 2018 to 2022.⁴⁰ This metric includes funding for research and medical schools, since research is both an integrated aspect of an institution’s educational quality and a key driver of the postsecondary sector’s economic impact. The second column represents “state effort,” measured in this report as the ratio of state and local funding for postsecondary education and research to state fiscal capacity, or total taxable resources.⁴¹ (See the Methodology section at the end of this report for a full description of the calculations and metrics included in Table 1 and Figure 2.)

At one end of the spectrum, New Mexico, Wyoming, and Hawaii rank highly in both postsecondary education funding and state effort. Hawaii and New Mexico both had high effective tax rates, at 11.4 percent and 9.4 percent on average, respectively, over fiscal years 2018 to 2022. (see Appendix B for additional data on effective tax rates and the share of tax revenues allocated to higher education by state)⁴² New Mexico also allocates a significant share of its tax revenue to higher education, at 10.3 percent, relative to the U.S. average of 5.5 percent.⁴³ While Wyoming has a low effective tax rate (6 percent), it allocates the highest share of its tax revenue to postsecondary education nationally, at 13 percent.⁴⁴

By contrast, New Hampshire, Pennsylvania, Vermont, Colorado, Rhode Island, and Delaware rank low on both funding levels and funding effort. While Vermont, Rhode Island, and Pennsylvania all have effective tax rates above the U.S. average of 7.7 percent (10.4 percent, 8.3 percent, and 8 percent, respectively), they allocate low shares of their tax revenue to higher education—each ranging from 2 percent to 3 percent.⁴⁵ Colorado, Delaware, and New Hampshire have effective tax rates below the U.S. average (between about 6 percent and 7 percent) and allocate low shares of this revenue to higher education (between 2 percent and 4 percent).⁴⁶ Policymakers in these states should bolster funding for their public higher education systems to ensure students have access to affordable, high-quality postsecondary education and that state economies benefit from investments in workforces and regional communities.

Notably, in FY 2024, Massachusetts began to appropriate revenues generated by a new progressive tax policy that helps fund higher education (the Fair Share Amendment, discussed below). Consequently, Massachusetts saw its ranking relative to other states in per-student education and research funding increase from 17th (for the 2018–2022 average) to seventh in 2024, highlighting the effectiveness of such policies.⁴⁷

Figure 2 indexes the figures in Table 1 to the U.S. average, indicating the percentage above or below the national average for each state on both measures. Currently, there is no established legal or universal definition of funding adequacy in higher education, and debates about the need and nature of such benchmarks are ongoing.⁴⁸ In the absence of definite thresholds, these national benchmarks can serve as useful guideposts to give state legislators a general sense of how their state’s postsecondary education funding level compares with those of other states in light of varying state fiscal capacities.

The four quadrants of Figure 2 represent four different groups of states that are either high on both effort and support (top right), low on support but high on effort (top left), low on both support and effort (bottom left), or high on support but low on effort (bottom right). Thirteen states fall into the high support-high effort quadrant, nine states fall into the low support-high effort quadrant, 21 states fall into the low support-low effort quadrant, and seven states and the District of Columbia fall into the high support-low effort quadrant.

The 21 states in the bottom left quadrant represent those with the greatest opportunity for state policymakers to bolster state support for higher education, as they fall below both the U.S. average in state and local funding per student and the level of funding provided in relation to the size of the state’s tax base. These states (in order of funding effort, starting with the lowest) are: New Hampshire, Pennsylvania, Colorado, Vermont, Rhode Island, Delaware, New Jersey, Washington, Missouri, Ohio, Virginia, Florida, Iowa, Minnesota, South Dakota, Oregon, Montana, Indiana, South Carolina, Oklahoma, and Michigan. These states range widely in fiscal capacity, from Oklahoma, which ranks 44th in taxable resources per capita, to Washington state, which ranks fourth.⁴⁹ (see Appendix for additional data on taxable resources per capita by state)

By contrast, states that fall below the national average in funding levels but provide an outsize share of higher education funding relative to the size of their economy (top left quadrant) may be candidates for increased federal funding to help close gaps in need and outcomes between wealthier and less wealthy states. These nine states (in order of funding effort, starting from highest to lowest) include Mississippi, Alabama, West Virginia, Utah, Kansas, Wisconsin, Kentucky, Louisiana, and Arizona. Mississippi and Alabama are notable for having state funding effort levels 71 percent and 49 percent above the national average, respectively, despite ranking 50th and 48th in taxable resources per capita nationally.

