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This paper simulates alternative distributions of general purpose state aid to local governments under different combinations of criteria: tax capacity, effort, and revenue needs. Revenue needs are based on Tobit estimates of the costs of providing average levels of 16 categories of services. Segmenting the sample into high and low population jurisdictions provided a more realistic set of cost estimates. Available revenues or capacity are determined by multiplying each jurisdiction's tax bases by standard tax rates. A Need-Capacity gap, the difference between needed revenues and available revenues, is used as a needs-based distribution strategy for general purpose aid. Finally an effort gap, based on above average tax efforts was added to the Need-Capacity gap to define a Need-Capacity-Effort strategy.


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