Information Regarding the Effect of Applying the Representative Tax System to the General Revenue Sharing, Medicaid, and Vocational Education Programs

In response to a congressional request, GAO analyzed the effect that the Representative Tax System (RTS) would probably have on federal aid to states if it were used in three formula-based programs: (1) the Revenue Sharing program; (2) the Medicaid program; and (3) the Vocational Education program.

With respect to the distribution of revenue sharing funds, GAO compared: (1) the effect of replacing personal income with the RTS in three- and five-factor formulas; (2) the effect of the two-factor formula that uses population and the RTS; and (3) the effect of the two-factor formula, with personal income being used in place of the RTS. For the Medicaid program, GAO studied two alternatives: (1) replacing the per capita income squared with a per capita RTS squared, and keeping the minimum federal share at 50 percent; and (2) replacing per capita income squared with the RTS measured on a per person-in-poverty basis rather than on a per capita basis, and reducing the minimum federal share from 50 to 40 percent. Lastly, GAO analyzed two alternatives for incorporating the RTS into the formulas used to distribute vocational education funds: (1) replacing per capita income with a per capita RTS; and (2) replacing per capita income with the RTS expressed on a per student instead of per capita basis. The analyses and comparisons showed that, if replacing personal income with the RTS were the only change made, federal funds would be redistributed away from states with relatively large nonincome revenue sources. However, this outcome would probably not occur because the rationale for using the RTS would support other changes. The additional changes made in conjunction with using the RTS showed no general distributional pattern because the distributional outcome was sensitive to both the program being considered and the additional formula changes likely to be made.