Although there are strong correlations between funding and outcomes in higher education, funding levels alone do not tell the full story or account for all differences in outcomes, particularly in the vastly different economic and social contexts found in different states.⁵⁰ Nevertheless, increased state and local funding for higher education has generally been shown to reduce the student debt burden for four-year college students, promote success and completion among community college students, and raise overall state attainment, as described in the introduction of this report. State legislators must assess their states’ education funding needs relative to other priorities and identify the areas within higher education systems that require additional support to meet their state’s education and workforce training needs.

Most state and local tax systems are regressive, imposing greater relative tax burdens on low- and middle-income families than on wealthy households.⁵¹ The Institute on Taxation and Economic Policy (ITEP) reports that 44 states have tax structures that exacerbate income inequality.⁵² On average, the lowest-income quintile has an effective state and local tax rate of 11.4 percent, while the middle 20 percent has an effective rate of 10.5 percent and the top 1 percent has an effective rate of 7.2 percent.⁵³ Those states that rely most heavily on sales and excise taxes, have a flat income tax, or lack an income tax typically are the most regressive.⁵⁴ Progressive state tax policies that increase tax rates for the highest earners and the most profitable businesses can help generate revenue for public services such as education without increasing the burden on low- and middle-income families.

The examples below highlight progressive state tax policies that raise state revenue for public education by taxing the highest earners, the wealthiest individuals, and the most profitable businesses. They can serve as models for states seeking to increase public support for higher education, particularly amid budgetary challenges in the years ahead.

The Fair Share Amendment, which raises funds for public transportation and higher education through a 4 percent surtax on incomes exceeding $1 million, was approved by Massachusetts voters in 2022 following a multiyear grassroots campaign.⁵⁵ The initiative began as a citizen-initiated process, one of two methods available in Massachusetts for passing a constitutional amendment. This process requires a petition to collect about 75,000 signatures that is approved by 25 percent of state legislators in two legislative sessions before appearing on a statewide ballot.⁵⁶ The process failed in June 2018, when a state court struck the proposal from the ballot on the grounds that it did not meet the constitution’s requirements that any multipart proposal address closely related issues.⁵⁷ Ultimately, the proposal advanced through the legislative amendment process, receiving support from 50 percent of the legislature in two consecutive sessions (2019 and 2021), and was subsequently affirmed by voters in November 2022.⁵⁸

The Fair Share Amendment tax, implemented as a surtax, applies to all forms of income, including capital gains and unincorporated business income.⁵⁹ The revenue generated from this policy is statutorily reserved for investments in public education and transportation, including “affordable public colleges and universities.”⁶⁰ The policy generated $2.4 billion in FY 2024 and $3 billion in FY 2025.⁶¹ In FY 2024, 23 percent of appropriated funds from this policy supported higher education, while in FY 2025, this share was 19 percent.⁶²

From fiscal years 2024 to 2026, the Massachusetts state legislature appropriated $732 million in state funding for public higher education programs from Fair Share Amendment revenues, including $367 million for student financial aid and scholarships, $223 million to offer free community college, $53 million for capital improvements, $43 million for institutional operations, $31 million for student support services, and $16 million for university endowments.⁶³ These appropriations accounted for 45 percent, 47 percent, and 53 percent of the state higher education budgets in fiscal years 2024, 2025, and 2026, respectively. (see Figure 4)⁶⁴ The additional surtax revenues allowed for a 64 percent year-over-year increase in higher education funding between fiscal years 2023 and 2024, the first year the investments were available, and have quickly grown to account for a significant share of state funding for higher education.⁶⁵ Community college enrollment increased by 14 percent in 2024, almost 2.5 times the national average of 5.8 percent.⁶⁶ These investments also support training for more than 6,000 workers in high-demand fields, including 2,300 in nursing and allied health professions, 600 in computer and information sciences, 1,600 in business and management, and 1,500 in other disciplines.⁶⁷

