Revenue Sharing Formulas:

An Assessment and Framework for Further Research

PAD-81-57: Published: Apr 1, 1981. Publicly Released: Apr 1, 1981.

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Since its inception, the revenue sharing program has distributed general-purpose aid to nearly 39,000 State and local governments by use of a complex formula. One of the major concerns about the program has been distributional equity. In this discussion, the intrastate allocation of revenue sharing aid is assumed. The intrastate formula is generally considered to take three cirteria into account: (1) revenue capacity, (2) revenue effort, and (3) a crude measure of need as measured by population. The conceptual issues surrounding the formula are examined, and the structural issues are addressed. Two separate formulas are derived. One equalizes revenue raising capacity; the second rewards the effort made in providing local public services. Both formulas are based on the normative principle that equal, effective tax rates ought to allow communities to provide equal levels of public services. A description of the current intrastate revenue sharing formula demonstrates that it is identical to the effort rewarding formula. Thus, it is concluded that the revenue sharing formula embodies only the one objective of rewarding high effort. Data presented indicate that the relationship between these criteria is very weak. Assuming that effort is the appropriate criterion for distributing revenue sharing aid, the impact which the tiering process has on the allocation of aid to local governments within a State is examined. The maximum and minimum per capita grant constraints and the tiering process are interdependent. The budget constraint limiting the size of grant allocations to a maximum percentage of expeditures can be altered so that it is consistent with the effort cirterion embodied in the formula rather than superseding it. Current methods for measuring effort have been adopted, in part because there is general agreement that the current data being used represent a reasonable proxy for the theroretical concept being measured in light of currently available data.

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