Please forgive me if my question sounds a little dumb, as I am a recent convert to Libertarianism and Austrianism. How does the in-state tuition rate for colleges work? Is it tax-payer subsidized, or what?
Yes, it is subsidized by taxes.
It's been a while since I worked at a university, but assuming nothing has changed, here in Texas the legislature sets both the tuition rates and the amount of funding each university gets. The direct funding provided is a multiple of the tuition collected. The in-state/out-of-state rate differiential makes foreign students very attractive since state funding is based on tuition dollars collected rather than students enrolled. Both types of students are subsidized though.