The expansion of Massachusetts’ need-based financial aid program covers the full cost of attendance at public two- and four-year institutions for students eligible for Pell Grants and reduces tuition and fee costs for students from middle-income families (with annual incomes of approximately $85,000 to $100,000) by one-half.⁶⁸ This funding benefited more than 34,000 Massachusetts students, allowing Pell Grant recipients to graduate debt free and saving students from middle-income families nearly $4,000 per year on average.⁶⁹

Massachusetts lawmakers set aside specific funds for the Fair Share Amendment revenues to ensure transparency and sustainability in their use. Revenues from the surtax are deposited in an Education and Transportation (E&T) fund, subject to an annual spending cap.⁷⁰ Eighty-five percent of revenues that exceed this level are deposited into a fund that supports one-time capital expenditures, while the remaining 15 percent are deposited into a reserve fund.⁷¹ These budgetary mechanisms ensure Fair Share dollars are put toward their intended use, balance short- and long-term goals, and have a reserve fund to draw upon during recessionary or low-revenue periods.

In November 2025, a ballot initiative was passed in Colorado that raised taxes on high-earning families through a slightly different mechanism.⁷² Proposition MM reduced the cap on certain state income tax deductions for taxpayers earning $300,000 or more annually.⁷³ By reducing the maximum deduction claimed from $12,000 to $1,000 for single filers and $16,000 to $2,000 for joint filers, the program will generate up to $95 million in additional revenue for the state’s Healthy School Meals for All (HSMA) Program.⁷⁴ After fully funding the program plus a reserve of 35 percent, any additional funding that is generated by Proposition MM will be used for the state share of the federal Supplemental Nutrition Assistance Program.⁷⁵

This program ensures universal free school meals are available to public school, charter school, and state residential facility students. Research shows that this policy increases academic achievement, student health and well-being, and reduces barriers and stigma that sometimes discourage income-eligible students from participating.⁷⁶ Some Colorado school districts have reported up to a 30 percent increase in students eating meals in the school cafeterias as a result.⁷⁷ Additionally, such policies reduce administrative burdens for schools and eliminate the issue of unpaid meal balances.⁷⁸

These benefits will cost an estimated $327 for high-income single filers and $574 for high-income joint filers annually.⁷⁹ According to ITEP, Colorado has the 39th most regressive tax system in the country, where the top 1 percent of households (with incomes of more than $850,000 annually) pay 7 percent of their income in taxes and the next 4 percent of households (with incomes of more than $334,000) pay 7.6 percent.⁸⁰ By contrast, households in the bottom quintile (earning less than $28,000) pay 8.3 percent of their income and middle-class families in the third quintile (earning $52,000 to $95,000) pay 9.9 percent.⁸¹ The relatively small additional cost to the highest earners in the state provides basic necessities to elementary and secondary school students, bolstering their well-being and academic achievement.

Because state courts have interpreted Washington state’s constitution to ban a broad-based income tax, Washington has long had one of the most regressive tax structures in the United States.⁸² According to ITEP, the state’s lowest earners pay more than three times the share of their incomes compared with the top 1 percent of earners.⁸³

In 2022, Washington enacted a capital gains tax aimed at high-income individuals. Capital gains refer to profits generated from the sale of assets—typically stocks, bonds, and real estate. In May 2021, the state legislature passed S.B. 5096, which imposed a 7 percent tax on capital gains in excess of $250,000.⁸⁴ This tax applies to profits from capital asset investments that are held for more than one year, including investment income but excluding retirement accounts, real estate, and small-business sales.⁸⁵ In 2025, the state legislature approved an additional 2.9 percent tax on long-term capital gains exceeding $1 million, raising the top marginal rate for the capital gains tax to 9.9 percent.⁸⁶ Revenues from Washington’s capital gains tax are allocated for education expenditures and school construction.⁸⁷ The first $500 million is deposited into the state’s Education Legacy Trust Account, which funds public schools, child care, and early childhood education.⁸⁸ Any revenue above this threshold is dedicated to school construction.

