The Case for Equalizing AId

Equalizing aid can be used by the fed-eral government to equalize fiscal out-comes or resources among subnational governments, or by states to equalize outcomes or resources among local gov-ernments. Although equalizing aid can sometimes be justified in part on effi-ciency grounds, we focus on its primary function, namely, to achieve equity ob-jectives. ’ The equity objective of a donor government can take many forms. The central theme of this paper is that the appropriate design for an equalizing aid program depends on the form of this objective. Intergovernmental aid is not, of course, the only tool higher-level governments can use to assist poor or troubled lower-level governments. State governments, for example, can achieve equity objec-tives by altering the fiscal arrangements within which local governments operate. A state could take over from local gov-ernments the financing of certain ser-vices, such as social services, that place large burdens on a few jurisdictions, * or, to counter fiscal disparities in education financing, a state could encourage the merger of school districts. Hence, inter-governmental aid should be viewed as