Changes in Revenue Sharing Formula Would Eliminate Payment Inequities; Improve Targeting Among Local Governments

GGD-80-69: Published: Jun 10, 1980. Publicly Released: Jun 10, 1980.

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The equity and the targeting of the revenue sharing formula used to determine revenue sharing payments to more than 39,000 local governments were considered. Only the intrastate formula for distributing revenue sharing funds to local governments was evaluated. Calculations for allocating funds to state and local governments are based on complex formulas and procedures specified in the Revenue Sharing Act. The formula to determine the allocations to local governments includes the following three factors: population; per capita income, used to measure a government's need; and adjusted taxes, used to measure a government's effort to meet its needs. The intrastate allocation process begins by a tiering process of dividing funds among geographic county areas. Once the county area allocation is established, separate amounts are set aside for Indian tribes and Alaskan native villages, the county government, municipalities, and townships located in the county area. The distributional impact of general revenue sharing allocations was examined in terms of amounts received by different types of local governments. Extensive analyses were performed of the effects of tiering procedures and the application of constraints in the revenue sharing allocation process. Results were developed from computer simulations of the formula under alternative sets of constraints, with and without the current allocation tiering process. The impact of these formula simulations on jurisdictions was examined with different characteristics, such as fiscal effort, income, fiscal need, and service responsibilities.

There are widespread differences in per capita revenue sharing payments to governments within a state. These inequities, prevelant nationwide, are created primarily by tiering allocation procedures in that the total amounts set aside for counties, municipalities, and townships vary widely among county areas. Consequently, high fiscal effort governments located in low fiscal effort county areas compete for smaller amounts of revenue sharing funds than they would if they were located in a county area with a fiscal effort equal to or greater than their own. GAO concluded that eliminating tiering procedures would lead to greater equity in revenue sharing payments. The act contains constraints or limitations on the amount of a recipient's payment. If the constraints were modified, more funds would go to cities, fiscally stressed governments, and low income governments providing moderate levels of public services. Funds would be directed away from townships, other limited service governments, and wealthier communities. However, modifying formula constraints without eliminating tiering would lead to greater inequities in revenue sharing payments among similar governments within a state. Thus, GAO concluded that modifying formula constraints should be made only in conjunction with the elimination of tiering procedures.

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