In the first two years since the enactment of this tax, public education in Washington has benefited from robust additional investments, including:⁸⁹

• $240 million to expand eligibility and lower out-of-pocket costs for child care programs for low-income families.
• $101 million to provide access to prekindergarten for more than 4,000 additional children.
• $29 million for specialized child care services for children with specific needs.
• 171 individual infrastructure projects to build new schools, modernize or renovate existing facilities, improve heating and ventilation, or improve building safety, as a few examples.⁹⁰

The revenue from the 7 percent tax totaled $840 million in 2022, its first year; $419 million in 2023; and $561 million in 2024.⁹¹ These figures vary considerably due to market volatility, illustrating one drawback of this policy—it is cyclical, as it fluctuates with the stock market, providing less revenue in years when it may be needed most and potentially creating challenges for state budget planning. However, as discussed in the recommendations below, states can use budgeting practices such as reserve funds to set aside some revenues during especially high-revenue years for use during lower-revenue years, helping manage these fluctuations.

In 2019, the Oregon State Legislature enacted the Student Success Act, establishing a state “corporate activity tax” on businesses to raise dedicated revenue for state education programs.⁹² This tax applies to gross receipts, or total revenues, exceeding $1 million (with some deductions), and equals $250 plus 0.57 percent of the commercial activity of more than $1 million.⁹³ It allows businesses to subtract 35 percent of labor costs or other cost inputs in calculating the taxable amount of gross receipts.⁹⁴ A share of the revenues are deposited into the State School Fund (SFF), including a required $40 million for high-cost needs for students with disabilities.⁹⁵ Similar to the Massachusetts Fair Share Amendment, revenues from this tax are deposited into a “separate and distinct” fund in the state treasury, the Fund for Student Success.⁹⁶ About 50 percent of the funds remaining after the deposit into the SFF are sent directly to support K-12 schools; 20 percent are used for early learning for children from birth through age 5; and 30 percent are used for various other statewide K-12 education initiatives, such as school meals and summer school programs.⁹⁷

From 2020 to 2024, the corporate activity tax generated $1.2 billion on average annually.⁹⁸ For the 2023–2025 biennium, $531 million went to early education programs and $1.7 billion went to K-12 initiatives, representing 40 percent of the budget for Oregon’s Department of Early Learning and Care and 28 percent of the budget for the Department of Education, which administers K-12 education programs, respectively.⁹⁹ An additional $702 million was deposited into the SFF, representing 5 percent of the $15.3 billion in total funds made available from the SFF in the budget those years.¹⁰⁰ These funds have enabled an expansion of free school meals to nearly 200 more schools, bringing the share of Oregon students with access to school nutrition programs to 3 in 4.¹⁰¹ They also funded summer school programs for an additional 40 Title I schools in the state, providing additional learning and enrichment opportunities to students from the highest-needs schools.¹⁰²

In early learning, the largest allocations supported Oregon’s comprehensive family assistance program from the prenatal stage through age 5 ($194 million), high-quality preschool for low-income families ($148 million), and early intervention and early childhood special education services ($115 million) over the course of the 2023–2025 biennium.¹⁰³ These funds were projected to serve at least 15,000 children birth through age 5 annually.¹⁰⁴

While Oregon’s corporate activity tax generated much-needed revenue from business activity to support early childhood and K-12 education, an even more equitable model would tax corporate profits rather than revenues. There is evidence that taxes on gross receipts are at least partially passed on to consumers, and therefore function more like a hidden sales tax, while taxes on corporate profits tend to be more progressive.¹⁰⁵

Numerous state constitutions contain limitations on how states can raise tax revenue from their residents. These include total bans on certain types of taxes, restrictions on whether tax brackets can be structured in a progressive way, requirements that new tax laws receive a supermajority of votes in the legislature, or limits on the amount of tax revenue that can be raised or on the amount of public funds that can be spent. While these limitations do not foreclose the possibility of enacting new progressive tax policies, they are hurdles that policymakers and advocates should be aware of as they seek to bolster public funding for education and other initiatives.

