Decentralized systems of government finance give rise to fiscal disparities due to interjurisdictional variations in tax bases and expenditure needs. Intergovernmental aid is used to address such disparities. This article explores changes in local tax capacity and intergovernmental aid resulting from urban shopping malls that extract retail sales and sales tax revenue away from surrounding areas, especially rural counties. A model is developed and estimated to determine the impact of urban malls on local government sales tax bases, controlling for sales tax rate differentials and other factors. The results reveal a 15.9% decline in the sales tax base for counties in close proximity to two newmalls. The analysis is extended to examine impacts of changing local tax capacity on state education aid. Based on the programconsidered here, less than 20% of the loss in own-source revenue is recovered through increased aid.
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