How Revenue Sharing Formulas Distribute Aid:

Urban-Rural Implications

PAD-80-23: Published: Apr 22, 1980. Publicly Released: Apr 22, 1980.

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GAO was requested to examine the targeting of Federal revenue sharing aid to States and local governments classified by their metropolitan-nonmetropolitan status. The distribution pattern of revenue sharing aid to urban and rural areas was studied at three levels: State areas, county areas, and county governments. The issue of equity was raised because the formulas that distribute revenue sharing aid to rural and urban areas result in rural areas receiving greater aid on a per capita basis than urban areas. To determine if the urban-rural distribution of revenue sharing was consistent with the geographic pattern of need, a case study was made applying fiscal capacity, fiscal effort, and fiscal pressure as the three generally accepted measures of need.

An analysis indicated that there was a tendency to distribute more revenue sharing aid to high "effort" governments and to low income governments, and there was no tendency observed to target more aid to governments with high fiscal pressure. The targeting efficiency of the formula was relatively poor in relation to the county governments studied because of the various constraints placed on the intrastate formula and the geographic tiering process. It was concluded that targeting efficiency with respect to income would always be worse than the targeting efficiency with respect to fiscal effort.

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