Florida, Texas, Nevada, and Tennessee have constitutional bans on individual income taxes.¹⁰⁶ The Washington State Constitution includes a “uniformity clause” that requires that “all taxes shall be uniform upon the same class of property,” which the state judiciary has interpreted to ban a graduated income tax.¹⁰⁷ The state court upheld the 2022 capital gains tax on the grounds that it is an excise tax, not an income tax.¹⁰⁸ This policy is a strong example of successfully implementing a progressive new tax structure in a state with strong limitations on the legislature’s power to levy taxes.

Sixteen states impose supermajority requirements to enact new tax laws, mandating approval by two-thirds, three-quarters, or three-fifths of the legislature to amend tax statutes.¹⁰⁹ In three states, the requirement applies to specific types of taxes (such as property or income taxes), whereas in the remaining 13 states, it applies to all tax types.¹¹⁰ Despite this higher legislative bar to pass new tax laws, states with supermajority requirements levy taxes at “nearly identical” rates as states without them, according to the Center on Budget and Policy Priorities.¹¹¹ These legislative hurdles present several challenges, from potentially exacerbating the negative economic effects of recessions by forcing lawmakers to implement spending cuts instead of targeted tax increases, to entrenching wasteful or inequitable tax exemptions, to increasing the cost of state capital investments such as school construction. States constrained in their ability to raise tax revenue often receive lower bond ratings and as a result incur higher interest rates.¹¹²

Finally, many states impose limitations on the amount of revenue that can be generated through taxation or spent by the state government. As of 2020, the Tax Policy Center reported that 24 states had expenditure limits, 19 had revenue limits, and 12 had both.¹¹³ These policies typically set caps on the growth of revenues or expenditures annually in either absolute dollar amounts or percentage increases, frequently setting them to the annual rate of personal income growth.¹¹⁴ Some of these limits are constitutional, while others are statutory.¹¹⁵ Like supermajority requirements that limit the adoption of new tax laws, tax and expenditure limits can have harmful consequences such as forcing states to rely on local taxes or fines and fees that burden the lowest-income residents.¹¹⁶ These policies can also raise borrowing costs for state-funded projects because states with limited ability to raise revenues are less attractive to lenders.¹¹⁷

Higher education, often referred to as the “balance wheel” of state budgets, is particularly vulnerable to cuts during economic downturns.¹¹⁸ These cuts often result in higher tuition and fees, increased student borrowing, fewer community college graduates, and overall declines in educational attainment. The potential downstream effects may include slower economic growth, fewer skilled graduates, and a reduced tax base. To prevent the state divestment in the postsecondary sector seen during previous recessions, state policymakers should consider the following strategies to stabilize and sustain state funding for public higher education.¹¹⁹

Budget stabilization funds (BSFs), or rainy day funds, set aside revenue in a separate fund to be used during periods of lower tax revenue, such as recessions.¹²⁰ These funds have been shown to bolster state coffers and dampen the effect of downturns.¹²¹ All 50 states have BSFs for their general revenues, and some have BSFs for specific expenditures, including Medicaid and education.¹²² State legislators should explore using this mechanism to increase and stabilize state funding for public education, including higher education, thereby preventing reduction in support for students and families during periods of heightened need.

New types of taxes or modifications to existing tax structures that draw more from upper-income brackets, such as those outlined in this report, can help generate additional revenue for the institutions that provide broad access to postsecondary education and training while ensuring the cost burden does not fall upon those who can least afford to pay. Like in Massachusetts, Colorado, Washington, and Oregon, state legislatures can employ revenue-raising strategies such as increasing marginal income taxes for the highest brackets, reducing or eliminating credits and deductions that primarily benefit individuals with very high incomes, increasing taxes on capital gains and other types of income derived from wealth, and increasing taxes on large businesses. States can build equitable and robust capital gains tax structures by including other types of passive returns on wealth, such as dividends, interest, and passive business income, an approach recently taken in Minnesota.¹²³

