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

 
STATE AID TO LOCAL GOVERNMENTS
State Share of Own-Source Revenue Sent to Local Governments Percent of Local General Revenue Provided by the State Per Capita Local General Revenue, including State Aid
Alabama 44.3% 29.2% $4,314
Alaska 21.5% 34.0% $7,163
Arizona 59.6% 28.0% $4,553
Arkansas 44.8% 50.4% $3,199
California 66.4% 32.6% $7,035
Colorado 44.8% 20.9% $5,761
Connecticut 28.0% 26.1% $4,724
Delaware 23.8% 39.9% $3,451
Florida 39.8% 19.3% $5,022
Georgia 52.1% 24.5% $4,430
Hawaii 3.2% 7.1% $2,303
Idaho 50.7% 36.9% $3,549
Illinois 50.0% 24.5% $5,457
Indiana 49.8% 33.8% $4,398
Iowa 40.5% 29.3% $4,703
Kansas 40.5% 28.0% $4,845
Kentucky 34.9% 33.4% $3,297
Louisiana 47.7% 31.5% $4,727
Maine 31.3% 31.0% $3,638
Maryland 34.2% 25.7% $4,760
Massachusetts 32.9% 26.9% $5,395
Michigan 53.7% 39.1% $4,664
Minnesota 49.4% 37.9% $5,261
Mississippi 52.3% 36.8% $4,129
Missouri 40.6% 24.6% $3,932
Montana 36.3% 36.8% $3,491
Nebraska 39.1% 17.9% $6,532
Nevada 60.8% 32.1% $4,921
New Hampshire 38.2% 28.0% $4,009
New Jersey 35.2% 27.0% $5,288
New Mexico 50.0% 45.8% $4,057
New York 60.9% 29.4% $8,998
North Carolina 43.0% 29.9% $4,269
North Dakota 30.5% 36.4% $4,269
Ohio 57.1% 36.4% $4,761
Oklahoma 33.3% 29.2% $3,478
Oregon 47.3% 32.2% $4,645
Pennsylvania 50.9% 34.4% $4,955
Rhode Island 25.2% 24.5% $4,039
South Carolina 36.5% 26.3% $4,056
South Dakota 33.9% 23.7% $3,842
Tennessee 44.7% 20.4% $4,880
Texas 51.0% 25.0% $4,724
Utah 32.8% 27.2% $3,842
Vermont 45.7% 60.8% $4,110
Virginia 37.8% 28.8% $4,471
Washington 47.6% 28.4% $5,605
West Virginia 28.5% 38.9% $2,861
Wisconsin 47.5% 35.3% $4,834
Wyoming 53.7% 35.6% $8,353
United States 48.2% 29.2% $5,273
Source: U.S. Census Bureau State and Local Government Finances by Level of Government and by State, 2009-2010. Excludes amounts received as reimbursement for services performed by local governments for the state government; shared state taxes or property tax relief related strictly to school funding; share state taxes with specific uses, such as gasoline taxes, designated for highway purposes; and share of state taxes expressly for local employee retirement system even if they are first passed through the parent government.

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