State Aid to Local Governments

Local governments—cities, towns, counties and special purpose districts—need reliable revenues to deliver services, ranging from public safety to education to health and human services. State aid plays a vital role in those revenues. In FY 2010 (the most recent year for which data is available), states transferred over $475 billion to local governments – almost half of their own-source general revenues.

State aid clearly constitutes a significant portion of local general revenues— nearly 50 percent of local revenues in Arkansas, for example, and over 60 percent in Vermont. In contrast, the percentage of local revenue provided by the state in Hawaii is 7.1 percent. The U.S. average is slightly less than one-third.

Per capita local revenues from all sources, including state aid, ranges from a high of $8,353 in Wyoming to a low of $2,303 in Hawaii.  In the U.S., local government revenues  average $5,273 per person. Variation exists for many reasons, including differences in the mix of state and local responsibili­ties, local revenue-raising authority and capacity, and citizen preferences for tax and service levels.  For example, the state of Hawaii operates as a single school district, so the percent of local general revenues provided by the state does not include aid to public schools—largely accounting for the state’s lower per capita local revenues.

There is no comprehensive summary of state methods for transferring aid to local governments. The large number of local governments in the states makes it difficult to accurately determine revenue transfers from the states. According to the U.S. Census Bureau’s Preliminary Count of Local Governments in 2012, there are over 89,000 units of local government across the 50 states and the District of Columbia.

In addition to the number of local governments, distribution formulas vary greatly from state-to-state and often change from year-to-year.  Factors considered in aid distribution formulas also can include population size, returning of tax dollars to their geographic origin, reimbursement for lost property taxes, and local needs. Local need for­mulas are often based on the notion that the quality of local public services should not depend upon the tax base of the community. In this situation, wealthy communities may be able to provide higher service levels and lower tax rates, while poorer communities may have high tax rates and lower quality services.

Another way to consider state aid to local governments is to look at revenue sources that are earmarked or designated for local governments. The most frequently earmarked or shared taxes for local governments are in­come and sales taxes. A portion of gambling and severance taxes also are often distributed to local govern­ments that are most affected by the activities that generate the revenues.

Table 1. State Aid to Local Governments