An Econometric Analysis of a Federal Revenue-Sharing Allocation Formula

The purpose of this paper is to evaluate the proposed allocation of funds sunder the Better Communities Act of 1973 by assessing the degree to which funds are actually allocated according to specific formulas incorporated in the legislation. Under the Better Communities Act, funds would be allocated to state and local governments on the basis of population, poverty, and overcrowded housing The degree to which these allocation criteria as well as other economic variables explain the proposed allocation of Federal funds is assessed. When the three variables in the formula were used to explain the variation in the distribution of funds among states, the results were poor because only about 33% of the total variance was explained. Although the explanatory power of these three variables was considerably higher when SMSAs were employed as the unit of observation, the empirical findings still indicated that the allocation criteria proposed alone were relatively unimportant. Moreover, our results reveal that the formula explains little of the variation in per capita distribution of funds among either states or SMSAs, even after including other economic variables as allocation criteria. In conclusion, these findings imply that the proposed distribution of funds among both states and large SMSAs fails to follow closely the requirements of the allocation formula set forth in the Better Communities Act. The approach employed here can be applied to evaluate other distributions of Federal revenue-sharing funds according to specified criteria of need.