For corporate taxes, mandatory worldwide combined reporting (WWCR) is the gold standard to equitably and comprehensively tax business profits.¹²⁴ Tax cut legislation enacted by the Trump administrations in 2017 and 2025 restricted the reporting and taxation of foreign income by multinational corporations.¹²⁵ Implementing WWCR would address corporate tax avoidance by ensuring that assets or income shifted to lower-tax jurisdictions abroad are fairly taxed. Such policies would drive revenue for states and create level competitive environments for domestic small businesses, which may struggle to compete with multinational corporations that engage in offshore profit-shifting most.¹²⁶ Analysis by ITEP finds that adopting WWCR would increase state income tax revenues by 14 percent and add $18.7 billion per year to state budgets.¹²⁷

The 34 states without policies requiring supermajorities of the legislature to enact tax laws, in particular, should consider new progressive strategies to raise tax revenue before the impacts of the BBB fully manifest.¹²⁸ These lower barriers make it more feasible to develop and implement tax policies that support the range of needs of the states’ residents, from health care to food security to education.

Alabama is one state that has an education trust fund, which sets aside separate funds for K-12 education in the state treasury. This mechanism may be one reason Alabama ranks highly on the state effort measure in its higher education funding, despite being a lower-income state and slightly below the average in funding per student. (see Figure 2)¹²⁹ Several of the other state examples surveyed in this report, including Massachusetts, Washington, and Oregon, directed tax revenues from the new tax policies into separate funds for education. This budgetary mechanism promotes transparency and ensures the funds are used for their intended purpose.

Forming an interstate commission or working group to develop a framework that aligns funding models with educational needs is necessary to inform a national understanding of funding adequacy. The commission could account for differences in state economies and educational systems in the funding adequacy framework, creating a flexible system that creates standards for states to aspire to while accounting for the range of differences across states. Such an analysis may consider differing state education and employment goals and establish recommendations for allocating state funds accordingly. While most states set strategic goals for education outcomes such as degree attainment rates, determining the resource levels necessary to reach these targets is a greater challenge.¹³⁰ The K-12 education system has more established methods of determining funding adequacy, which may include cost function analysis, the judgment of expert panels, and estimating the costs of evidence-based practices.¹³¹ States such as Illinois, Virginia, and Texas have undertaken such efforts to estimate adequacy levels for higher education institutions.¹³²

Sharing resources and best practices across states would be invaluable to furthering policymakers’ understanding of adequacy. In the absence of a nuanced adequacy analysis, benchmarking can be a helpful alternative, in which a reasonable benchmark such as the median funding levels of a comparison group (such as other institutions within the state or region, a set of peer institutions, or an aspirational set of targets) can serve as an indicator of underfunding.

Twenty-six states and the District of Columbia have democratic processes that allow residents to propose new statutes or constitutional amendments.¹³³ These processes generally require that residents gather a certain number of petition signatures to place a proposal for a new law or constitutional amendment on the ballot during the next election.¹³⁴ Fifteen states allow citizen-initiated processes for statutes, amendments, and vetoes, while six allow for statute and veto referendums only, two allow for amendment initiatives only, and two allow for veto referendums only.¹³⁵

In the examples of new progressive taxes for education cited in this report, two states—Massachusetts and Colorado—enacted them through ballot initiatives. Both required grassroots support as well as an organized, motivated group of advocates to advance the campaigns. In Colorado, a group called Keep Kids Fed raised more than $800,000 to build support for the ballot initiative.¹³⁶ Education funding proposals are strong contenders for potential ballot initiatives, as a majority of Americans support stable or increased funding for public education because students and families experience both its benefits and its shortcomings firsthand.¹³⁷

Historically, states have reduced investment in higher education during recessionary periods, cuts that have come at a high cost. These funding cuts not only negatively affect student outcomes, but they also have ripple effects of economic harm, including underinvestment in postsecondary education, slower job creation, and a weakened broader economic recovery.¹³⁸

States can drive revenue growth and stabilize appropriations for higher education by defining and meeting their adequacy requirements, adopting new progressive tax structures, and utilizing budgetary mechanisms such as trust funds and stabilization funds to prevent divestment in the education sector. Grassroots groups can advance supportive policies for higher education through ballot initiatives, several of which have achieved success in recent years. State and local funding are load-bearing pillars of the American public higher education system, and strategies to sustain and strengthen these resources will benefit students, families, communities, and the broader economy.

