Summary

Pursuant to a congressional request, GAO assessed whether states were meeting the needs of financially distressed communities in light of the expiration of federal revenue-sharing in 1986, focusing on: (1) the extent to which state assistance programs reduced differences in tax burdens among general purpose local governments; and (2) whether state programs were more effective than federal revenue-sharing programs in reducing tax burden differences between distressed and better-off communities.

GAO found that: (1) between 1977 and 1987, state and federal aid dropped from 40 percent to 31 percent of local revenues, with reductions in state aid accounting for 2 of the 9 percentage point drop, and an overall reduction in federal aid accounting for the rest; (2) due to the decrease in state and federal aid, local governments financed an increased share of their expenditures from local resources; (3) differences between affluent and poorer communities' per-capita incomes widened, suggesting that fiscal disparities between the communities had also increased; (4) the extent of disparities differed across states; (5) in fiscal year 1985, states provided local governments $10.9 billion in general purpose fiscal assistance and federal revenue-sharing provided another $4.6 billion, reducing disparities by approximately 18 percent; and (6) since federal revenue-sharing was more targeted to distressed communities, it reduced disparities more than most state programs.