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How was this not illegal already?
There was nothing prohibiting it.
Taxes? I don’t know full details or if this is even tangentially related (or maybe it is the same thing). There is a supposed practice as some universities (maybe just the non-UC’s and Cal State’s) that if you were a relative (I’m assuming immediate family only) working at say USC for example, you could get accepted into the university without paying tuition. The only catch was you got severely taxed (something like 30%; of what, I don’t know) for attending tuition-free.
You can get a discount from universities if a spouse works there, but that's not the same as getting accepted automatically.