The author would like to thank Corey Husak, Viviann Anguiano, Bobby Kogan, David Bergeron, Alex Cogan, Paige Shoemaker DeMio, Casey Peeks, and Lily Roberts at the Center for American Progress and Carl Davis from the Institute on Taxation and Economic Policy for their reviews of and feedback on this report. The author also thanks Madison Weiss and Jazmine Amoako for their fact-checking and Evan Yi for additional support.

“Education and research appropriations per student” were found by adding the variables “Education Appropriations Excluding Federal Stimulus,” “Agriculture and Extension Appropriations,” “Medical School Appropriations,” “Research Appropriations,” and “Four-Year Medical Financial Aid” from the State Higher Education Executive Officers Association’s “State Higher Education Finance: FY 2024” report data.¹³⁹ This metric seeks to combine state appropriations for higher education and research. While it includes “Medical School Appropriations” to capture state funding provided for medical education and research, it does not include “Hospital Appropriations,” which can also be used for general operating expenses for hospitals and public service patient care. “Gross FTE Enrollment,” which includes medical students, is used to calculate the level of funding per student. This approach seeks to avoid the potentially distorting impacts of state spending on hospital operations in states with public universities with large hospital systems while still including state support for medical education and research.

This metric was then adjusted for regional price parity (RPP) and the ratio of two- and four-year students enrolled in public institutions in the state. These adjustments account for price differences across states to recognize that high-cost states must allocate more dollars to achieve the same level of support. They also account for the differing mix of two- and four-year students enrolled in the state, as four-year institutions generally require greater resources. The enrollment mix adjustment for the District of Columbia was not available for FY 2018 and FY 2019, so the adjustment from FY 2020 was used. The RPP adjustment comes from the Bureau of Economic Analysis,¹⁴⁰ and the enrollment mix adjustment comes from the FY 2024 “State Higher Education Finance” report from the State Higher Education Executive Officers Association. It is done in nominal dollars.

“State effort” in this table is defined as “education and research appropriations as a share of taxable state product.” It seeks to convey the amount a state dedicates to higher education and research as a share of its economic output. While funding levels per student convey an absolute level of support, this metric puts support in relation to the resources available to the state. States with higher effective tax rates and that dedicate higher shares of their tax revenue to higher education will be higher on this metric. Total taxable resources (TTR) are taxable gross state product plus other taxable income that is not captured by gross state product, such as income earned by commuters who work in the state but live in another state. For a full methodology of TTR, see U.S. Department of the Treasury, “Total Taxable Resources.”¹⁴¹

Both metrics were averaged over the five-year period from 2018 to 2022 to avoid choosing a single year in which a state’s funding or effort may be an outlier for any variety of reasons. It also captures both years before and after the start of the COVID-19 pandemic.

Notably, the state effort calculation uses the unadjusted figure for education and research appropriations. This is because this calculation is a ratio that essentially represents an in-state comparison between a state’s funding level and its fiscal capacity (which is not adjusted for RPP). Similarly, the enrollment mix is not accounted for in this figure, because it seeks to understand the amount of funding relative to fiscal capacity in a broad way without accounting for policy choices around the nature of the state’s higher education system.

Finally, the level of funding per student in Illinois has been adjusted to account for the share of funding that is going to fund the state pension system. Since 2008, Illinois rapidly increased state appropriations and in recent years remains an outlier, with levels nearly twice the U.S. average. The level of annual funding used to fund pensions, which averaged 36 percent from fiscal years 2018 to 2022, has been excluded in this table. (Data on the share of state appropriations going toward pensions were provided as a courtesy by the State Higher Education Officers Association and are available from the author upon request.¹⁴²

Figure 2 uses the two columns in Table 1, “State and local funding per student” (horizontal axis) and “State funding effort,” defined as education and research appropriations as a share of the state’s taxable state product (vertical axis). Each point represents a state. The graph takes each of these measures and benchmarks them to the U.S. average, with the aligning point on each axis representing the percentage above or below the U.S. average for that state. For example, Mississippi’s education and research appropriations are approximately 7.1 percent below the U.S. average, but its state effort is very high, at 104 percent above the U.S. average.