In 2003, the Texas Legislature faced a $10 billion budget shortfall.

Rather than filling the hole by increasing taxes, legislators cut spending and limited future spending wherever they could. One way they did so was by “deregulating” tuition.

Ever since universities gained the ability to set their own rates, there have been attempts by legislators to reclaim their authority to set tuition, contending that deregulation is to blame for recent tuition increases.

According to the National Center for Education Statistics, tuition increased 47 percent between 2004 and 2008 at public universities statewide. During that same time period, tuition increased a more modest 28.9 percent at private universities in Texas. Based on these numbers, it is seems reasonable that some legislators view the dramatic tuition increases after 2003 as a direct consequence of the policy.

To be fair, even though tuition at public universities has increased 47 percent statewide in the four years since deregulation, tuition at Texas public universities increased 31.5 percent in the four years prior to tuition deregulation. Based on the limited post-deregulation data, it may be the case that tuition deregulation has accelerated the pace of tuition increases, but tuition was certainly increasing prior to the policy being implemented.

Deregulation is not the sole reason tuition is increasing, but it seems to be a factor in the speed and degree of the process. Legislators should not necessarily take re-regulation off the table because an argument can be made that the old policy of letting the legislature set tuition worked better than the new policy of letting universities set it. However, lawmakers need to be aware that simply repealing the measure is not going to stop tuition increases.

One problem is the out-of-control university spending that is enabled by the lack of free higher education market. The same economic principles apply to universities as apply to any other provider of services or goods. In this case, the good is education. Students who want to purchase this good can decide for themselves if the cost is worth the product.

Unfortunately, this economic exchange is skewed in higher education because of excessive government involvement in the market, as well as the prestige placed on degrees from the state’s research universities whether justified or not.

For example, the government saddles for-profit universities with excessive bureaucratic requirements before they can open their doors; even when such universities are successful in opening, the government subsidizes public universities to a much larger degree than for-profit universities. These factors make it difficult for new suppliers to enter the marketplace to meet the increased demand caused by government loans and grants.

Another fundamental problem with tuition deregulation is that universities got to have their cake and eat it too – they can increase tuition however much they see fit while continuing to receive state funding.

So, who should set tuition: the legislature or universities?

The problem is that both tuition-setting methods are inherently flawed. Neither allows the market to determine the appropriate price of tuition.

Infusing competition into a highly regulated higher education market is the best way to address the problem of unbridled university spending and the resulting tuition increases. Placing state funds in the hands of students rather than universities – i.e., distributing state support for higher education through student scholarships rather than campus appropriations – would make it necessary for universities to improve quality and keep costs low in order to stay in business.

Instead of having our universities compete for state funds, why not have them compete for students? Should this happen, newly empowered university customers could decide for themselves whether having a college degree was worth the cost and would encourage universities to keep tuition as low as possible.

Elizabeth Young is a higher education policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.