Including User Charges in the General Revenue Sharing Formulas Could Broaden the Measure of Revenue Effort

Pursuant to a congressional request, GAO conducted a study of practical methods to improve the measurement of revenue-raising. The study focused on the feasibility of broadening the current revenue-sharing effort measure to include user charges.

GAO found that it would be possible to include user charges at the interstate level, but that it would only be possible to include user charges at the intrastate level if additional data were collected by the Bureau of the Census. Even with that data, technical and definitional problems would have to be resolved before it would be practical to include user charge revenue. The growth in reliance on user charges to raise revenue prompted an assessment of whether tax effort adequately measures revenue-raising effort. When it ranked state and local governments on the basis of tax effort and user charge effort, GAO found evidence of disparities. The magnitude of the disparities was small but growing over time. GAO considered four possible ways to include user charges in measuring the revenue-raising effort. It found that allocations were improved for states having relatively high reliance on user charges and concluded that including user charge revenue effort in the first tier of the allocation formula would improve the measurement of the revenue-raising effort. Currently, state governments are ineligible, but state taxes, local education taxes, and special district taxes are included in the interstate tax effort measure. If Congress decides to fund state governments again, alternatives which included both state and local user charges would be more appropriate. If states remain ineligible, it may be appropriate to include both state and local user charges, because state and local taxes are currently used in the interstate allocation formulas.