In 2003, the Department of Education proposed an update to the state and other tax allowance, a part of the federal need analysis for student financial aid. Most federal aid as well as some state and institutional aid is awarded based on the student's cost of attendance less the student's and/or family's ability to pay these costs--known as the expected family contribution (EFC). The allowance, which accounts for the amount of state and other taxes paid by students and families, effectively reduces the EFC. Given the potential impact of the allowance on the awarding of aid, the Government Accountability Office (GAO) determine what factors have affected the updating of the tax data on which it is based, the effects the proposed 2003 update would have had on financial assistance for aid applicants, any limitations in the method for deriving the allowance, and strategies available to address them. GAO recommends that the Secretary of Education: (1) formalize procedures to ensure that Education annually requests and obtains the most current tax data from the Internal Revenue Service (IRS); (2) revise the methodology for calculating the allowance to better reflect the varying tax rates paid by students and families in different income groups; and (3) determine whether more effective data sources or methodologies exist for deriving the allowance. The following are appended: (1) Scope of Methodology; (2) State Selection Matrix-Ranking of Potential Impact of Proposed Allowance, Listed by Category; (3) Average Tax Rates on Adjusted Gross Income, by State and Income Level; (4) Simulation of Tax Allowance Percentages under Various Options, by State-Families with Adjusted Gross Income of $15,000 or more; (5) Comments from the Department of Education; and (6) GAO Contracts and Staff Acknowledgements. (Contains 9 tables and 6 figures.)